My theory of the credit crunch
If I'm wrong with this, please explain why. I know it's a simplistic argument, but I think that banks, and specifically the greed of those who run them, are to blame for the current financial crisis.

So here's the sequence of events, as I saw them:

House prices started to rise, as the demand increased. This was due to a number of factors, including such things as immigration, because of a buoyant labour market in the UK. Fine. But then people complained that they couldn't afford to buy a property because they were being priced out of the market.

The banks, seeing that there was money to be made, then thought, "Sod it, we'll lend people 125% of their new house's value, even if that's 5 times their income".

So more people could afford more money for houses, and property price inflation became worse. Eventually, the bubble burst (all the sub-prime mortgage lending, and buying of debts etc was unsustainable and it all came crashing down) and the banking system all but collapsed.

Now, as I see it, had the banks not given out such large mortgages, then many people wouldn't have been able to afford houses at the original asking price. But the chances are that this would have caused a fall, or at least a stagnation of house prices, such that houses would have been affordable with realistic mortgages.

Discuss.
( K2k6 has a proper job these days, Fri 17 Jul 2009, 12:59, 2 replies)

There's something to this.
Note, though, that this means that the problem has to do with people expecting the system to perform unreasonably, not with the system itself.
( Enzyme is powered by sunlight, Fri 17 Jul 2009, 13:04, closed)

True
But if the system hadn't performed to their expectations there would be less of a problem now, albeit much wringing of hands at the time.
( K2k6 has a proper job these days, Fri 17 Jul 2009, 14:02, closed)

house prices rose
because money was being given away at low rates in the US and it was 'invested' in housing - not because of demand, unfortunately. Demand is what people are ready, willing *and able* to pay. The 'able' bit was enabled by the US gvt low rates.
The banks gambled on an ever increasing market and were taking commissions for the parcels of debt.
Yes the banks lent irresponsibly, but people also borrowed unfeasibly. We get stiffed with mortgages worth more than houses [Japan had 95% drops, av. house price sold in May in detroit $6k, expected drops in the UK up to 90%], they get bailed out. By us. Bend me over, hold the lube.
(Countryslicker, Fri 17 Jul 2009, 13:48, closed)

"expected drops in the UK up to 90%"
You are officially mad. Try 25% from top of market...
(stalinism, Sat 18 Jul 2009, 14:35, closed)

watch
this space...
Yeah who wants to believe that?. We're already down 20%, and we've +4x this contraction to go, all the alt-As and Ninjas in the US yet to fall over will bring down most of the rest of the banks, and with it the ability to buy houses with credit. Check down the back of your sofa, and in your back pocket. If/when we get bank runs, that's what houses will go for..what you've got left, under your control. Who'd have believed you could now buy a house for $750 in detroit 5 years ago? Certainly not the banks who leant the money....
(Countryslicker, Sat 18 Jul 2009, 21:19, closed)