An Unsolvable Problem????
At the end of the day, a bank's, insurance company's, and pension plan's assets are primarily loans that the institution depends on getting paid to generate income.
Many many banks are leveraged 3, 4, 5 to one and more. In other words, if it has $100 dollars in deposits, it may have loaned out $500 or more depending on capital.
Here is the problem, if only 25% percent of its outstanding loans default, all of the deposits could be wiped out. Right now, most bank debt is focused on residential and commercial real estate debt. Many smaller banks have the majority of their outstanding loans dependant on commercial real estate debt. This area is really beginning to heat up as far as defaults go. In the next few days you will likely be reading about a few more banks failing.
Most of our country's assets is debt. In order to hold its value, debt must perform. The problem is as income falls at faster and faster rates....more and more debt is defaulting at the municipal, corporate and individual level.
As debt defaults, banks can't lend causing even more defaults. As the spiral grows, the economy slows as business after business shuts down and job after job is eliminated.
At this point, lots of people are sitting there wondering what is going to happen next. Never in our nations history have so many been unable to meet their obligations......and we are just beginning.
How do you finance $40 Trillion in debt with only $5 Trillion in the bank and not enough revenues to service the debt?
Not only that, we have a huge wave or people retiring thinking they will be supported by the few below them who are going broke............very interesting times indeed.....no wonder Paulson seems beligerent every time he speaks....