Sunday, October 26, 2008

The circle of credit and "culture of contentment"

Jasmin @Bonbeach, Mornington Pennisula, Melbourne, Australia.

Quick simple summery for myself about the credit crisis

notes from: Fiona Allen ""

1. Deregulation of the mortgage lending market intended to allow more people to have the opportunity to own their own homes

" The subprime mortgage market — lending to people whose income is too low, insecure or risky to qualify for an ordinary mortgage. "

"Selling the most sophisticated of financial products to the most vulnerable households came at the end of two decades of financial deregulation, which was also a period of rapidly rising housing expenditure. Between the 1950s and 1970s in the English-speaking countries, housing overtook food as the largest single expenditure for the average household."

2. Results in people having "The maximum amount a ‘typical couple’ could afford to borrow under standard lending rules jumped from $135 000 in 1992 to $305 000 in 2006."

3. Rising house prices soon overtook rising incomes, borrowing capacity and purchasing power.

Conclusion - Allowing people who cannot really afford to borrow money encourages them to spend that extra cash, inducing a overvaluation of property prices, thus putting them more into a debt that they really can't afford long term and eating into their ability to save and spend.

All this income going into house debt repayments makes Jan unhappy as she doesn't get to spend money as a consumer, which inturn affects retail which affects wholesalers and manufacturers.

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