The crisis explained in words of one or two syllables

You’ve got to love an economics video that uses ABBA for its background music.  You’ve also got to love an economics video that uses very simple language to show that Obama has been a very good friend to Fannie and Freddie, and they’ve loved him back, to the profound detriment of the American people:

Incidentally, I know people who were the beneficiaries of these types of loans.  They were good people, but they got in way over their heads financially.  When I queried why they were doing this, their response was, essentially, “Because we can.  If the bank is going to give us the money, why shouldn’t we take it?”

What I thought, but didn’t say, was” Well, you shouldn’t take it because, even if the bank is being stupid, you shouldn’t be.  It’s unlikely that you can service these loans, and you’re going to end up, at best, with a destroyed credit rating and, at worst, completely bankrupt.”  And indeed, the credit rating is gone, and bankruptcy is imminent.

As I said, my friends aren’t bad people.  They truly believed that, if the bank trusted them with the money, everything was going to be golden.  It didn’t occur to my friends that they had to apply some of their common sense and life experience to determining whether they were doing something wise.

I bet that scenario played out in hundreds of thousands of households across America.

H/t:  Danny Lemieux

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  • Deana

    That is fantastic!

    At the end of the video, there is a link to a similar video on Obama’s support for comprehensive sex education in kindergarten – that one is even better.

    I find myself getting more angry about this entire bailout. I also know people who got mortgages that were waaaaaay beyond what they could pay. Back when I lived in D.C. and was thinking of buying a place there, I distinctly recall a real estate agent encouraging me to purchase a condo that was six (yeah – 6!!!) times my gross income.

    My head did one of those triple turns you see in horror films. I couldn’t believe what I was hearing.

    I’m just glad I didn’t do what everyone else was doing. It’s called common sense and now the rest of us in America are paying for everyone else’s stupidity and greed.


  • suek

    Heh. When I was much younger, the rule of thumb was that you didn’t spend more than 25% of your income on your housing. The other half of that was you didn’t expect to pay more than 3x your income for a house…I think. I haven’t had to think about it for a long time.

    The problem today is that if you followed that rule of thumb, a lot of people would be living out on the street! At least in my area.

    So…what happens in an economy where the housing has inflated to a level that is unattainable for most of the wage earners in the area??? Does this have any effect on this immediate issue?

    Friends of mine – also a long time ago – started with very little. They bought their house with no down or at least very little down. When he was employed, he made pretty good money – no problem with immediate expenses, although saving was not something they did. Unfortunately, he lost his job…I don’t remember why. That started a period of time when employment was spotty – there were lay-offs, and last in – first out was the rule. They went on unemployment, and welfare, when they had to. But the house payment got paid. If they ate nothing but beans, macaroni and cheese, the house payment got paid. If the phone had to go, then it had to go – the house payment got paid. I think they made it through – I don’t know for sure…I moved and lost touch, but she was one determined lady, and she said that house was going to be all they had when retirement came and he couldn’t work any more. I bet they made it, but it was touchy.

  • Gringo

    Those who would loan $500 K (whatever) on a house without anything down from the buyer are simply, dumb, dumb. Should we pick up the pieces? I don’t know.

  • suek

    But Gringo…the CRP or whatever it was required them to give out those loans. That’s why it’s Congress’ fault that this has mushroomed. It isn’t really the banks’ fault – if they wanted to stay in business, they had to give loans to people who couldn’t normally get a loan. That’s the whole thing – it was government interference in the first place that caused this.

  • Ymarsakar

    The problem today is that if you followed that rule of thumb, a lot of people would be living out on the street! At least in my area.

    So…what happens in an economy where the housing has inflated to a level that is unattainable for most of the wage earners in the area??? Does this have any effect on this immediate issue?

    That’s what apartments and renting a room in somebody else’s home comes in.

  • Ymarsakar

    I think to a certain extent, there will always be parasites in the human world. That’s just a fact of life.

    The Democrat philosophy is to give such people more influence and birth rates while the Republican philosophy is to educate these people so that they can make better choices in a better economic decision tree.

    The solution aspect of this little scenario is interesting, however. For one thing, it has some similarities with Petraeus’ counter-insurgency efforts in Iraq. We are both trying to convince people that our way is the best way, while at the same time telling them that they have the freedom to choose. Well, most people, not just Arabs, will say “if we have the liberty to choose, why should we choose your way of doing things and not AQ’s”.

    In the end, the answer was “because human beings don’t like pain and going with AQ was going to cause you a lot of pain, from them and from us.” If they went with our way, however, the pain will only be coming from AQ and soon we’ll get rid of AQ too, since their power base in Iraq depended heavily on local Sunni support and/or neutrality.

    What this means in the final analysis is that, yeah, helping out the Sunnis would be seen by Democrats as bailing them out of a situation the US and Iraqis put themselves into: depending on who the Democrats want to string up first, us or our allies. In Iraq, the Democrats saw it first as US bailing out Iraqis and second as the US digging themselves a deeper hole with the surge. Whereas in Vietnam, the Democrats said that the Vietnamese was being subsidized unfairly by the US Military Industrial Complex and needed own up and “defend their own country”. The defeat of South Vietnam proved to the Democrats that might makes right in that if you can’t defend your nation, you ain’t going to have that nation for long. And they’ll tell you this, even now or especially now.

    THe benefits to a “bail out” however, is that it buys you time to cement the support of the people you will need to defeat the enemies of humanity you must. If you help the Sunnis but don’t actually change the way they do things, then nothing is going to change in the future and you’re going to have to cook up another surge, again, to go into AL Anbar later. If you don’t bail out the Sunnis with military support and economic aid, what is going to happen is that it is going to spread to the rest of Iraq, including Kurdistan, and make everybody suffer. This applies the same to the American financial markets, as well. This is one reason why Bush calls himself a compassionate conservative: due to the fact that ruthless classical liberals don’t tend to feel any qualms about crushing individual choice when that choice is creating, right now, a future that is going to harm people who never had part in making such choices to begin with. If your choice is going to lead, even partially, to the collapse of a major segment of American markets that affect everybody, innocent and guilty, corrupt and honorable alike, then somebody is going to have to step on your “rights”. Bush, however, doesn’t go with that philosophy, as can be seen in Katrina where he didn’t eject the Governor of Louisiana and evict the Mayor of Chocolates, but instead allowed the Governor the time and freedom to call upon the National Guard or not call upon the National Guard: amongst other liberties that lead to the suffering of hundreds of thousands. This is the difference between compassion and ruthlessness. Mercy to the guilty is no compassion for the innocent, but it is compassion for the guilty. 50/50

  • Ymarsakar

    If you don’t purge people and obstacles like Dodd and Obama, then yes, you are going to have to bail people out of the same problem again, in the future. But that is to be expected, of course.

    THere can be no change in politics when politicians are bought and they stay bought.

  • Oldflyer

    Ymarsakar, it is interrelated. The cost of houses escalated because the financing was so easy. If financing had been more restrictive, the builders would have built to the market. Well, they did, but it was a false market.

    I live in a semi-rural area. For many years the homes around us varied from modest to fairly substantial; but nothing excessive. A few years ago the developers came in and started building hundreds and hundreds of over-sized McMansions selling at 3 to 4 times what the market had previously supported. Observors just scratched our heads and wondered how so many relatively young people could afford these houses. Then, the “value” of the existing homes went out of sight. My home doubled in paper value in a few years (so did the tax bill based on the new assesment). I am sure this is a common story around the country.

    Having been around awhile and having seen previous bubbles, I predicted that it would eventually come crashing down. Unfortunately, I had no idea of the magnitude of the crash, because like many other people I did not fully understand the true effects of the bundling.

  • Ymarsakar

    Ymarsakar, it is interrelated.

    What are you replying to?

  • Mike Devx

    One of my relatives bought a home five years, not realizing how pernicious the negative-% rate terms would end up being. Economic plans did not pan out, and that relative had to refinance two or three years in. As of today, that relative is still making every house payment on time, but there’s doubt that that can continue for much longer.

    This represents the hidden side of the crisis: How many more people are like my relative, still hanging on, but probably not able to hang on much longer? They will sell and take an extreme loss if they can, or they will foreclose. And due to the refinancing, my relative’s loan would probably not be thought to be in the *risky* set.