In case you haven’t been paying attention, or just simply ignored the crisis, NPR’s This American Life had a great summary and explanation of the current mortgage/housing crisis in the U.S.
Here’s a very brief summary as I understand it. Basically there’s suddenly been all this new money in the world. The amount of money being spent worldwide doubled over the last 6 years.
Poor countries were becoming richer and richer by making things like TVs and selling oil so suddenly there’s LOADS of money with no place to invest. And what good is money if you can’t invest it to make more money for you? So we end up with twice as much money looking for investments but not twice as many places to invest into.
Alan Greenspan kept the fed interest rate at 1% – so that folks couldn’t make money off of us treasury bonds. The show says basically, Greenspan said, “Screw the international pool of money – we’re not going to help you make money off our treasury bonds.” Ha!
So the investors looked for other places to invest – like the US housing market. And investors were willing to take a risk on mortgage loans in order to make well more than 1% on their investments.
But of course the investors don’t want to worry with the hassle of individual loans so folks on Wall Street found a way around the issues and hassle of individual loans. Folks would sign on to a mortgage at 5-10% and then those loans are sold to small banks who then sell them to a guy on Wall Street.
That guy on Wall Street now has several thousand loans with big fat checks coming in every month – and will be scheduled to come in for the next 30 years. So he turns around and sells shares of his investment to all these folks with loads of new money, aka mortgage bank securities.
By 2003, just about everyone who could qualify for a loan could get one – yet the money was just getting started. So the loan qualifications and guidelines got looser and looser till folks could get half-a-million dollar loan without any proof of income.
Of course the more loans you give out, the stronger your security will be.
“We almost couldn’t produce to help keep the appetite of our investors happy.”
And the rich get richer and the poor get poorer.
Of course this is just a brief summary of a one-hour program. Listen online for the real details and what really started the crisis.
