posted on Oct, 1 2008 @ 11:35 AM
It isn't just the poor that are sucking up credit. Businesses rely on credit lines to purchase inventory, cover payroll, etc....Banks rely on credit
to insure they have enough cash on hand to conduct their business. And, a lot of money that was in circulation, albeit on paper, has now vanished.
Credit in itself is a valuable economic tool. But it must be leveraged correctly. Very fundamental accounting practices teach how to read a balance
sheet and get all nervous when the debt-to-asset ratio gets all askew.
Regardless, it isn't a failure of the credit system itself that is putting the squeeze on available credit now. In what one would consider a normal
world, a lot of mortgages could default without the resultant ripple we're seeing now. Other financial instruments, centered around the mortgage
industry, were used as investment tools by bundling the mortages in what looks like attempts to "hedge" mortgage failure.
Apparently, the concept of dependency amongst risks went right over the heads of the financial whizzes. Sure, if one or two mortgages went bad and
unpaid, it wouldn't have a catastrophic result. What they didn't figure (the geniuses) was what would happen if a lot of mortgages started
defaulting. Suddenly, the billions tied up in these arrangements turned into so much toilet paper. If the big banks suddenly are left holding toilet
paper.....lending more of it out would place them even further into an "illiquid" position.
One can only hope the middle class suddenly swells as vasts amount of wealth disappear; yet not take us down also.
That's my take on it....in a nutshell.