Good morning, John.
It's Monday ... uh, sometime in the end of September...
The MacBook tells me it's the twenty-ninth.
Today, because I'm having a rather bad hair day,
and the entire world is having a rather bad financial day,
I think I'm gonna take care of both of those things,
by explaining the recent financial crisis, with a number of different hats on my head,
representing exactly who I am, at the time when I am talking.
"Hi! My name is William; I want a loan. Can I have one?"
"In the past, we only gave loans to people who could pay the amount of the loans, but now -
since the cost of your house is just gonna keep goin' up, and up, and up -
we've decided that we're pretty much gonna
give everybody a loan, for whatever month that they want,
and they don't have to actually prove that they'll be able to pay it off."
"Oh! Cool. That's actually really good for me, because I don't have a really good job,
and I couldn't really afford the mortgage payments."
"Oh, do we have a deal for you! Check this out: we'll give you, like,
no mortgage payments for, like, two years! And you won't have to pay any loans at all!
You just - it's free! It's like a free house!"
"Oh my God, two years? Well, in two years I'll probably be, like, the CEO of my company!
And my house will obviously be worth, like, fifty percent more, so
what am I really concerned about here?"
"Uh, nothing! You have nothing to worry about at all. Here's your loan!"
"Thank you!"
"Boy, am I glad I don't actually have to secure that loan!
I'll just send it off to the bank, and they'll have some
solution for what to do with this crappy loan that I just made."
Meanwhile, at the bank:
"We're giving out a lot of loans ... but we're not seein' a lot of income from those loans,
but we need to give out more loans, so what do we do? How do we get more capitol,
so we can give more bad loans?"
"Well, I think I have an idea for us. How about we do this:
we take the loans that we've got, and then we sell them.
We sell them as assets. We say,
'These loans are going to be paid back, and if they're not, then the houses that they're on
will be worth way more in the end, anyway!
And, so, the loans will have a great deal of worth.'
We'll sell them off, and people will buy them up like hot cakes, and they'll be so excited!
And here's an idea: we'll give them different names,
so the bad mortages we'll name 'Triple-A',
and we'll say they're the best of the bad mortgages.
And then, the really bad mortgages we'll name 'Triple-B',
which sounds way better than 'Really, Really Bad Mortgages'!
And then the ones that stink like elephant diarrhea on a hot day -
we'll just not name those ones at all, and give people really great interest rates on
those securities."
"Oh, my God, that kinda sounds like a good idea!
So people will just buy 'em, and then we'll get more money,
so we can loan more money out!
...But, wait a second: if the bad mortgages
all turn out to be bad, aren't we just screwing ourselves? I mean,
yeah, we end up making more money in the short term,
because now we can make a loan, and then make money on that loan by selling the loan,
but, in the long term, aren't we gonna be screwed?"
"Oh, you have the wrong vision! You see, you're looking into the future.
What you need to do is think about next quarter,
because that's what our investors are thinking about!
You need to think about how much money we will be making
in the immediate future! Thinking two or three years down the line
is not something we do here in the financial sector.
And, besides, housing prices will always go up, and if not, the government will be there
to catch us."
"Why would the government be there to catch us?"
"Because, my friend, if we go down,
the country goes down. Don't worry; they'll be there."
Two years later...
"Aawww, I can't pay this mortgage payment... And my house is worth way less!?
Hold on a second, let me get my calculator!
Dwah! I knew it!
My mortgage is worth way more than my house is!
I could default on my mortgage, and then get another mortgage,
and get a way better house for the same price!
I'm totally gonna stop paying these mortgage payments!"
Back at the bank:
"Hello...?"
"Hello, my name is Jeremy Hogart, and I bought
a bunch of your mortgage-backed securities, and I have recently discovered that they are
worth absolutely nothing. What the freak is going ooon?"
"Very much apologies for the inconvenience,
yes, lots of people bought them. In fact, people bought them recently
in the economies across the world, and - and it's possible that we may have triggered
somewhat of a tiny,
massive global recession.
Very sorry, working on it right now... We'll get back to you.
Please, do not call again. Bye."