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<blockquote data-quote="squeak9798" data-source="post: 5671836" data-attributes="member: 555320">The simple answer;1) When banks make a lot of high risk loans, those loans eventually go bad and the banks start losing money.&nbsp; When banks start losing money, they stop lending to &quot;high&quot; risk customers, reduce lending to &quot;moderate&quot; risk customers and sometimes even make it more difficult for &quot;low&quot; risk customers to get loans (higher downpayments, reducing lines of credit, reducing their exposure, etc).2) Banks can only lend X amount of money.&nbsp; Banks can&#039;t lend an infinite amount of money.&nbsp; Their ability to lend is dependent upon several different factors.&nbsp; If they are losing a lot of money, and some of their other investment activities go south, their ability to lend is reduced, so they reduce lending their money to high- to moderate- risk customers.Keep in mind &quot;customers&quot; aren&#039;t just you and me.&nbsp; They are short term loans to businesses and other banks for things like inventory, payroll, lending to other institutions and customers, etc.&nbsp; When a business loses it&#039;s short term borrowing ability, they get stuck in a crunch because they have to spend their more liquid assets (cash, etc).&nbsp; If that happens for a long enough period of time, then the companies and other banks start having cash flow problems themselves.&nbsp; Basically, it&#039;s just one big snowball effect.If you owed 90% of the houses original value but the value has dropped by 20%, then if you tried to sell your house you would still owe the bank 10% of the original value.&nbsp; You&#039;re on a variable rate loan (like a lot of people were), the rate adjusts and your payment goes up to a point that you can&#039;t afford it.&nbsp; You can&#039;t sell your house, because you owe more than it&#039;s worth.&nbsp; So the bank forecloses.&nbsp; Repeat this a couple million times, and home values deflate further.&nbsp; The bank takes back the house, sells it for a fraction of it&#039;s current value and lose a BUNCH of money.&nbsp; So they cut back their lending.&nbsp; From here, see the beginning of this post //content.invisioncic.com/y282845/emoticons/smile.gif.1ebc41e1811405b213edfc4622c41e27.gifSecond, many people use the equity in their home for &quot;available credit&quot;.&nbsp; They rack up a bunch of credit card debt, then expect to be able to use the equity in their home to consolidate to reduce their payments.&nbsp; Home values deflate and they can&#039;t do this anymore, so now they are stuck with payments they can&#039;t afford and nothing they can do about it.&nbsp; Or, people use the equity in their home to borrow $$ for home improvements, etc.&nbsp; Values deflate, that equity is no longer there, so they have to put those projects on hold.&nbsp; So now they are spending less $$ in the economy because they don&#039;t have this &quot;available money&quot; that used to be in their home&#039;s equity.&nbsp; So now consumer spending takes a bit of a hit on top of everything else.I&#039;m sure Flip will pimp-smack me if I&#039;m way off base.....but that&#039;s a general idea of why those issues matter.</blockquote>

[QUOTE="squeak9798, post: 5671836, member: 555320"] The simple answer; 1) When banks make a lot of high risk loans, those loans eventually go bad and the banks start losing money. When banks start losing money, they stop lending to "high" risk customers, reduce lending to "moderate" risk customers and sometimes even make it more difficult for "low" risk customers to get loans (higher downpayments, reducing lines of credit, reducing their exposure, etc). 2) Banks can only lend [B]X[/B] amount of money. Banks can't lend an infinite amount of money. Their ability to lend is dependent upon several different factors. If they are losing a lot of money, and some of their other investment activities go south, their ability to lend is reduced, so they reduce lending their money to high- to moderate- risk customers. Keep in mind "customers" aren't just you and me. They are short term loans to businesses and other banks for things like inventory, payroll, lending to other institutions and customers, etc. When a business loses it's short term borrowing ability, they get stuck in a crunch because they have to spend their more liquid assets (cash, etc). If that happens for a long enough period of time, then the companies and other banks start having cash flow problems themselves. Basically, it's just one big snowball effect. If you owed 90% of the houses original value but the value has dropped by 20%, then if you tried to sell your house you would still owe the bank 10% of the original value. You're on a variable rate loan (like a lot of people were), the rate adjusts and your payment goes up to a point that you can't afford it. You can't sell your house, because you owe more than it's worth. So the bank forecloses. Repeat this a couple million times, and home values deflate further. The bank takes back the house, sells it for a fraction of it's current value and lose a BUNCH of money. So they cut back their lending. From here, see the beginning of this post [IMG]//content.invisioncic.com/y282845/emoticons/smile.gif.1ebc41e1811405b213edfc4622c41e27.gif[/IMG] Second, many people use the equity in their home for "available credit". They rack up a bunch of credit card debt, then expect to be able to use the equity in their home to consolidate to reduce their payments. Home values deflate and they can't do this anymore, so now they are stuck with payments they can't afford and nothing they can do about it. Or, people use the equity in their home to borrow $$ for home improvements, etc. Values deflate, that equity is no longer there, so they have to put those projects on hold. So now they are spending less $$ in the economy because they don't have this "available money" that used to be in their home's equity. So now consumer spending takes a bit of a hit on top of everything else. I'm sure Flip will pimp-smack me if I'm way off base.....but that's a general idea of why those issues matter. [/QUOTE]

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