I'm like, what's going on?
ARE WE GOING TO CRASH
IS THIS 1929
IS THIS 2008
AM I GOING TO HAVE A JOB WHEN I GRADUATE COLLEGE?
I think a good thing to do–before we grab a paper bag and recreate the hyperventilation dramatized in sitcoms–is to try and understand the root of the issue.
For an informative video introduction, watch this: https://www.youtube.com/watch?v=h4Ns4ltUvfw
A SUMMARY
"real money and promises about money go back and forth; it's called CREDIT"
REMEMBER that teeter-totter analogy at the beginning of the video? Economically, we are all at the playground, riding that thing. In other words, we are contributing what we can to keep the economy going!
This is the glorious idea of untainted capitalism.
The theory of capitalism is beautiful: it boasts an economic system in which everyone is giving money and taking money at different times, contributing to HOMEOSTASIS.
Like any ecosystem or body: IT'S A BALANCING ACT. You sleep and you are awake; you give money and you receive money.
Ever hear that capitalistic axiom, "you gotta spend money to make money?"
The idea is, you need to be out in order to be in.
THINK OF YOUR MOODS: could you ever feel AS HAPPY AS YOU DO SEEING SARAH POSTED ON HER BLOG TODAY if you didn't experience the despair you do WHEN SARAH DOESN'T POST?
Similar to capitalistic theory, you can't know happiness without sadness.
~~i declare my narcissistic episode done now~~
Given this exhaustive theoretical description, I wish to never hear an uninformed rebuff of capitalism. Capitalism promotes ideas we all ought to remind ourselves of, such as BALANCE.
but you don't have to show it off all the time.
Keep balance on the mind as we teeter.
People buy houses and want to live in them as soon as possible. However, most house buyers can't possibly pay the entire price of the house at one time, so they set up a deal with the bank (which owns the house) also known as a mortgage or IOU.
IOU is literally "I owe you." Haha.
The mortgage is created when the bank pays the balance on the house that the house buyers did not pay. Therefore, the house buyers now owe the bank money.
Mortgages allow house buyers to pay back what the bank loaned out over a period of time.
For many buyers, this is a sustainable method of payment.
Having the money to loan out is called DEPOSITORY BANKING, because banks need large sums, or deposits of money, in order to lend money.
But what do the banks get out of this?
When entering into a mortgage, you agree to interest on that mortgage, or little fixed sums that you pay back to the bank in addition to the original amount that is owed (i.e. the price of the house). This goes back to the idea of balance: You lucky house-buyer take money now, but are expected to pay that–and then some–later.
The teeter-totter: In the long run, banks receive more money than they lent out. To make money, you must spend money.
(2) SECOND WAY A CAPITALISTIC ECONOMY OSCILLATES: BUSINESSES
People have ideas and think they're so good that they want to make money off of their ideas.
bet you haven't seen a meme in a while.
To make money, these innovative people start businesses. But to start a business–invest in a big capitalistic endeavor much like buying a house–you have to make promises.
The promises business starters make are similar to the promises house buyers make. As a bank invests in a house, expecting the house-buyer to pay back the remaining sum and then some more through a mortgage, an investor invests in a person's idea for a business, expecting to share in that innovator's anticipated profit.
Let's pretend I am trying to sell a new Toothpaste that I believe is superior to both Crest and Colgate.
haha, the SECOND meme you have seen it a while. it's a productive day for you.
The above meme illustrates the complex, world-bending issue many tooth-enthusiasts face. My product, TeethPaste, however, will eliminate the problem; it is both grammatically correct ("tooth" paste is singular–what's with that?) and effective at eliminating bad breath.
"I'll make money soon with TeethPaste! But hey, in order to get started and promote my product, I need money from you, dear investor. If you fund me now, I'll promise to reimburse you and then some with the profit I'll eventually reap."
The promise I make as an advocate of TeethPaste is called a security. You invest in me now, and I secure you hold on future profit.
TO QUICKLY SUMMARIZE
DEPOSITORY BANKS (house-buyer deals): SELL MONEY FOR PROMISES
I will give you money now and you promise to return it and more to me later.
INVESTMENT BANKS (business deals): SELL PROMISES FOR MONEY
I will promise you a percentage of my company's profit if you give me money now.
This all seems orderly and good. So what's the big deal? What's the controversy of capitalism?
In 1999, the GLASS-STEGALL ACT, which separated Depository from Investment Banks, was repealed and replaced by the fancy-shmancy "Financial Service Modernization Act"
"This connected depository activities with investment activities"
oh yeah, cuz we're modern now and everything
EVENTS THAT FOLLOWED
oh yeah, cuz we're modern now and everything
EVENTS THAT FOLLOWED
MORTGAGES were now sold to investors, WHO EXPECTED TO MAKE MONEY ON WHAT ONLY THE DEPOSITORY BANKS USED TO BE ABLE TO: "mortgage-backed securities"
THE GOVERNMENT started helping people buy houses, creating the "housing boom"
The BOOM, or rapid increase in house sales, involved people who normally wouldn't have been allowed to purchase houses suddenly purchasing houses.
To be allowed to buy a house, one usually went through background checks. In the case of faulty credit score, low income, or whatever indicator that pointed to the risk the person not being able to pay his or her mortgage, some were barred from house-buying.
During the boom, LESS ATTENTION was given to background checks, so people who were very likely to NEVER BE ABLE TO PAY THEIR MORTGAGE IN FULL were expected to.
Why were these risky investments allowed?
Quick money for investors.
Since demand for houses increased during the boom, the supply, along with the price, of houses increased. Investors saw this as an opportunity to profit off a lucrative market.
But when there's an up, there's always a–
Recall Balance.
As you probably expected, with all these risky investments made in doubtful mortgage deals, people defaulted, or failed to pay back on their loans.
When people default on their mortgages, their houses foreclose. When foreclosure really picked up following the boom, there were too many houses and not enough people to live in them. So, house price drops. The supply of fancy houses is exceeding the demand of fancy houses.
Now, houses suddenly became not worth as much as their corresponding LONG-TERM mortgage payments (PEOPLE COULDN'T PAY BACK THEIR PROMISES) so the banks tried to quell investors' woes by using their own deposits.
its deposits?
THE MONEY YOU AND I KEEP IN OUR BANKS THAT WE THINK IS SO SAFE AND CUDDLY IS USED FOR THINGS
I used to think that the money I kept in my bank account went untouched. But no honey, that isn't the case. We keep money in the bank for beautiful capitalism–spending money to make money. The price you pay for keeping your money safe is the bank's ability to use it.
No wonder when the economy goes up, you gain a little extra money in your account. But when it goes down, you lose some.
So, what happened in the 2008 financial crisis? The banks really had to use its deposits to pay back private investors who muddled up the capitalistic theory in order to make quick money and get rich.
Now i sound as cynical as my father. But that's what happened.
My father's pretty wise, I think. I make fun of hi for being a geezer but he's pretty keen on these subjects.
In recovery from economic failure, what happens? The government holds a lot of responsibility:
help banks, investors, or people?
"How do we fix this, and restore responsible balance between money and promises?"
TeethPaste.
P.S. many of these concepts can be hard to understand; I know I don't fully understand them; here's another video that may be of some financial aid:
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