Let us try to explain the current financial crisis in personal terms:
Suppose you are an average citizen of a first world country, i.e. USA, U.K... The last past few years you have experienced that the prices on properties have grown inmensely, and... suddenly you realize that instead of having your money in your bank or in the stock market, it probably would be wiser to buy a piece of property. But how can you afford to buy a property if you have little money or no money at all? So... you say to yourself: "Well I'm going to ask the bank to lend me some money and I will guarantee it with the same property I'm buying, because, anyway, it will cost a lot more in the next future than what I'm paying for it right now".
You go to your bank, and they study your case and tell you.
Bank: "Well Mr. X, I can see that you have these incomes and those debts and so on and so forth, and given that you are not really in a position to borrow any money, I have no other choice but to deny this loan".
You: But,... you said to yourself .... "oh my... I´m loosing this great opportunity, some bank or financial institution will probably accept my deal If I accept a higher interest rate (a subprime mortgages perhaps!!), beacuse of course, and honestly speaking, the bank is taking some risk on me".
So one day, early in the morning you go to one of those Magic banks willing to lend you money for a higher interest rate, "because you can not afford to pay any mortgage or loan, but .... given that you are buying this beautiful property in DreamLand and it is going to be worth a lot more money in the future, if you do not pay them (the bank), they will anyway keep the property and sell it for a higher price"
So this fantastic guy in the Magic Bank tell you:
MagicBank: "Ok, Mr. X here is the money and here is your mortgage document... please sign here".
You sign and go home happy becuse you are about to make some interesting money and, who knows, perhaps you could sell this property in the future for a lot more money and get that beautiful house of your dreams for you an your family. Oh, guess what!!??, your neighbors Mr. and Mrs Y also got their loan even though he is currently unemployed!!!!.
Days when on, but as they passed the Real Estate bubble bursted ... and.... property prices, not only stoped raising, but started to drop away. Suddenly you found yourself trapped in this nightmare, having to pay for an amount of money that you know you can not afford, because of interest rising and because your company, the promissing building company you thought was going better and better last year, is not really going well anymore. In fact, you still have in mind the day you had to fire your secretary Elizabeth. Oh my, what are you going to do? .... well in your case is not so bad anyway ... the bank will keep the beautiful house and that's it. But Mr. and Mrs Y, gave their own house as guarantee to the bank; he is still unemployed and she, last time you heard, was about to lose hers. Oh my ... your neighbors just lost their house!!
But that Magic bank that gave you the money you needed, is in real troubles now. It has those mortgage papers it can not collect and own these properties that are worth less than before.The Bank says Oh my!! we are losing money and it does not look that it is going to improve.
John, that magic bank clerk that authorised your subprime mortgage, heard that although the bank was facing some problems things were not really bad because some other bank decided to get some mortgage packages at a real good price, and with that money they were going to cut their loses. Not only that but also some other even more "inteligent banks" sold those debts to their clients, at a very attractive price they could not even refuse, thinking in all the money they were going to make out of pennies. Besides, these clients thought, the bomds are supported and backed up by these famous banks in the US and some other around the world.
The thing is that now, hardly any body would be able to recover his/her money if goverments do not intervene by granting some money that will support this situation and avoid a total collapse of some banking and financial institutions.
Oh and guess what!! you and I and Mrs. Y have our savings deposited in some of these institutions but .... oh my.... they have lost so much money that .... I do not even want to think about, because goverments around the world and some healthy financial companies in the UK, Japan, South Korea are taking over these financial institution for a real bargain price.
As we say in Spain "A río revuelto, ganancia de pescadores", that is to say "in troubled waters, fishermen gain". I´m sorry for you Mr. X and even more sorry for the Y's but that's how it goes.... the economy was claiming for it's own balance, the real value of things, and human greed needed a call of attention.
So far so good, now goverments realize how difficult things currently are, and after sometime they have remembered that some laws were supposed to be applied, not to mention that some survaillance was needed .... but who really cared about some time ago if everything was going Hunky Dory!!
That is why the Spanish authorities as well as some others around the world are now telling the public that they are now taking measures!!!!
By Steven Schaffer. Economist and MBA. Member of Costaluzlawyers team.