This is How The Economy Went Bad

[ZakShow]

How did the economy went bad? Low interest rates, assurance of mortgage brokers, stock market losses and the US electoral campaigns are essential factors on how the economy went bad (http://www.zakshow.com/how-did-the-economy-go-bad/). This chart will explain and clarify everything:

http://www.zakshow.com/wp-content/uploads/2009/01/economy_redo.jpg

What do you think?

[Fergal]

As good an explanation as any.

The trouble in the Irish economy is very much tied to the construction industry as explained by points 1 & 2 in your chart. More here - 30 Steps to The Collapse of the Irish Economy! (http://www.businessadviceforum.com/showthread.php?t=2704)

[kingmurtaza196]

I agree with point 1 & 2. Banks offered low interest rates to the people & people started buying expensive homes & other expensive stuff thinking that they only have to pay the interest.. People just used to pay the interest of the money with their other income & when suddenly the economy fall down, the banks wanted their money & people had no other clue rather then selling their homes . As economy fall down, people who had loans lost their jobs.

Let me know if I am wrong at any point :)

[Nazreen]

I think this article with this explanation on how the economy went bad was first posted on the ONION (http://www.theonion.com/content/infograph/how_did_the_economy_go_bad). So credit should go to them.

I agree with you kingmurtaza196 about the low interest rates but as mentioned in another thread in the forum, I also think that human greed is the root cause of the US economy going bad. With the low interest rates, people were greedy and bought 2 - 4 houses on mortgage thinking that it would be a good investment . The banks and mortgage companies were also greedy and approved these applications without really even checking whether these individuals would be able to pay. After a majority of Americans already had these mortgages, the price of houses went down and with that, the US economy as well. People started defaulting in their payments and the banks started losing money. The banks then started tightening on their credit lending and with that the economy went from bad to worse. People no longer have any money to spend on vacations and other luxuries.

Well that's how it started anyway. Local banks and investment firms started going bankrupt, people spend less and less and retailers and businesses are also closing down. And to make matters worse, gas prices also went up.

On a lighter note, I don't think John McCain has anything to do with it. It might just be coincidence but with President Bush going down, so did the US economy go down as well. LOL :D

[Fergal]

...I also think that human greed is the root cause of the US economy going bad. With the low interest rates, people were greedy and bought 2 - 4 houses on mortgage thinking that it would be a good investment ...

Would you still call it "greed" if things had worked out differently and the economy did not go belly up?

If the economy had leveled out and slowed down without collapsing, these people would be comfortable and in a position to afford the best health care and education for their children. If it had worked out that way would you not describe these people as successful, ambitious, risk takers who worked hard to create a better life for themselves and their families?

The word "greed" suggests that there is something wrong with taking risks and trying to better yourself?

I invested in property myself and because of the dramatic fall in property prices, my investment is gone. To some extent, I was greedy and I sincerely hope that I've learned from my mistakes. I'd be better off financially today, if I'd spent my money on a fancy car, but would I be a better person? I somehow don't think so. Hopefully the experience gained and lessons learned were worth the financial cost.

Yes, I could have given a lot of money to charity to help people less fortunate than myself and because of negative equity I'd personally be in a better financial position today. Maybe someday I can make amends for that.

Don't worry I'm not offended by your use of the word "greed" I ask the questions because they are questions that I've grappled with myself.

Truth is, there is probably a very thin line between ambition and greed and in our heart of hearts we know when we've been ambitious and when we've been greedy.

[Nazreen]

I think we could call it that if people are blinded by greed. Their decisions would have been irrational because they're risking more than they can afford to. As these popular sayings on greed, "Don't count your eggs until they hatch" and "Don't bite more than you can chew" ... buying 2-4 houses on mortgage is greed if you cannot afford to pay for it.

As with any kind of investment, we shouldn't risk everything on it. Especially if you're just starting in investing, investors should start small and keep their investment portfolio manageable.

[Fergal]

Property investments are different to other investments because of the way they are generally mortgaged. If you get a 90% mortgage to purchase a property and then the property value falls by 10%, you are effectively left with nothing. Because, if you sold the property you would only have enough money to pay back the mortgage. This example is oversimplified, in fact you would be worse off - when you consider prefessional fees, mortgage interest etc.

Using the example above, if the value of your property fell by 20%, you would actually have lost more than you originally invested. This is the unfortunate situation that many property owners now find themselves in.

Other investments, such as shares, are generally not mortgaged in this way. So if the value of your investment falls by 10%, you only lose 10%. Property was traditionally considered to be a very safe investment. Hence, the expression "safe as houses". Not anymore!

This is the first time in Ireland's economic history, that houses prices have ever fallen significantly. Therefore, it is understandable that investors stretched themselves in the hope of greater returns in the future. The same investors would most probably have never stretched themselves to purchase shares or for other types of investment.

[DEADMAN]

Interesting fact as explained.

I quite knew that housing thing is going popular at US at lower rates. That is what making things complicated.

Also, "free money" why don't people realize that there is no such money freely without doing anything?

Giving loans to them who can't afford them - is somewhat I think is ruining themselves and whole business and continuing world financial crisis.

Well, the remedy would be to apply strict policies by Government and people being more awared to avoid future new troubles.

[Fergal]

Sub-prime mortgages sparked off lots of problems in the US. By comparison The Irish economy actually had only a tiny proportion of sub-prime mortgages, yet we managed to follow the US economy down the unemployment and negative equity paths.