We're Screwed

We're Screwed

Recently, "The Big Short" depicted how the events leading to the housing crash of 2007 and why the big banks failed.  It was a well timed film, because today, we are on the verge of another economic crisis.

In the 2007 crash, the housing market collapsed because people with subprime mortgages could not afford to pay their bills and the shares and futures that these mortgages were dependent on started to decline.  These shares and futures were bundled in collateralized debt obligations, or CDOs.  The shares in these CDOs did not need to meet the same standards as those in a prime mortgage, so they were filled with volatile stocks and commodities that were likely to decrease in value.  When the shares that these mortgages were built on failed and the owners could not make up the deficit, the banks were forced to foreclose on their properties in order to keep from losing money.  Because so many people had subprime mortgages and all of their houses were being foreclosed, the banks were left with nothing and the economy collapsed.

The same thing that happened in the United States in 2007 is happening today.  Chinese mortgages are not built on CDOs, but their entire market is in jeopardy, meaning that their housing market is destined to collapse as well.  The Chinese markets have dropped more than 12% since the year began., and almost 40% since June.  The Chinese have been focusing less on exports, and domestic industries took a toll.  Many Chinese companies saw little growth this year, and it is showing in their market's decline.  The Chinese government were forced to close their market today after it dropped more than 7%.  To top it off, large-scale investors were previously restricted from selling stock, and this expires tomorrow.  Fear will lead to panic selling tomorrow, and many of these investors will dump their shares, causing the market to fall even further.  When it opens tomorrow on Friday, January 8, the market will plummet.  This will have rippling effects across the entire world economy, as China has 17% of the world's wealth.  We are currently looking at a recession equal to or greater than that of 2008.

We're screwed (unless the market rebounds next week).

Edit: Never mind.