Information on American debt crisis

Discussion in 'Economics' started by jasonc, Nov 1, 2007.

  1. jasonc


    I was wondering if anyone could explain the current debt crisis in the United States or direct me to information explaining it. I am referring the the crisis relating to mortgage rates.
  2. Imagine if you will that you were looking to buy a car and had a $10,000 budget. While looking, prices kept going up and soon that car was worth $15,000. You still want that car but don't have the budget. No worries, we can get you in that car with a loan that has a 1% rate and resets in a couple of years. You can afford that!! And when your rate resets in a couple of years that car will probably be worth $20,000 used!!

    So you jump in. Meanwhile, the car market falls apart and your car is worth $5,000 now, your loan is now going to reset at a 7% rate and you won't be able to afford the payment with the new rate. If you sell, you cannot get enough money to pay off your loan.

    So you let the bank come and repo it. Now the bank cannot sell it either for enough to cover the loan and will take a loss. Also to note is that the bank packaged that and levered it up, so any loss it takes can be ultra magnified.

    Apply this to the much larger housing market.
  3. jasonc


    wow thanks a lot for the replies that wikipedia article was very good and i appreciate the analogy thanks.
  4. S2007S


    mortgage rates???

    while your at take a look at credit card debt in the United States as well. 2/3 of the economy is related to consumer spending, the consumer borrowed as much as they could from their houses now its credit cards, whats next?