here's the scoop... it's all to do with the money
markets..
you know about banks buying each others' stuff... like say, i'm
this el-crapo bank in the US and i keep lending these inbred
rednecks who spend the money not on their home loan but on
moonshine and lard...
i've got this huge account full of these ill-conceived loans.. so
to keep from going under, i sell these things to another bank for,
say.. 70% of the face value.. the other bank then assumes the
risk..
everyone goes on an orgy of selling crap in the money market
keeping the best performing (thus stable and profitable loans)
accounts for themselves.. these instruments become part of
everyone's portfolio..
so, when the &$*# hits the fan, and one segment dies (in here,
the sub-prime market).. that part of my portfolio just became
worthless... my portfolio is now not worth as much.. people try to
sell the stuff... others who have my instruments in their own
portfolio will be in trouble too.. and their price drops..
it starts an ugly downward spiral where the rats start to leave the
sinking ship.. and it affects the price of the company..
now companies require credit and liquidity to operate.. and if
their net worth starts plummetting, banks (which are already in
trouble) will start calling in the debt.. killing the companies as
credit and liquidity dries up..
once the companies start dying, panic comes in and the other banks
start to call in their debts, killing even more companies, which in
turn will kill the banks.. which will kill the economy...
the central bank pumps liquidity into the system in order to stop
this from happening..
all in all, it's simple.. the money markets, banking system,
companies and corporates are run by people who will not hesitate to
slit your throat in order to survive one more minute even if they
know that their long-term survival is dependent on you...
