I have been predicting an economic downturn since 2005, based on the lackluster "recovery" from the dot-com debacle. Jobs have never "been there" despite low unemployment, and banks [backed by the infamous Federal Reserve interest-rate hikes] have been squeezing ever more blood out of the middle class. (Who can really afford 25-30% interest rates on credit??)
Real-estate appreciation led many people to re-finance their homes as a way of getting spending cash. BUT the loans being "pushed" were ADJUSTABLE rate mortgages (ARMs), with low initial "teaser" rates but blockbuster "reset" rates nearing (or exceeding!) double digits. Teasers made it easy for buyers to qualify for loans they really couldn't afford. No one was complaining because home sales and refinancing were keeping the economy "thriving" [GW Bush, Aug 2007] So now with real estate prices at "plateau" levels (everyone who can afford one has one, no one who doesn't have one can) , the mortgage/re-fi boom is over. No more easy cash to spend on consumables, AND no way to pay the mortgage.
OK, I thought the impact would be in loss of consumer purchasing power (drop the GDP).
What REALLY happened is that the failure of these "subprime" mortgages tanked financial instruments that included them! If the loan won't be repaid, it's value is zero. How do you know how many will fail?? Hence, all the hedge funds et al can't be reliably valued and nobody wants to be stuck with them!
Different cause, same result: economic depression, possibly leading to a recession. Triggered,
ironically, by the Fed jacking up interest rates to try to cool down the economy and control
inflation. If there's a lesson here it's that you shouldn't mess with things you can't control or even fully understand! [rant off]
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