CREDIT CRUNCH EXPLAINED

Credit Crunch

(The other key to understanding the financial mess is understanding credit.)

The Bank Lends Money

               The bank gives you a credit and you use that to spend money at the grocery store.

              The bank also gives the grocery store credit because the grocery store has to [borrow] to buy things from a supplier, let's say the cereal factory.

    The supplier [or cereal factory] needs to buy wheat or flour, so they borrow money from the bank too.

But because of the current economic situation, banks don't trust anyone to pay them back.  Due to credit reduction, the cereal factory can't buy as much wheat, and the grocery store can't buy as much cereal and you can’t buy as much cereal.   When stores or suppliers can't afford to buy as much as they used to, they can't do as much business. Then, people get laid off.

As a result, all the people who lost their jobs aren't paying taxes or shopping as much.  They're a net drain on the financial system and they're not contributing.   In the first nine months of 2008, 750,000 people in the United States lost their jobs. In September 2008 alone, an incredible 159,000 jobs were lost. "This is what hurts this system, and that's why it affects you."

In order to start fixing the financial problems plaguing the country, the U.S. government has proposed a $700 billion bailout plan.  People were phoning their congressmen and congresswomen saying, 'We don't want you bailing out these fat cats,' because the perception was we were helping all these guys on Wall Street and they were going to get richer and richer even though they'd done all of this to us. "But it's really all of us who are going to be affected." 

Inadvertently, we're going to have to help Wall Street to get the money trickling down to you, because that's the system through which money flows.

Still, the task at hand should be to fix the problem instead of wasting time blaming Wall Street. "The bottom line is it's like your 3-year-old has set fire to your curtain, and you're having a conversation about whether 3-year-olds should have matches or whether your kid's a brat.  Put the fire out, and have the conversation with your kid later. That's the situation that we're in right now. The fire is going to consume your house if it does not get put out."

Terry S. Forsberg, ABR, CRS, GRI, Associate Broker         

RE/MAX Fine Properties  602-410-9547