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How has the recent banking crisis affected the stock market?
Do you think this change in the stock market is related to the downturn in banking?
It has a very strong effect on the economy because of the multiplier effect from economics.
Businesses need to borrow money to continue to make money. Under the current situation, banks aren’t lending out money.
An example is like, you own store that sells tee shirts. You go out and borrow money to order 5,000 from your whole seller at $5 per tee shirt, and then you try to sell each tee shirt for $20. Pay off the rent/your workers, etc and payback the bank as quickly and possible and the rest is your profit.
What happens when the bank doesn’t want to lend you money anymore? Well to be safe you now need to use your own money IF you have enough, most likely you are not going to order 5,000 this time or even worse close down.
Because of economics of scale if you order under 5,000 tee shirts your wholesaler might even charge you more per tee shirt. Maybe 1000 tee shirts will cost you $8 per shirt, which cuts your profits even further, etc.
So now you close your shop and you are screwed. But since this is happening to everyone. The mall where your shop was can’t find anyone to replace your store. So he’s screwed too. And the teenage workers that use to work at your shop are screwed too since they don’t have a part time job anymore. etc etc
It sets off a very bad chain reaction.
October 4th, 2009
The banking crisis has killed the stock market because banks are not lending money as easily. This witholding of capital slows the economy (cash is being sat on or "mattressed"), which hurts earnings of businesses, which drops stock prices.
Boo-yah, take that Cramer! lol
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October 4th, 2009
It has a very strong effect on the economy because of the multiplier effect from economics.
Businesses need to borrow money to continue to make money. Under the current situation, banks aren’t lending out money.
An example is like, you own store that sells tee shirts. You go out and borrow money to order 5,000 from your whole seller at $5 per tee shirt, and then you try to sell each tee shirt for $20. Pay off the rent/your workers, etc and payback the bank as quickly and possible and the rest is your profit.
What happens when the bank doesn’t want to lend you money anymore? Well to be safe you now need to use your own money IF you have enough, most likely you are not going to order 5,000 this time or even worse close down.
Because of economics of scale if you order under 5,000 tee shirts your wholesaler might even charge you more per tee shirt. Maybe 1000 tee shirts will cost you $8 per shirt, which cuts your profits even further, etc.
So now you close your shop and you are screwed. But since this is happening to everyone. The mall where your shop was can’t find anyone to replace your store. So he’s screwed too. And the teenage workers that use to work at your shop are screwed too since they don’t have a part time job anymore. etc etc
It sets off a very bad chain reaction.
References :
Keynesian economics
October 4th, 2009
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