Q: I'm trying to understand what is happening with the US Economy. I keep hearing all these things about foreclosures, people no longer being approved for mortgages and downward trends in the stock markets. I guess what I'd like to know is what is causing all this to happen? Is it lack of work or the high price of fuel or the rising cost of living? Can anyone try to explain to me what is happening and what all this says about the future of the average family?
A: The main cause is none of the things you've mentioned. The main cause is excessive lending by various banks and other financial institutions, and excessive borrowing by both businesses and individuals. Many people and financial institutions have borrowed so much money that they can't pay it back. And when people can't pay back the money they've borrowed. Then they simply declare bankruptcy. And the money they've borrowed disappears into thin air. It's lost forever and ever for whoever lent that money. Lehman Brothers, the financial company that filed for bankruptcy on Monday this week, had at one point a debt to equity ratio of 30:1. They borrowed 30 times more money than their assets were worth. They've made some bad investment bets and lost not just their own money but also some of the money they've borrowed. According to some news reports I've read. Until 2004, government regulations prohibited financial companies from exceeding 12:1 debt to equity ratio. But in 2004, Securities Exchange Commission eliminated this restriction. And all the major investment banks built up their debt loads far beyond that 12:1 ratio. Borrowing so much money and investing it was good for their profits as long as their investment bets worked out well for them. But lately their investment bets went badly against them. And they've lost a lot of their borrowed money. http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html