Mike Fleming Posted January 26, 2014 Posted January 26, 2014 I recently thought up this simple way to convey the GFC using analogy and was looking for comments/criticism. So, let's say there is this guy who is doing really well for himself. He is a real high-flyer, he's spending money and enjoying life. Then let's say for whatever reason the money dries up, he loses his job, whatever. He's down in the dumps. It's his own personal recession if you like. So people look at the guy and say "how can we help this guy get back on his feet?" Then the answer comes. "I know, we'll give the guy a credit card with a huge limit. And because we know he doesn't have much money incoming, we'll drop the interest rate below what it normally is so that he can service the debt". Over the next few years the guy is back to normal spending money on his credit card and enjoying life. He's having his own personal boom if you like. Do you know where the story ends? Well, eventually he reaches the limit on his card and is unable to borrow any more. This is his personal credit crunch if you like. Now he can't spend the money to keep up his lifestyle, but he still has a huge debt to service. But he was using borrowings to help manage the debt. Eventually he reaches a point where the debt can't be managed anymore. Now he is in his own personal financial crisis. End of story. The difference collectively is that when the financial crisis arrives where society as a whole is unable to even service the debts any more, it is not so much the borrowers problem as the banks problem. I don't know exactly how the old adage goes but it's something like "if you owe the bank a million dollars you have a problem, if you owe the bank a billion dollars the bank has a problem". Hence, banking crisis.
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