The sad truth is that the housing boom that we enjoyed was, no pun intended, a house of cards. People who couldn't afford homes were given interest-only mortgages so that, on paper, they could afford them. Or, people leveraged equity (again, that existed on paper) in their permanent homes to speculate in other real estate markets. Then, when the prices started to plummet, they were unable to sell either home quickly enough and/or for enough money to pay off the loans, and that's when the foreclosures started.
These financial institutions invested heavily in real estate, be it the stock of homebuilders or in mortgages, and now those investments are nearly worthless. Therefore, their "assets" are also nearly worthless and they can't meet their payments.
The other thing to remember, TIS, is that maybe you don't THINK you have much invested in the stock market, but you do. Your pension plan, your money market, your 401K, your long term CD, your bonds, they're all invested. And that's why the volume of trading is so high, and why the fluctuations are really NOT the cause of alarm. In October of 1987, known as Black Monday, the Dow dropped over 500 points, but the volume of shares traded was so much lower than it is today. The Dow Jones average then was probably around 2,000. The Dow was down almost 500 yesterday, but it still closed at almost 11,000. So while the numbers are still frightening, the percentages are completely different.
In addition, you have rising costs of food, energy and fuel, three staples, which has caused a downturn in the money being circulated. Also, many businesses are reluctant to raise prices because they fear it will drive away customers, so they're breaking even or operating at a loss just to keep the doors open. For example, I read today that General Mills saw a nice upturn in sales because people are eating home more. However, because their costs have increased so greatly, despite the fact that sales rose, their profits still fell.
Who can fix it? Time. What goes up must come down. The economy has crests and troughs. Right now we're in a trough. And eventually, although it may take years, it will go back up. And then banks will once again open their purses and make unwise lending decisions. It happens.
