Learn about Wall Street!
And now it's time for global economics with Teri: the part of the show where Teri comes out and teaches us something about
me: hey
Teri: hey
me: i has a question
do you know anything about bank bail outs?
Teri: well...a little
why?
me: well i know i'm supposed to be all outraged about them
and i guess i kind of am...
but i mean...what was the alternative?
Teri: is this in terms of the Occupy Wall Street?
me: kinda
jeff decided to get interested
the problem i have is
if the banks didn't get bailed out by the government...
i have my money IN banks
so don't we all lose, in that scenario?
Teri: well...
I tend to agree with you, in part
or, to start with?
I don't know
our current financial crisis was caused by the banks
me: how?
Teri: do you know what mortgage-backed securities are?
me: :-/ nope
Teri: okay
that's where it starts
I'm trying to simplify this
and I'm not, like an expert
it's like, 2006
and there's a lot more money in the world than there used to be
because formerly poor countries that didn't have any money are now rich and looking to spend money
I'm a little fuzzy on how money is just created like that, but smarter people than me assure me that it is
So, like China, India, Saudi Arabia...they got really rich selling us stuff
and they had a bunch of money to invest
somewhere along the way...
they ran out of stuff to buy
by buy, I mean "invest in"
traditional investments had a low interest rate
but someone came up with the genius idea of getting these foreign countries to invest in our mortgages
real estate was always a good investment
and up until that point, had a good return
me: ok
Teri: so they created mortgage-backed securities
which basically made it so that investors like China could buy big BUNDLES of individual mortgages
me: how do you buy a mortgage? like, what does that even mean?
i thought a mortgage was something you had to take out on your house if you're broke
Oh, excardon me!
Teri: not just if you're broke
you might be thinking of a second mortgage
a mortgage is a loan for a house
that is secured by a house
almost everyone who buys a house does so with a mortgage
so you borrow $150,000 to buy a house
agree to make payments for 30 years
and if you don't make the payments, the bank can come and take your house
me: so a house loan is a mortgage
Teri: yes
me: ok so why/how is china buying these?
Teri: while you're still making payments, you're a joint owner with the bank
the bank realized that China would pay money to them NOW, to collect the money that you'd be paying back over the next 30 years
China (& others, but for short) was looking for safe long-term investments that were almost guaranteed to make them more money
someone, back in 2006 or so, decided to bundle together like 200 or 300 mortgages to sell to China
the bank wanted to make money
China wanted to make money
you, as the house buyer, pay back what the house is worth, plus interest
China and the bank win in this situation
and you do too, to a point, since you get to buy a house that you couldn't afford without the loan
you with me so far?
me: yeah, this sort of sounds like student loan consolidation actually
Teri: yeah
and, I mean, banks are in the business of buying and selling loans
but mortgages hadn't been sold in bundles like this
me: ok, so they sold a bunch of mortgages to china
Teri: turns out, they sell like hotcakes
foreign investors are eating them up
"I'm totally invested in these American hotcakes!"
Teri: buying all of them they can
me: lol worst idiom
Teri: pig in a poke!
me: BEST IDIOM!
Teri: So the banks, i.e. Wall Street
decide to just create more mortgages
by getting more people to borrow
me: wait...huh?
Teri: and they do THAT by loosening up the guidelines for borrowing a mortgage
me: soooo
hold on
Teri: so traditionally, you need a 20% down payment, a good credit score, proof of a steady job, and a low debt-to-income ratio to qualify for a mortgage
me: you need these things so the bank can be assured they'll get their money back
right?
Teri: yes
it's proof that you're a good bet to pay back the loan
me: but since the bank is just going to sell the loan to china, they no longer quite give a fuck
isn't china going to not want to buy these sketchy loans?
This is one doodle that can't be un-did, Home Skillet.
Teri: China doesn't know they're sketchy
everyone, all the way up to Mr. George W. Bush pretends that everything is cool
in the meantime, Wall Street just keeps loosening what it takes to get a loan
me: Lying?
Teri: eventually, there are literally loans called NINA loans (no income, no assets)
that basically, the only qualification to get a loan is to SAY you have a job
me: wtfingf!
Teri: but no one's checking anything
and you don't need a down payment anymore
me: i mean...
did anyone really think this was going to end well?
Teri: right?
basically, Wall Street didn't care, because they were making a ton of fucking money in the meantime
me: i've got basically a 10th grade economics education and i can tell that's fucked up
Teri: so lending money to people who probably can't pay it back became the name of the game
me: and that's just china's problem
Teri: there's a whole separate piece of this with the real estate market, and how this whole game is just inflating prices everywhere
me: (i'm using "china" to represent all foreign investors)
Teri: and there's a real moral issue, not unlike the student loan crisis, in my opinion, that the lower and middle class are being sold this promise that real estate is a good investment
and it's always good to buy a house
because you'll always get your money back
etc.
and while, to a certain point, it had been true until then
all sorts of things were brewing that were going to make that untrue in the near future
and instead of taking steps to mitigate or control the situation
Wall Street kept making and selling mortgages
and the government kept letting them
me: (agreed btw - i still have this unsubstantiated guilt in my mind because i don't own a house)
I don't even WANT a house, i just feel like i'm supposed to have one
Teri: yep
me too, kinda
though, I'm tired of moving, so there is that
so anyway...
back in 2008, the proverbial shit hit the fan
me: what happened
Well, you see...
Teri: oh---one other piece of that shady mortgage bullshit
is banks sold people on the idea of an adjustable rate mortgage
for pretty much the first time ever
so they could afford payments when they first bought the house, because they would only pay like 3% interest
but the mortgage rate was tied to the economy
and the payments would go up if interest rates did
me: wait, what?
interest rates would just go up for no reason?
Teri: not for no reason
interest rates change with the general health of the economy
with oil prices
with inflation
with supply & demand
when the federal government says so
me: o-kay
money's mercurial as fuck apparently
we should've stuck with wampum
Besides, this stuff is cool as hell.
Teri: it is, lol
me: so what happened in aught eight?
Teri: well...
finally, someone realized that housing prices were insane
the demand for these mortgage-backed securities and the ease of getting a mortgage had caused prices to increase drastically
it's kind of a supply and demand thing, too
with so many mortgages available, so many people wanted to buy, that the houses were in demand and could cost more
but were they *Really* worth more than when this nonsense had started?
so, higher prices
coupled with sketchy mortgages
led to people not being able to afford their mortgages
which led to default
which led to more houses on the market
which led to lower prices
which led to higher interest rates
which led to people not being able to afford their mortgages
which led to default, more houses on the market, even lower prices, even higher interest rates, and so on
me: so, a housing crash?
can i ask - what's happening to all these people who suddenly can't afford their homes? leftist propaganda would have me believe that they're all out on the street, but that can't literally be true
Teri: leftist propaganda?
yes, people are foreclosed on and evicted from their homes
we're skipping ahead a little, but it's absolutely relevant to your original question
me: but not, like, ONTO THE STREETS right?
Teri: well...I mean
it's ONTO WHEREVER YOU CAN FIND
me: they get cheaper living situations, or move in with their parents, or...
Teri: yeah, plenty moved in with family
me: i just think it's a melodramatic way to say it
Teri: cheaper living situation is tough, because your credit is shot so it's hard to rent
me: and melodrama isn't helping anyone
i hate it when politics does that shit to make their point
Teri: well, I don't think it's too crazy to say...as far as those people are concerned, they were put out on the street, and then it was up to them to find their parents home, or whatever
but I get your point, generally
me: mkay
anyway go on
Teri: the housing crash sucked
and would've sucked
on it's own
but what made it worse is how the global economy works
because, guess what? China's pissed that their investments aren't working out the way they should
"YOU DID WHAT WITH MY BUDGET SURPLUS?!"
Teri: and Wall Street groups in charge of giving companies and investments credit ratings?
they promised China these were a super-safe bet
as safe as buying bonds directly from the United States Government
turns out, they lied
this is where exchange rates, and "how's the dollar against the yen" and all that shit comes in...
but basically all our Chinas were a little more reluctant to give the US money
me: durrr i would be too
Teri: which turned the housing crisis into a credit crisis
because now, it's not just that house prices suck
Wall Street was dependent on that capital coming from the Chinas to make all kinds of loans
car loans, credit cards, small business loans, etc.
and when it's harder to get credit...
small businesses (like the ones you and I work for?) can have a much harder time operating
that have to take smaller risks, and not expand as much as they would otherwise, typically
they don't have the opportunities for growth that they would with additional money borrowed
they hire fewer people
they have to lay people off
as their clients start doing the same and offering them less business
so now, not just housing and credit, but unemployment rises
me: good god, it's like watching dominos
The economic crisis in a nutshell.
Teri: so now, it's 2008 and all of these things are happening
and Obama inherits a huge fucking disaster
though it clearly happened on Bush's watch
"I got this from George, but look: he spoojed economic crisis all over the face."
Teri: which brings us to...government bail outs and your original question
a lot of money went into bail outs and economic recovery
some of it was for states to spend on road construction, so they could afford to hire people, who then bought supplies, etc...kind of setting the dominos back up?
but most of it went to banks on Wall Street
the Wall Street banks were supposed to use this money to keep lending
again, setting those dominos back up
to ease the credit crisis
me: uh uh
Teri: they were supposed to use this money to NOT evict people, but let them stay in their homes
me: why do i get the feeling they totally blew their allowance on bullshit
Teri: because they did
including million dollar bonuses or some shit to upper level employees
"Wow, a housing relief budget! I'ma buy four yachts and a python!"
me: WHAT THE FUCKING FUCK
excuse my language
but WTFINGF!
Teri: http://articles.nydailynews.com/2010-02-23/news/27057087_1_bonuses-wall-street-personal-income-tax-collections
me: i'm supposed to appreciate the fact that that money comes back to new york in tax revenue?
i don't live in new fucking york!
Teri: that's the stuff that people are pissed about
It's like Wall Street borrowed their dad's car, drove drunk, and wrecked it, begged for cash from their dad to fix the car, and then spent it on booze instead repairs
"How do you sleep at night?"
'On silk sheets, rolling naked in money."
For more from Teri, go here: http://helkat.livejournal.com/379768.html
me: hey
Teri: hey
me: i has a question
do you know anything about bank bail outs?
Teri: well...a little
why?
me: well i know i'm supposed to be all outraged about them
and i guess i kind of am...
but i mean...what was the alternative?
Teri: is this in terms of the Occupy Wall Street?
me: kinda
jeff decided to get interested
the problem i have is
if the banks didn't get bailed out by the government...
i have my money IN banks
so don't we all lose, in that scenario?
Teri: well...
I tend to agree with you, in part
or, to start with?
I don't know
our current financial crisis was caused by the banks
me: how?
Teri: do you know what mortgage-backed securities are?
me: :-/ nope
Teri: okay
that's where it starts
I'm trying to simplify this
and I'm not, like an expert
it's like, 2006
and there's a lot more money in the world than there used to be
because formerly poor countries that didn't have any money are now rich and looking to spend money
I'm a little fuzzy on how money is just created like that, but smarter people than me assure me that it is
So, like China, India, Saudi Arabia...they got really rich selling us stuff
and they had a bunch of money to invest
somewhere along the way...
they ran out of stuff to buy
by buy, I mean "invest in"
traditional investments had a low interest rate
but someone came up with the genius idea of getting these foreign countries to invest in our mortgages
real estate was always a good investment
and up until that point, had a good return
me: ok
Teri: so they created mortgage-backed securities
which basically made it so that investors like China could buy big BUNDLES of individual mortgages
me: how do you buy a mortgage? like, what does that even mean?
i thought a mortgage was something you had to take out on your house if you're broke
Oh, excardon me!
Teri: not just if you're broke
you might be thinking of a second mortgage
a mortgage is a loan for a house
that is secured by a house
almost everyone who buys a house does so with a mortgage
so you borrow $150,000 to buy a house
agree to make payments for 30 years
and if you don't make the payments, the bank can come and take your house
me: so a house loan is a mortgage
Teri: yes
me: ok so why/how is china buying these?
Teri: while you're still making payments, you're a joint owner with the bank
the bank realized that China would pay money to them NOW, to collect the money that you'd be paying back over the next 30 years
China (& others, but for short) was looking for safe long-term investments that were almost guaranteed to make them more money
someone, back in 2006 or so, decided to bundle together like 200 or 300 mortgages to sell to China
the bank wanted to make money
China wanted to make money
you, as the house buyer, pay back what the house is worth, plus interest
China and the bank win in this situation
and you do too, to a point, since you get to buy a house that you couldn't afford without the loan
you with me so far?
me: yeah, this sort of sounds like student loan consolidation actually
Teri: yeah
and, I mean, banks are in the business of buying and selling loans
but mortgages hadn't been sold in bundles like this
me: ok, so they sold a bunch of mortgages to china
Teri: turns out, they sell like hotcakes
foreign investors are eating them up
"I'm totally invested in these American hotcakes!"
Teri: buying all of them they can
me: lol worst idiom
Teri: pig in a poke!
me: BEST IDIOM!
Teri: So the banks, i.e. Wall Street
decide to just create more mortgages
by getting more people to borrow
me: wait...huh?
Teri: and they do THAT by loosening up the guidelines for borrowing a mortgage
me: soooo
hold on
Teri: so traditionally, you need a 20% down payment, a good credit score, proof of a steady job, and a low debt-to-income ratio to qualify for a mortgage
me: you need these things so the bank can be assured they'll get their money back
right?
Teri: yes
it's proof that you're a good bet to pay back the loan
me: but since the bank is just going to sell the loan to china, they no longer quite give a fuck
isn't china going to not want to buy these sketchy loans?
This is one doodle that can't be un-did, Home Skillet.
Teri: China doesn't know they're sketchy
everyone, all the way up to Mr. George W. Bush pretends that everything is cool
in the meantime, Wall Street just keeps loosening what it takes to get a loan
me: Lying?
Teri: eventually, there are literally loans called NINA loans (no income, no assets)
that basically, the only qualification to get a loan is to SAY you have a job
me: wtfingf!
Teri: but no one's checking anything
and you don't need a down payment anymore
me: i mean...
did anyone really think this was going to end well?
Teri: right?
basically, Wall Street didn't care, because they were making a ton of fucking money in the meantime
me: i've got basically a 10th grade economics education and i can tell that's fucked up
Teri: so lending money to people who probably can't pay it back became the name of the game
me: and that's just china's problem
Teri: there's a whole separate piece of this with the real estate market, and how this whole game is just inflating prices everywhere
me: (i'm using "china" to represent all foreign investors)
Teri: and there's a real moral issue, not unlike the student loan crisis, in my opinion, that the lower and middle class are being sold this promise that real estate is a good investment
and it's always good to buy a house
because you'll always get your money back
etc.
and while, to a certain point, it had been true until then
all sorts of things were brewing that were going to make that untrue in the near future
and instead of taking steps to mitigate or control the situation
Wall Street kept making and selling mortgages
and the government kept letting them
me: (agreed btw - i still have this unsubstantiated guilt in my mind because i don't own a house)
I don't even WANT a house, i just feel like i'm supposed to have one
Teri: yep
me too, kinda
though, I'm tired of moving, so there is that
so anyway...
back in 2008, the proverbial shit hit the fan
me: what happened
Well, you see...
Teri: oh---one other piece of that shady mortgage bullshit
is banks sold people on the idea of an adjustable rate mortgage
for pretty much the first time ever
so they could afford payments when they first bought the house, because they would only pay like 3% interest
but the mortgage rate was tied to the economy
and the payments would go up if interest rates did
me: wait, what?
interest rates would just go up for no reason?
Teri: not for no reason
interest rates change with the general health of the economy
with oil prices
with inflation
with supply & demand
when the federal government says so
me: o-kay
money's mercurial as fuck apparently
we should've stuck with wampum
Besides, this stuff is cool as hell.
Teri: it is, lol
me: so what happened in aught eight?
Teri: well...
finally, someone realized that housing prices were insane
the demand for these mortgage-backed securities and the ease of getting a mortgage had caused prices to increase drastically
it's kind of a supply and demand thing, too
with so many mortgages available, so many people wanted to buy, that the houses were in demand and could cost more
but were they *Really* worth more than when this nonsense had started?
so, higher prices
coupled with sketchy mortgages
led to people not being able to afford their mortgages
which led to default
which led to more houses on the market
which led to lower prices
which led to higher interest rates
which led to people not being able to afford their mortgages
which led to default, more houses on the market, even lower prices, even higher interest rates, and so on
me: so, a housing crash?
can i ask - what's happening to all these people who suddenly can't afford their homes? leftist propaganda would have me believe that they're all out on the street, but that can't literally be true
Teri: leftist propaganda?
yes, people are foreclosed on and evicted from their homes
we're skipping ahead a little, but it's absolutely relevant to your original question
me: but not, like, ONTO THE STREETS right?
Teri: well...I mean
it's ONTO WHEREVER YOU CAN FIND
me: they get cheaper living situations, or move in with their parents, or...
Teri: yeah, plenty moved in with family
me: i just think it's a melodramatic way to say it
Teri: cheaper living situation is tough, because your credit is shot so it's hard to rent
me: and melodrama isn't helping anyone
i hate it when politics does that shit to make their point
Teri: well, I don't think it's too crazy to say...as far as those people are concerned, they were put out on the street, and then it was up to them to find their parents home, or whatever
but I get your point, generally
me: mkay
anyway go on
Teri: the housing crash sucked
and would've sucked
on it's own
but what made it worse is how the global economy works
because, guess what? China's pissed that their investments aren't working out the way they should
"YOU DID WHAT WITH MY BUDGET SURPLUS?!"
Teri: and Wall Street groups in charge of giving companies and investments credit ratings?
they promised China these were a super-safe bet
as safe as buying bonds directly from the United States Government
turns out, they lied
this is where exchange rates, and "how's the dollar against the yen" and all that shit comes in...
but basically all our Chinas were a little more reluctant to give the US money
me: durrr i would be too
Teri: which turned the housing crisis into a credit crisis
because now, it's not just that house prices suck
Wall Street was dependent on that capital coming from the Chinas to make all kinds of loans
car loans, credit cards, small business loans, etc.
and when it's harder to get credit...
small businesses (like the ones you and I work for?) can have a much harder time operating
that have to take smaller risks, and not expand as much as they would otherwise, typically
they don't have the opportunities for growth that they would with additional money borrowed
they hire fewer people
they have to lay people off
as their clients start doing the same and offering them less business
so now, not just housing and credit, but unemployment rises
me: good god, it's like watching dominos
The economic crisis in a nutshell.
Teri: so now, it's 2008 and all of these things are happening
and Obama inherits a huge fucking disaster
though it clearly happened on Bush's watch
"I got this from George, but look: he spoojed economic crisis all over the face."
Teri: which brings us to...government bail outs and your original question
a lot of money went into bail outs and economic recovery
some of it was for states to spend on road construction, so they could afford to hire people, who then bought supplies, etc...kind of setting the dominos back up?
but most of it went to banks on Wall Street
the Wall Street banks were supposed to use this money to keep lending
again, setting those dominos back up
to ease the credit crisis
me: uh uh
Teri: they were supposed to use this money to NOT evict people, but let them stay in their homes
me: why do i get the feeling they totally blew their allowance on bullshit
Teri: because they did
including million dollar bonuses or some shit to upper level employees
"Wow, a housing relief budget! I'ma buy four yachts and a python!"
me: WHAT THE FUCKING FUCK
excuse my language
but WTFINGF!
Teri: http://articles.nydailynews.com/2010-02-23/news/27057087_1_bonuses-wall-street-personal-income-tax-collections
me: i'm supposed to appreciate the fact that that money comes back to new york in tax revenue?
i don't live in new fucking york!
Teri: that's the stuff that people are pissed about
It's like Wall Street borrowed their dad's car, drove drunk, and wrecked it, begged for cash from their dad to fix the car, and then spent it on booze instead repairs
"How do you sleep at night?"
'On silk sheets, rolling naked in money."
For more from Teri, go here: http://helkat.livejournal.com/379768.html