Millions of people are probably wondering what this financial crisis is really about. Now I'm not pretending to be some kind of expert economist, but I do know a little about finance. I won't pretend to be as smart as Supergurl, but I'll certainly try.
Its all about cash flow. The old saying goes, "Cash is King." Yes, it is. Cash comes from us: the consumers, the investors, the taxpayers, the savors...all of the above. When we put our money in the banks, our banks use our money to lend and earn interest for us (the depositors) and for the banking institutions (the lenders) administering the loans. Banks anticipate that we won't all pull our money out when times get rough; therefore, most banks lend more than what their cash reserves can handle. When the entire herd rushes to the "cash machine" to withdraw all of the money, panic sets in. And this is what actually has been happening over the past several weeks. I won't bore you with actual money figures, for I'm merely trying to describe present market behavior.
The "big money" wants to pull all of their cash out because confidence in the financial markets has tanked. People are afraid of their money security. This is akin to stuffing money under the mattress. And when everyone stuffs their money under their mattresses, there is no money left to lend. This is what the talking heads refer to as "credit drying up."
We absolutely do not want the credit markets to dry up because credit drives economic growth. It always has and always will. Borrowing essentially represents an individual or partnership betting on future income potential with a promise to pay back the original debt plus interest. Most entrepreneurs cannot make money without money, which is why most firms either rely on startup loans to launch new businesses or lines of credit to fund inventory. In the residential world, borrowing enables individuals and families to buy homes now rather than having to save up for 30 years while living in a rental property. Borrowing has improved our ways of life. Period. So when credit dries, growth slams to a screeching halt causing most economies to fall into a tailspin.
So that is really what this crisis is all about: people want their money under their mattresses, either in the form of dollars or in the form of some other tangible asset like...oh, I don't know...say...GOLD??!!!! Yes folks, this is the reason why gold has skyrocketed in value. It is not backed by debt like the US currency. It is a valuable and tangible asset that has stood the test of time. After all, why back your currency with risky collateral debt when you can pull a bar of gold from the closet? Nixon was dead wrong pulling our currency off of the gold standard. Dead wrong. Fucker.
Solvency is simply defined as the ability to pay all current liabilities with cash. The massive lending institutions like Freddie & mother fuckin' Fannie are in the tank because they don't have the solvency to pay the obligations on all the crap loans out there owned by millions of people around the world, including you and me who might own some of these portfolios in our retirement accounts. And its partly their fault, and partly the government's fault forcing them to loan money to people who can't pay it back. Fuck fuck fuck has political correctness not shown its ugly face to you people, yet? The lack of solvency has caused panic in the market, causing millions of investors around the world to pull their cash from the market. And when the market runs out of money, there will be no more money left to lend. And for those investors out there looking for their monthly payments on existing loans? Well, those who own the good loans get paid (and that money paid will probably not be reinvested in the market), and those who own the bad loans are pretty much fucked.
That's my description of this mess. I probably sucked, but I tried.