Financial Armageddon

And down came the stock prices, so as I've been asked a few times as to what's going on here's a simple explanation -

The disparity between income and house prices in the USA

There that was easy wasn't it. Okay I'll expound; it's to do with a market called sub-prime, essentially lending money to people (primarily for mortgages) who aren't expected to be able to pay it back. Sounds stupid doesn't it, who'd lend money with the expectation of not getting it back? Well to compensate the lender charges more interest, so these people who are cash-strapped get charged more - bravo.

The premise goes that enough people will pay back the loan plus interest to compensate for those that default, the return being higher then if you'd lent money to people who you know will pay it back, but who do so at a lower rate of interest. High-return, but high risk.

In order to spread the risk, the loan/debt is split up and 'sold-on' to other institutions. They get the returns, with a smaller part of the risk. In theory if there are a lot of defaulters it'll be spread around a lot of companies and institutions and not cause a problem. If you get a cluster in one lender it might cause them trouble, but should have a negligible affect elsewhere; that's the theory. Unfortunately if you get a lot of defaulters in each lender things take a tumble. Rather then just one part of a sold-on debt crashing you get lots from different areas all failing.

People get antsy, money gets pulled and liquidity falls, to compensate the big banks have been throwing money into the pit to keep things stable.

Now we get some banks who borrow money from the big banks to use in their loans rather then use the assets of their savers, except there's less money available from those sources now. So now they get into trouble and people get antsy again.

It will stabilise, it will start to climb again; but some questions will be asked and hopefully some lessons learnt.