Basically, in the 1970s, the US  banks started to realize the fact  that to get more money, they had to lend money out to people. The realized that banks don’t make a huge amount of money just from having your money sitting in the bank.They will have to roll it around to make profit. That’s when banks realise that not everyone withdraw their savings out at the same time. So they have a option to lend the money invested by other people

Suppose you have £100 in the bank A as savings, the bank will lend out £75 of that to other banks B and start to earn interest on the loan given to  the other bank. So now, technically you still have £100, and the bank who borrowed the money from the other bank(B) has £75. So it seems like there’s £75 more in the financial system. Bank B will then lend that money to a consumer (that’s you or may be your friend) and earn enough interest the person pays back the bank B .In turn bank A also makes money in the process from the interest paid by B.

So, now that there’s £175 in the system instead of just £100, what happens when you want to take that money out? Bank A will have most of its savings in similar schemes, but people wont  take their savings out at the same time (normally) so Bank A just uses other peoples savings to pay your savings.

So where’s the problem? The problems arise when the consumer who take money as Housing loan can’t afford to pay back. Normally bank can sell the house to repay debts. The problem is that the house market has crashed. SO the bank B don’t get enough money to pay back Bank A.  Bank B was a little worried, but handled the situation by borrowing money from bank C to repay the loan taken from bank A. The same procedure repeated again and gain and the chain build up.

The main issue was there was Lot of money theoretically but it is a vistual concept.

The main reason for the collapse is that too much of the financial market was reliant on rising house prices and continued growth. The banks themselves stimulated the growth by making credit easier to get hold of, so people would spend more and the overall wealth of the country would increase. This was great for everyone, because everyone seemed to be making money. The problem with this is that the money was coming itself from the promise of money, not from any proper trade, so we were using money that only theoretically existed to buy things from other countries, living a life of luxury.

Unfortunately for us, this wasn’t sustainable and so the house market collapsed, unemployment began to rise as our export sectors got out priced by other countries not seeing the same growth as us, and now we’re in a recession. Eventually it will even out, but not for a long time will we be able to live like how we have for the past 30 years.