UN Blog: Did the stock market crash because the banks were failing? How do failing stocks affect the economy? and roasted chicken stock

Thursday, October 17, 2013

Did the stock market crash because the banks were failing? How do failing stocks affect the economy? and roasted chicken stock

Did the stock market crash because the banks were failing? How do failing stocks affect the economy?

In words that I will be able to understand, can anyone explain to me the correlation between the banks, the housing crisis, and the stock market. And how does the stock market affect the economy itself? I am just beginning to understand what the stock market is, so numbers and statistics are really not helpful.

Stock best answer:

Answer by Ian Brett Cooper
Basically it comes down to this:

1. Banks loaned money or gave credit to so-called 'high risk' people who were less likely to pay their debts, hoping that they would run into difficulty and be forced to pay a higher interest rate on the loans and increase the profitability of the loan.

2. Instead of being able to pay when the interest rates increased, lots of these people were unable to continue to pay the higher interest payments, so they defaulted on their loans and were forced into bankruptcy.

3. The banks, who expected customers to keep paying the high interest, were faced with credit cards and loans that were losing money due to huge amounts of bankruptcy.

4. The banks had no money to loan to home buyers.

5. As businesses get into deeper credit trouble, they start laying people off in an attempt to cut costs. As they lose money, the stock market, which is basically a betting shop based on confidence in businesses, is filled with people selling their stock.

6. As the stock prices go down, the companies are perceived as being worth less. That means they will not be able to get loans as easily. In order to stop this, a company may lay off even more people in an effort to appear more profitable.

The result - people and businesses owe more interest than they can pay, businesses go under, the housing market collapses, banks go under, the stock market crashes, unemployment goes through the roof creating a vicious circle (i.e. even more people defaulting on credit and loans) that could have (and still could) result in a 1929-style crash.