Economic Crisis Origins

[Stormieweather]

Anyone able to clearly describe this (economic crisis origins), in terms a 12yr old can understand? My daughter asked me this question as I was driving her to school this morning...

She doesn't have a good understanding of what an investment is, barely knows what a mortgage is, and has no idea what 'unemployment rate' means.

I had 3 minutes to lay it out...and what I said was, it's a domino effect that basically began with mortgages. Some banks/mortgage co's began giving mortgages to people who couldn't really afford it. The people (who couldn't really afford it to start with) began to default (ie: not pay) and so the banks and/or servicing co's began to lose money. Stock markets don't like when banks start losing money/going under, so their prices fell. This meant some people's companies became worthless, so they closed up. When they closed up, they began to lay people off (so they lost their jobs). These people no longer had money to spend, so other businesses began to lose money. The banks aren't giving any more loans to people who need it. So the companies have to lay people off. These people can't pay their mortgages without a job, and more banks go under and more stock prices fall and more prices get raised to make up for the people who no longer have money to spend.

Hell, I'm not really sure I understand the origins. Anyone got a better (ie: more accurate), simpler explanation I can offer her this afternoon?

Stormie

[dar512]

Originally Posted by Stormieweather

Anyone able to clearly describe this (economic crisis origins), in terms a 12yr old can understand?

Listen to the "This American Life" mp3 and you'll understand it enough to explain it.

Here's the short version as I understand it.

Certain mortgage lenders took greater risk on some mortgages than they should have. Loaning more than they should have to many buyers and taking mortgages from iffy buyers.

They did this because they didn't worry about the repercussions. They knew the mortgages were going to be bundled and sold. The debts would be problems for someone else.

The institutions that bought the bundles didn't worry because they were buying credit default swaps on the bundle. CDSs were intended to be a kind of insurance. The bank etc. would arrange a credit default swap on the bundle to insure things if they went bad. One of the problems, though, is that CDS were unregulated so the debts were not transparent. Institutions were making these deals without knowing exactly what the situation was.

CDSs were being created to cover all kinds of debts including these mortgage bundles. Since there was no regulation on CDSs two things happened. Institutions that were guaranteeing the CDS were not required to have cash reserves to cover the CDS. Second, institutions that did not hold the debt were allowed to create CDSs on a given debt. What was intended to be a kind of insurance became a kind of gambling.

Institutions that gave bad CDSs and didn't have the cash to cover them, ended up taking a nose dive -- which caused other CDSs to be called and so on.

I may be wrong on particulars, but I think that's the gist of it.

Also, listen to that last 10 minutes or so of that program to hear how financial lobbyists affected the bailout plan.

[tw]

Originally Posted by Stormieweather

Anyone able to clearly describe this (economic crisis origins), in terms a 12yr old can understand?

People at the highest levels of the business and government played money games so that real estate, companies, investment paper (ie bonds), etc were all declared as worth more. These vampires then took massive rewards while using those mythical values to justify their incomes and to create a ponzi scheme. A ponzi scheme can be explained to a kid by example.

The ponzi scheme has collapsed. Now America needs money to keep going and pay outstanding bills (including those for "Mission Accomplished"). No money today means jobs are lost up to four years later. America must sell things to foreigners for money – desperate to pay off personal and government credit cards. But the world no longer trusts these American businessmen who claimed everything was great. Foreigners need to see houes and companies decrease in value maybe up to 50% before they will buy. Government must buy up homes, companies, and investment paper. Then sell it to the world in a desperate attempt to find money. If government will not sell them, then foreigners will not trust who is selling them. America is now so short of actual money. We must sell things cheap.

Yes, it does get more complex. A ponzi scheme (using Enron accounting standards and CA energy crisis myths), that openly encouraged this past eight year party, has collapsed. Suddenly there is a shortage of money everywhere - and, worse, a shortage of trust in American businessmen. So government is also printing money. They will not admit it. Otherwise you might realize that massive inflation or stagflation is looming. Years later, prices for everything increase and adults lose jobs.

Today the Fed said it has unlimited funds. For adults, the Fed and Treasury will pump money into the economy that is does not really have and as if more money will create productive economic activity. Well yes. Jobs will be saved today. Then four years later, economic forces again take revenge for all that 'free' money. Americans will see a lower standard of living imposed either by 1) increased inflation (even though George Jr says there is not inflation), or 2) selling off American real estate and companies (meaning foreigners reap the profits), or 3) massive more government debt like we have not yet seen (meaning American will be paying higher interest payments to the world), or a dropping dollar (means less products for sale in America, higher gasoline prices, and increases in things such as grocery prices).

Bottom line - the American standards of living will be punished for a party we gave to the rich. Did you enjoy the party as your income dropped two percent during that period? Those who profited kept telling us how much better we were and how much lower our taxes were. Those were the best times.

A child must first learn how a ponzi scheme works. Only then can a child appreciate why so many adults these past years have been lying to themselves saying, "The fundamentals of this economy are sound". An economy always looks sound during a ponzi scheme. Debts of those fundamentals will now be paid mostly by those who are not so rich. Good thing your Federal income taxes were 20% lower these past six years. Oh? Your taxes did not go down? How could this be. The same people that said the economy is sound also said your taxes were lower. They would lie? What else were they saying while running a Ponzi scheme? They must have been telling the truth. After all, we reelected them?