Here’s one good thing about the mortgage crisis – we all had to admit we know nothing about finance. Here’s one bad thing about the mortgage crisis – it freakin’ sucks.
Now, let me say this – it doesn’t suck for everyone. Once a 9-5er working in television, I now work as a waitress at a restaurant that serves workers in the mid-town financial sector – like JP Morgan and Smith Barney. They still exist and when the markets crashed again last Monday, all of those people needed a place to go to commiserate…And so, they came into my restaurant, laid down their corporate cards and drank Macallan 18 ($24 per shot)…and then they tipped me…they tipped me a lot.
When it comes to why we’re in this mess, I have to admit that I know nothing about finance. So, when National Public Radio’s THIS AMERICAN LIFE did a show on mortgages and the crisis, I listened very carefully. I wanted to do a whole “mortgage crisis” summary – but I think the radio story is so easy to understand, and so entertaining that you should all listen to it too. Here is the link:
They played “puppet theater radio”:
- Katie wanted to buy a dollhouse. She bought it for $90.
- To get the money, she got a mortgage from Bobbie’s Bank.
- Bobbie’s Bank got the money from the people that deposit money into their checking and savings accounts….
- 8 people…like Ronald Reynolds- deposited $10 each into their checking and savings accounts.
- Bobbie’s Bank also had $10 in capitol
- People gave the bank $80, it spent it on Katie’s mortgage, but hopes that one day Katie will pay them back and holds the house as collateral. So, if those people ever want to withdraw their $80…the bank will eventually have the money to pay them. For now, it will hope the collateral is enough.
Savings Accounts: $80 Bobbie’s Bank: $10 Katie’s Mortgage: $90
The Bank Owes People What the Bank Has What People OWE the Bank
- Katie made a bad decision and bought the dollhouse without the means to pay for it. She lost her job…or never had a good one…or just wanted an american dream she couldn’t afford. The bank never asked if she had a job, they wanted katie’s mortgage THAT badly.
- Katie defaulted on her mortgage.
- When Bobbie’s Bank reclaimed the house…they realized that the house, because of the housing market, is now only worth $70.
- To make matters worse, people start wanting to withdraw their money because they have lost their jobs or gave money to Madoff and need to pay their rent.
- The bank tries to sell Katie’s dollhouse, but can’t. Even if it could, that $70 doesn’t make up enough along with their collateral to balance all of it’s depositers.
- The 3 columns don’t even out, the bank is now INSOLVENT, and the only person that can help is the FEDERAL GOVERNMENT. They didn’t help Lehman Brothers…and the bank failed.
- The money the FED did initially give to people, the banks held because they had to make their columns balance. The FED expected them to lend it out to jumpstart the economy. They thought the fed was crazy.
This is an oversimplified version of This American Life’s Story. This story also involves many other interesting factors –
Why is the Federal Government taking over Citi Bank?
What was so bad about George Bush’s dream to have minority home ownership increase under his presidency ?
Who are people like Roger from “Freemarket Solutions” – who’s company goes door to door buying your dollhouse mortgages, lowering your payments, or just taking the entire thing off your hands and turning you back into a renter?
Go to the story and if you can, make a donation to the greatest Radio Show Ever.