by Gerald Davis

Created on: February 23, 2009

On talk radio and TV news shows there has been a lot of banter about what actually caused the financial meltdown and whose fault it is. People like Rush and Hannity blame democrats and the banking rules that forced banks to make bad mortgage loans to people who could not afford them. Others just do the popular thing of the 2000's, blame Bush for allowing deregulation in the banking market. Each of these arguments try and score political points for their own side.

I realized what happened was pretty much a combination of sabotage, greed, and confidence. The whole thing started with Bear Stearns bank. It was a simple wall street rumor that started the whole thing. A rumor was floated that the bank was in trouble. This was reported immediately by CNBC. Once it hit the airwaves, people got scared and lost confidence in the institution and began selling shares and withdrawing funds. It was a run on the bank. The problem is that when a run occurs, you find out the bank really does not have all that cash on hand. When a bank can't meet those obligations it fails.

When the bank failed, experts went in to find out what happened and that is when they found out about all the bad mortgages and what had been done with them. It wasn't necessarily that the housing market was going south and that foreclosures were up, that happens. What the problem was, was that the bank had written insurance policies guaranteeing that the money would be paid if the mortgages went bad. It was the assumption of the bank that prices would continue rising and they would not have to pay those debts, only collect the insurance premiums. Bad assumption.

One thing that they also discovered was that all of these guarantees were purchased by nearly every other major financial institution. With Bear Stearns unable to pay on the policies, the companies that bought those policies were all of a sudden unable to meet their obligations. AIG, Fannie Mae, Freddie Mac, all would fall as a result of the domino effect, thus making confidence in the entire system go bad. When there is no confidence, people pull out their money, and these companies operate on other peoples money. You deposit your money, the bank lends that money to someone else, then it gets paid back with interest. With all the money gone, nothing to lend. The lending market freezes.

When the lending market froze, this put every other company in jeopardy because every company lives on loans. Without those cash loans, they can't pay their bills. The

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