Do you think this can explain the housing bubble in a way you will understand?
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans). Word gets around about Heidi’s "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit. By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.
Consequently, Heidi’s gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses. One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi. Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs. Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers. Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi’s bar. Any questions?
No, it should go something like this to be accurate:
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, THE GOVERNMENT comes up with a new marketing plan that allows her customers to drink now, but pay later. Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans). Word gets around about Heidi’s "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit. By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages.
Consequently, Heidi’s gross sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes that these customer debts constitute a GRAVE FINANCIAL DANGER and LIMITS Heidi’s borrowing. He sees no reason for any undue concern, since the debts of the unemployed alcoholics as collateral are worthless and any dope can see that, and he has prudently prevented his bank for risk.
The GOVERNMENT sees what is happening, and decided that this is not fair. Poor unemployed drunks have a right to get their drink and the bars who cannot afford to pay the bills should be able to serve them. So the DEMOCRATS in the GOVERNMENT go to the banks and lay down a ultimatum, lend to the bar owner or we’ll invesitigate you and we will find something and shut you down. Just do it and we’ll guarantee the loans via FNMA, and FMAC. The banks had no choice, but come up with a way to make the loans happen, or be run out of business by the Fed’s.
With that at hand, at the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses. One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi. Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs. Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt, and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers. Amazingly though, the bank, the brokerage houses and their respective executives are chastized as evil capitalists by the very DEMOCRATS in the GOVERNMENT that forced them to make bad loans or be shut down. The GOVERNMENTS guarantee was worthless as the multi-billion dollar no-strings attached cash infusion from their cronies in Government, ended up being squandered by the DEMOCRATS appointed crooks in the form of kickbacks. The GOVERNMENT now steps up, blames the banks for being capitalists, exonerates their crook cronies in FNMA, and FMAC and creates the TARP package to bail their buddies in the FNMA, and FMAC out. The funds required for this bogus TARP bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi’s bar. Any questions?
No.
Yes
The people who figured this out made over 5 million a year. Those who can figure out how to do it again are making 10 million a year. As we are a Conservative company. would you consider working for us at 8 million a year? Please contact us A.S.P.
Not really, since you missed the most important factor. The banks at first had higher lending standards and refused to give out mortgages to those they didn’t think could repay it. But then the government stepped in and told the banks that they will give out more loans, especially for the poor and minorities. The banks tried to resist, saying that those borrowers are too high of risk. The government then said okay but if you don’t increase your lending to them, you run the risk of being charged with discrimination in lending (said like a mob boss threat).
So the banks lend out money like candy from that point on. Which is find so long as housing values are increasing over time. But then the values dipped a bit and the bottom fell out due to all of the bad loans generated over time. People with appropriate mortgages are not impacted nearly as much in a housing downturn because they properly paid enough money down so that endin up in an upside down mortgage is much less common. If not for all of the bad loans, the housing market wouldn’t have fell as fast or as far because there wouldn’t have been nearly as many foreclosures which in turn wouldn’t have caused the values of homes nearby to fall so much.
Or if you want the really short summary of the cause of the housing market crisis:
Barney Frank
Close enough. The only part you have missed is that in your analogy, the brewery would have been paying Heidi and the brewery manager a personal bonus for the increased sales so that the impending disaster would have ignored for much longer than it should have.
Nope.
People buying more house than they could afford … in debt up to their eyeballs. The banks gave bigger loans than they should have, in fact they encouraged it. They raised the time tested formula of 25% of income for housing costs to 40% … basically if you made 1k a month you shouldn’t pay more than $250 for housing (2k=$500, 3k=750 etc.)
When they raised it to 40% .. they nearly doubled the cost of housing for the majority of people, so when the economy took a downturn … so did the housing market
Combine that with the whole credit card dependent generation and you have a recipe for disaster.