It goes back to the nature of our banking system. We have fractional reserve banking. Ten dollars is deposited in a bank, and it can lend out a hundred dollars. This is the law. It is lawful.
If the economy contracts, loses, whatever ten percent, the shock is increased back to the banks, all through the lending, loan, credit system.
Everybody starts running for cover. Kind of a musical chairs. There are only 9 chairs worth of money for ten economic actors. Some people try to sit on two chairs, cahos.
Further. During the boom times, there is a lot of bad, poorly run business going on, but the easy money hid it. GM for example. When money got tight, credit got tight, customers few, prices squeezed, all sorts of lousy run, corrupt run, weak, poorly run companies, like old infected deers in a harsh winter, got killed off, or should of, but got bailed out by you and me. GM, AIG, ect.
Derivatives are everywhere, and have been. Nothing wrong or right with that.
On the plus side. People will go to school to learn( some, anyways ), people like to buy, other people like to sell, people like nice houses and new cars. Kids get born, old die. All the true, real economy exists as it has always. We just, unfortunately, have a predominantly leftist elite and political class that get’s in the way of us all sorting it out, pushing the old economy off on a iceberg and getting our new economy on it’s feet.
Thanks for the explanation. I have been told that derivatives exacerbated the bad loan problems. They took one bad mortgage and spread it throughout several different portfolios. I would appreciate your thoughts on that.
So you open a new bank. I'm the only depositor and I put in $10, say 10 singles.
Next guy comes in to borrow $100. Show me how you make that happen with only 10 singles in the vault. Thanks.
I suspect the FR "too big" wall street banking disinformation cabal will nitpick you on this. (Oh, I see they've started already!) So let's explain the way it actually happens; $10 is deposited. Assuming 10% reserve requirements, $9 can be lent out. That $9 is deposited, and $8.10 can be lent out, and so on. In the end, potentially, the original $10 in deposits can become $100.
Here's a good textbook on the subject, for those interested in how fractional reserve banking works, (and can lead to booms that result in busts like the one we're experiencing now.)
If you're a poor student and can't afford the book, you can download a free PDF version.