Since 2008 we have heard and seen the sheer terror created whenever an event occurs which threatens to “bring down” the capital markets. Bank failures, credit freezing up, the collapse of the “system” all gets tossed about but what does it mean?
Suppose you work up tomorrow and all of your credit cards were cancelled. No Visa, no Exxon card, no Macy’s card. Furthermore, you receive notice that your home equity line is also cancelled. Now the problem becomes that you want to go shopping, travel and buy things but all you have to spend is the $75 cash in your wallet and the $500 you have in your checking account. Your next pay day is two weeks off. You have bills coming due which you probably won’t be able to pay.
The same thing happens to a bank or a firm such as Lehman Brothers when its credit “dries up.” Just like for an individual, if no one will loan to you, your ability to sustain yourself economically vanishes.