Understanding the financial crisis

NOT A GAME POST!!!

If you happen to be struggling to understand how this huge financial crisis we are all in could have happened (don't worry, you aren't alone), I can only recommend to read My Personal Credit Crisis in the New York Times. There an economics reporter of the New York Times, well qualified to have known better, explains in detail how he got deep into debt up to the point where he is waiting for the foreclosure on his mortgage. He explains exactly how with not much disposable income after alimony payments he still managed to borrow half a million dollars, which he then obviously couldn't pay back.

It somehow reminds me of a 20 year old film called Rosalie goes shopping, which explains that: "When you're $100,000 in debt, it's your problem. When you're $1,000,000 in debt... it's the bank's." You just need to add that if *everyone* is a million dollar in debt, then it's the world's problem. If everybody used to spend (income + X%), then not only need people to go back to spend only their income, but they need to spend (income - Y%), with the Y% used to pay back the debt. The combined total is the spending and thus GDP falling by (X+Y)%.

I'm not very optimistic that this will be over soon, because I suspect the banks still have a lot of skeletons in the closet, for example in the form of credit card consumer debt. A recession means rising unemployment, which usually hits people most who already had the most credit risk, and causes them to default on their debt. It might take years before the mess is completely cleared up. And once the banks balance sheets and everybody's personal debt is "back to normal", whatever that is, we need to start paying back the trillions that our governments are now spending on our behalf to rescue the economy.

While the temptation is big to blame somebody for the mess, in the end it was a case of collective insanity. You need to be crazy to borrow half a million dollars on not sufficient income to pay it back, but there need to be a whole lot of crazy people involved in you actually getting that loan. I just hope that this scars us permanently with the lesson that you shouldn't live beyond your means. But like any major crisis, some people whose personal finances were perfectly in order will suffer too, because they lost their job, or their savings, or both. It just is very hard to explain to somebody that he just got fired because his company was exporting goods that a buyer on a different continent couldn't really afford, and now stopped buying.

Nevertheless there will be an even greater number of people who will come out of this crisis with not too much of a loss. 10% unemployment is a catastrophe for many, but it means that the other 90% still have a job. If you *were* saving instead of living on credit, you probably lost money from your investments, but if you weren't speculating wildly, most of those losses are on paper only. Working in a company during a crisis can be unpleasant, and many perks, bonuses, and pay rises will disappear or become much smaller in the years to come. But at the end of the tunnel many of us will emerge a bit poorer and a lot wiser. Just fasten your seat belts, this might be a bumpy ride.