The basic reason of the recent economic crisis is lack of demand

Posted by infoshelter under Global
From http://www.redgage.com 4881 days ago

Lack of demand, magnified by excessive optimism and greed, resulted in the recent global financial crisis.

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Written by businessavante
4881 days ago

I thought it had something to do with bad home loans - is that wrong?

businessavante

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Written by infoshelter
4881 days ago

Hello Businessavante,

The reason why bad home loans were given by banks, on the one hand, and were taken by consumers, on the other hand, was the belief, that those loans could be safely paid back.

Both sides, suppliers and buyers of loans, strongly believed in that outcome, otherwise they wouldn't give or take (depending on what side they were) so many loans.

All of a sudden, taking a loan was such an easy task, that people just a few decades ago wouldn't even dream of.

Optimism and belief in the payer's ability to pay the loan back (though not always verified by formal procedures, due to the banks' greed for fast, even not secure profit) ignited an overwhelming supply of loans.

Because loans are intangible consumer products and their cost is not immediately shown to the consumer's pocket (repayments may last for more than 30 years in many cases), consumers did not hesitate to take loans, based on the (wrongful) assumption that their income, and generally speaking, a strong, spending, consumer-oriented economy, would last for ever-or at least until they had fully repaid their loans, which, as we know now, did not happen.

This misleading assumption affected firstly the consumers themselves and in turn, all other individuals and businesses that were financially related or even dependent on them. This domino effect spread over the whole spectrum of industrial and financial activity all over the world.

Will it happen again? It certainly will, as it has happened so many times in the past, and so frequently in some cases, that it makes us wonder about people's weak memory and how easy it is to persuade us to take certain actions, based only on sentiments, such as overwhelming and groundless optimism and entusiasm.

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