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Originally posted by rai76
Are banks in Europe starting to fall down now as well?
This problem began and is firmly rooted in the USA. We do not have the same problems here, rather our systems have been infected by Toxic US investments which have fallen in value. Granted, our boys in the City got greedy too, but the origin of this mess is America.
The bankers lent people money who, if we're brutally honest shouldn't have been, on the basis that the property market would continue to rise indefinately.
100/110/120 % mortages, 5-7 times someones salary, whichever way you cut it, the lending was out of control.
Once the property prices hit a critical point, people stopped buying them, the prices began to fall, interests rates went up and people could no longer afford those huge homes with the huge mortages attached.
Suddenly, the banks were left holding unpaid mortgages on homes that are worth considerably less than what they were bought for. The defaults caused further problems in the system, which further restricted available credit and liquidity, magnifying the problem further.
All this accumulated and cascaded through the system until we're talking astronomical amounts of money that was lent on assets only worth 1/2 (or worse) of what they were bought for.
This is where you get the banks collapsing. With the collapse of one Bank, other institutions that were otherwise solid, suddenly looked shaky as they had lent the bust Banks money and now wouldn't be paid back. Onwards and upwards this went through the system.
This is how the mess got transferred from the USA to the rest of the world. Our housing market is not collapsing, but prices have fallen due to a drop in demand caused directly by the difficulty in getting a mortgage, as no one is lending now like they used to, because those very banks have been exposed to the US sub-prime mess, not because the banks or EU economies are inherantly unsound, but because of investments bought in America.