The world economic crisis - a Simpleton explanation

The US came close to being unable to meet its debt repayments this year and faced being ‘downgraded’ by credit agencies in the same way when you miss a credit card payment you can’t borrow more for a while. Greece needed baling out by the European Union in the same way you may call Dad to pay off some of your debts if you lose your job.

 The world economy was seriously damaged, and went into recession because of irresponsible lending by banks – the so called Credit Crunch. A recession is when the economy stops growing and starts shrinking. Banks were giving mortgages to people who could not afford to pay them and when lots of them defaulted on their repayments many banks went bankrupt and others had to be bought by their host countries.

 Those countries had to find silly amounts of money to stabilise the banks, which were seen as too important to go under. Problem was, with countries going mad with credit due to a decade long economic boom (economies were growing) there was nothing left in the tank to bail out the banks. Iceland nearly went bankrupt, and is being sued for billions by the UK – money it just doesn’t have!

 Even worse, with the economy going into recession, countries couldn’t do the equivalent of meeting their minimum credit card repayment because their tax income was shrinking. Now countries are facing bankruptcy.

 Some people say it is unfair that those in most need of government help – disabled people and reliant on an income from the state to survive for instance – should suffer while people on 7 figure salaries get their jobs and livelihoods protected. I’m one of them! The flipside is that banks enable countries to pay their debts by making economies grow, and economies growing mean that governments can spend more money on services for their citizens.

 There are calls to make banks lend more to businesses. If banks lend more to businesses, so the theory goes, they grow and pay more tax. Businesses paying more tax mean that countries themselves can pay off more debt and have more cash in their wallets to pay for public services / military adventures abroad. 

 Is this right? If you’re a successful entrepreneur who likes to speculate to accumulate, so you would say that a world controlled by banks is the way to go. If you are disabled with a long term illness and face your state income being slashed by the government whose credit cards are maxed out, you’d think otherwise. The system is as it is, and unless there is a revolution in the USA by a bunch of radical armed left wing economists, we aren’t going to see much different in the foreseeable future.