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Old 01-22-2008, 12:22 AM
 
Location: Charlotte, NC (in my mind)
7,946 posts, read 15,775,801 times
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Excuse me if this is an ignorant question, but seeing the markets collapse overseas and a very likely 1000+ point drop on the Dow on 1/22 is making me wonder...why all this is happening because of housing. What is it about a falling housing market in the US that is sending the entire planet into economic collapse? I understand there are problems but this is getting way bigger than anybody would have anticipated just 3 months ago.
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Old 01-22-2008, 12:38 AM
 
Location: Socialist Republik of Amerika
6,212 posts, read 12,012,850 times
Reputation: 1108
Banking works on leveraging paper. When the people quit paying on the funny paper, money goes away.

When builders stop building and people stop buying, there is a huge drop in purchasing, and consuming. Jobs get cut which creates a domino effect that won't stop until the last one falls, or unless something stops it.
Rate cuts, spurring on more buying.

So who wants to buy first?

freedom
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Old 01-22-2008, 01:09 AM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
27,091 posts, read 45,179,135 times
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It is too bad that it becomes such a big deal, but leverage will do that, just as leveraged margin over emphasized the Dot.com bust. Seems where there is lots of speculation, the vultures hover until they put us all at risk of catching 'the plaque' One announcer mentioned that mortgage money was 3% of our economy, and the 30% of economy in the export sector that is doing exceptional on the weak dollar is not getting any news. Misery loves company, and we should have plenty of both by this time tomorrow.
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Old 01-22-2008, 03:10 AM
 
Location: western East Roman Empire
8,061 posts, read 11,845,298 times
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The previous posters do well to speak about leverage.

Once upon a time there was a new land called America where people worked hard, with their very hands, to produce and make things. They consumed a part of their production, saved a part, and invested so that they could make things better.

After a period of history-making success, they became fat and lazy, not to mention arrogant, and outsourced production to others, and decided that they could consume based on financial flows, flipping each other house mortgages domestically, for example, and receive merchandise flows from abroad.

To be sure, as one of the above posters mentioned, there is that segment of the US economy that still manufactures and even exports merchandise (personally I happen to export services), but the economy is too skewed right now, so hopefully this recession will restore some balance between production and consumption.

However, most likely the government will intervene to keep consumption too far above production in the name of welfare or the ownership society or some such nonsense, we'll see.
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Old 01-22-2008, 03:54 AM
 
1,831 posts, read 4,939,914 times
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Two main reasons:

Banks around the world are taking multi-billion dollar losses due to bad housing loans. And there seems to be no end in sight since even the banks themselves don't even know how bad the losses are at this point.

So ... the whole financial system worldwide is in shaky situation.

And most of this economic expansion worldwide, incuding China, was financed through housing debt. So ... now that the credit and, consequently, spending has dried up ... we're now in a worldwide recession.
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Old 01-22-2008, 05:02 AM
 
3,883 posts, read 10,186,798 times
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If you had studied the fancy 100 page tax shelters in the 80s and 90s, you would see the same thing popping up in the fancy mortgage paper the financial institutions are trying to use today. When you cannot explain it, it may be (probably is) a problem.

Not going to be a good day.
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Old 01-22-2008, 07:42 AM
 
Location: Charlotte, NC (in my mind)
7,946 posts, read 15,775,801 times
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Quote:
Originally Posted by sweetana3 View Post
Not going to be a good day.
I have a feeling today is going to be the worst day for the economy since October 29, 1929. After today, we will no longer be talking about a "mild recession", but a severe depression as has not been seen since the 1930s. Get ready for 20-30% unemployment.
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Old 01-22-2008, 07:48 AM
 
3,763 posts, read 11,344,448 times
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I don't think you'll see 30% unemployment. Most average americans don't have all their money in stock. They will still need to eat, buy paper toweling, and occasionally buy new sheets. We may be looking at a downturn, but I just can't see 30% unemployment (seriously, 1 in 3 working age people unemployed!!) on the immediate horizon.
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Old 01-22-2008, 08:02 AM
 
10,833 posts, read 8,856,638 times
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And banks kept much of this debt off of their books in special accounts (SIVs). They borrowed funds to hold these securities. When the funds that hold debt securities lose their AAA credit rating and a certain percentage of their value, the banks have to pay back the money they borrowed from investors or other banks and bring these securities back on to their books. With the SIVs being liquidated, more debt is returned to the bank balance sheets means that they have to raise more cash (sell assets) and restrict lending to be able to meet regulatory reserve requirements.
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Old 01-22-2008, 08:05 AM
 
Location: Jonquil City (aka Smyrna) Georgia- by Atlanta
16,248 posts, read 22,441,647 times
Reputation: 3587
First of all the Dow is not going to drop 1000 points. I cannot drop more than 5% in a day without circuit breakers (were put in place in 1986 after a massive sell off) kicking in and shutting down the markets. Secondly the reason the housing markets are important is because of two things. The first is that rampant speculation in housing put lots of paper money in the economy as people pulled equity out of their homes to pay for new cars, flat screen TV sets and vacations. Since wages are not increasing more than about 3% a year, this well of money is what propped up the US economy for the past several years. The second was the fact that the housing boom also created lots of jobs- not just for the people that build the houses but for suppliers such as Lowes and Home Depot and others working to keep up with demand.
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