What has gone wrong with the world economy is something everyone is asking and people far more intune with the world can’t answer. Anyway the recent crisis was summed up recently like so. (hat tip Turbelence Ahead)

To understand the underlying reason why the enormous deleveraging triggered by the still-expanding financial crisis is doing much less damage than generally expected to the real economy, consider the following example: before the arrival of “hyper-finance”, if a family wanted a £100,000 mortgage they would go to the Halifax and simply borrow £100,000. Now consider what would have happened in the new financial world. The family would have borrowed £100,000 from Northern Rock, which would sell £100,000 of bonds to hedge funds, which would buy these bonds with £100,000 borrowed from Bear Stearns, their prime broker, which would raise this money by selling £100,000 of commercial paper to Citibank, which would then borrow £100,000 through the inter-bank market from Halifax. The original borrower is still the same household and the ultimate lender is still Haliax, but now a £100,000 mortgage has created £500,000 of new debt.

That seems to suggest that people simply did not understand the risks they were taking and the risks were not based on realistic assets. Usually the idea is. Your get a morgage from the bank for 100,000 for your 100,000 thousand pound house, If you cant keep up payments the bank gets the 100,000 pound house and flogs it for 100,000 pounds to cover the money they lost. All very good and proper. The problem is that is not how it happened. The above happened and 500,000 of debt accured on 100,000 of assets. The debt was not backed up and in away was illusionary. They were robbing peter to pay paul who robbed petter to pay petter there was not money.

Also the ellbrate webs of money seemed to create a situation where people didn’t see the bigger picture, Bank A borrowed possible in good faith from a bank B believing that the money they were owed from Bank C is good. When in fact Bank C was loaning them debt with nothing much to back it up. These banks seem to be trying to make money appear out of thin air. Moving imaginary amounts of it about.

People see this as a crisis in the building Industry. It really has very little to do with the bulding industry save for the fact that buildings are the largest sources of loans what has caused this is.

Is this the end of Capitalism like so many seem to wish will happen? No give it ten years people will look back and think man Katty Perry sure was annoying