Need a Hand? How the Economic Crisis Made National Debt a Problem
As America’s credit rating has been downgraded by agencies, Greece tilters, and Berlusconi departs (he’ll be back), are you confused by a lack of helpful ‘intros’ in the news to help understand the economic crisis? Wouldn’t it be good if reminders were provided?
Here is a quick, short intro and explanation, if you feel you need one, as an essential reader for how national debts suddenly became a dire issue, whilst you watch the latest developments and consider those seeking your votes in the next election in your locale, be they Mr. Key, or the extremely learned Michele Bachmann.
Many reasons have been given for why the financial mess arose, but it is agreed that it emerged from within the US, the only superpower, still, in 2007. As was commonly said, if the US sneezes, the world catches a cold. What occurred was a promoted atmosphere of increased credit lending, in part because Alan Greenspan and his band of merry men and women kept interest rates as low as 1% to help loans be paid back. With low interest rates, debts were not very risky, so more could be taken, helping economic growth.
Credit is an I.O.U. that has been accepted as currency in society. If you buy an item on credit, this is a form of agreement that, even though you are not using money to pay at the moment, you will eventually provide money to replace the “phantom cash” you just spent, as it were.
But if you are the one who provides lends credit or a loan like a mortgage, you can sell this, because it is considered as property (yep, it’s true, one of the “ingenuities of the market”). So if Party B loans Party A $400 at an annual interest of 4%, Party B can sell their part as loaner to Party C for a certain amount. This is a credit default swap (CDS), and many can be bought in one package, know as a collateralized debt obligation (CDO). If those loaned the money default on their loan (cannot pay), the seller of the CDS or CDO instead pays the buyer of the CDO or CDS.
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