Tuesday, October 07, 2008

The Current Financial Crisis In A Nutshell

A basic summary of what's going on:

If you owe the bank $10, it’s your problem. If you owe the bank $10m, it’s the bank’s problem.

If you and a million others owe the bank $10 each, it’s still your problem – but it’s also the bank’s problem.

If the bank then sells to an investor the $10 you owe, it ought to be the investor’s problem.

But if you have a problem repaying the $10 – and so do a million others – it’s both the investor’s problem and the bank’s problem.

Your problems and the investor’s problems mean the bank now owes another bank $10bn. That is both banks’ problem. But if neither bank will pay the $10bn it owes the other, it can quickly turn into a $700bn systemic problem.

And if the government then owes the banking system $700bn, it’s your problem.

1 comment:

Sen said...

Thanks for this good explanation for Current Financial Crisis, it's very usefull for me who's just a newbee with financial jargons.

But I don't really understand the last two paragraph, can you explain it more detail ?

"Your problems and the investor’s problems mean the bank now owes another bank $10bn. ....

And if the government ..."

Thanks in advanced,

Sen.