Did the stock market crash because the banks were failing? How do failing stocks affect the economy?

In words that I will be able to understand, can anyone explain to me the correlation between the banks, the housing crisis, and the stock market. And how does the stock market affect the economy itself? I am just beginning to understand what the stock market is, so numbers and statistics are really not helpful.|||Basically it comes down to this:





1. Banks loaned money or gave credit to so-called 'high risk' people who were less likely to pay their debts, hoping that they would run into difficulty and be forced to pay a higher interest rate on the loans and increase the profitability of the loan.





2. Instead of being able to pay when the interest rates increased, lots of these people were unable to continue to pay the higher interest payments, so they defaulted on their loans and were forced into bankruptcy.





3. The banks, who expected customers to keep paying the high interest, were faced with credit cards and loans that were losing money due to huge amounts of bankruptcy.





4. The banks had no money to loan to home buyers.





5. As businesses get into deeper credit trouble, they start laying people off in an attempt to cut costs. As they lose money, the stock market, which is basically a betting shop based on confidence in businesses, is filled with people selling their stock.





6. As the stock prices go down, the companies are perceived as being worth less. That means they will not be able to get loans as easily. In order to stop this, a company may lay off even more people in an effort to appear more profitable.





The result - people and businesses owe more interest than they can pay, businesses go under, the housing market collapses, banks go under, the stock market crashes, unemployment goes through the roof creating a vicious circle (i.e. even more people defaulting on credit and loans) that could have (and still could) result in a 1929-style crash.|||Actually, there is little relation between the two. A rising stock market is a good sign, and a falling market is a bad sign, but most investors are primarily interested in short-term gain, so the market is not much of a measure of the economy as a whole.





Some commentators mistakenly have argued that the return of market levels to those of two years ago means the recession is over. Some truly believe this, but others are cynical who simply want to preserve their own wealth. Most commentators on both TV and radio have incomes that far exceed the average income in the US, and it is in their interest to have the market improve, even as thousands are unemployed, forced into bankruptcy, or lose their homes.|||The falling housing prices meant that people could not pay off their mortgage by selling their house, so many just waked away and let the banks take the loss. The decline also made people less "wealthy" so the reduced their consumption even if they had no change in their income which hurt the economy and profits of companies





The banks lost so much money on the mortgages, and derivatives that many became insolvent so they stopped making loans for home mortgages and businesses. The difficulty getting mortgages reduces sales and made housing prices fall more and Many businesses depend on bank loans so they had to cut back which slowed the economy more and all businesses made less profits.





What people will pay for stocks depends on there expected profits so with profits down the prices of stocks fell. Because of the uncertainty there was some panic and they fell more than they should have just based on the reduced profits





The fall in the stock market also made people feel less wealthy so it further reduced spending causing the economy to get still worse and profits and home price to decline more. For the next step go back to top.|||None of them were the cause. They were all the effect of a larger force.





Economist Harry Dent figured out and wrote in "The Great Boom Ahead" that recessions and depressions are caused by the dominant generation passing it's peak spending years, which is ages 45 to 50. By then their kids are out of the house and out of their wallets. They start saving for retirement. Savers don't boost the economy.





The Great Depression was caused by the Henry Ford generation passing peak spending and it was cured by the Bob Hope generation moving into their peak spending years.





Our current situation is caused by the Baby Boomers passing their peak spending and it will be cured in about 8 to 12 years by the Echo generation entering their peak spending.





New Deals and stimulus packages have only transitory effects.|||The banks was just one of the problems. But you're right. It's mainly the problem. The banks were making bad loans to people who can't afford to pay it back. So, people who have mortgages to their homes have to default. That drops home values. Some people who's house has drop in value significantly decide to just stop paying. So banks are not getting any money from these people. So they can't use the money to loan to businesses who need it. This causes businesses to laid off more people and close down. Since people lost their jobs, they decide to save money instead of spend. If people don't spend, nothing in the economy works.