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Issue date: 10/16/08 Section: News

Numerous contributive factors led us to frozen credit in the American market, the depreciation of bank assets. However, the most oft-repeated reason for our rough and tragic situation is the real estate market. In layman's terms, what happened was the result of a shared assumption by the parties involved: the United States would always be profitable and that real estate values would always be on the rise, steadily or otherwise. Bank lenders were selling loans they had made, turning a profit from the fees paid by the investors who had bought loans without worrying about the actual borrowers of those loans ever paying them back, because the borrowers failing to pay had become a risk taken on by the investors. This is where most agree the problem started.

"The American consumer is, basically, going to stop consuming and start rebuilding her/his savings--especially when [home equity begins to decrease] and when you have the economy at 70% consumption. You can't address those imbalances without a recession," predicted Schiff in 2006.
Since then, borrowers, en masse, began to default on loans. The investors formerly keeping the banks above water by buying up loans are no longer willing to make risky decisions; the banks no longer have the steady flow of income from the investors and, thus, cannot distribute loans to those in need. Among other things, credit has begun to stagnate. Banks started foreclosing on their homes as a result, causing the value of homes everywhere in America to slide steadily down until we reached a place where even those that could (and were) maintaining their payments started to walk away from houses for which they had originally mortgaged. For example, a house initially worth $120,000 may have had its fair market value plunge to $80,000. Fair market value, by the way, is simply an estimate of what a willing buyer would pay a willing seller for an asset or property. Furthermore, home equity can be calculated by subtracting one's mortgage balance from the current fair market value of their home.

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