Working at the copyediting desk for the past week and reading almost all the articles that appear in the paper, I’ve been inundated by the gigantic financial crisis that went on earlier this week with the collapse of Lehman Brothers, the takeover of Merrill Lynch and the AIG troubles. While I’m no financial genius and can’t fully understand some of the stuff about the crisis, what I do get is that the troubles are largely based on these banks, brokerage houses, Wall Street firms etc holding so much worthless junk assets especially those sub-prime mortgages and other such risky loans. This confirms my suspicions that I’ve had for a while on how can an economy/ financial system be driven and sustained by loans. In North American society, it seems like everything purchased or owned is based on debt whether it be houses, cars, furniture and even tuition. For instance in Toronto, all those condos and big suburban houses being built are mainly bought by people who pay off small deposits and huge mortgages. Surely a system can’t be sustained if it’s based on non-existent virtual money? Surely this “culture of debt” will crash down some time sooner or later.
Of course, the problem really started to unfold when financial companies like banks and brokers, and even an insurance powerhouse, started to play around with all this risky mortgages/loans etc. to manipulate it to get as much as they could out of them all until all hell went loose this past week.
From Mary King in the Trinidad Express: Eventually [sub-prime mortgages] were securitised and sold as financial capital to investors — creating products that earned money not only for the initial lender but other investors around the world. The accumulated risks attached to these new products, derivatives, were difficult to access and via “liquidity-puts” the risks were accepted by the seller of the security. These new financial products create absolutely no new benefit in the real economy and only redistributed the wealth from “Main Street to Wall Street”. The collapse of the US construction sector then created huge losses for the sellers.
Anyways here’s a link to an article that gives a proper account of the crisis.