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Understanding The Financial Crisis--For Kids and Grownups

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How To Explain The 2008 U.S. Financial Crisis To Your Kids (and most adults) by Say it Visually (transcribed: dreig, elcaparazon.net) Picture a teeter totter. It´s fun when they´re going up and down. It´s not fun when they´re standing still. That´s how our economy works. Real money and promises about money go back and forth, They´re constantly changing balance. It´s called "credit". Buying a house is a good example.

Houses are expensive! So, people promise a bank more money later, to borrow a little money today. The promise they make, sort of an I.O.U., is called a "mortgage". They get the house today. The bank actually owns the house, that´s called "collateral". Every month, they pay a little bit back. The bank collects a lot more money than they loaned out, in the long run. Having the money to lend is called "depository banking", because banks have to maintain big deposits of money, to loan out. Another way money and promises go back and forth is called "investing".

Business are supposed to make more money than they spend, but sometimes, they need money to get started or to run, So they´ll promise some of the excess money from the future, to get starting money today. The promise they made is called a "security". Handling securities is a lot like handling money, so these banks are called "investment banks". So, basically, there are two kinds of credit activities. You could say depository banks sell money for promises, you could say investment banks sell

Until about ten years ago, the rules set by the Government after the Great Depression, kept depository activities and investment activities separate. Then in 1999, the Government eliminated some of these rules in what they called "The Financial Services Modernization Act". Suddenly... modern financial services companies could do both. This connected depository activities with investment activities. For example, groups of mortgages were bundled together and sold to investors. These "mortgage-backed securities" looked safe. After all...

Don´t people always pay for their houses? Shortly after this the Federal Government also decided to help more people get houses, they sort of lowered the borrowing money side of the depository totter, to help more people get on. Millions who could never afford it to promise house payments before, suddenly could. But it turned into what´s called a "boom". Lots of people wanted to buy faster than houses could be built, so the price went up. People temporarily forgot that up is always balanced by down. Many big financial services companies sold mortgage-backed securities. Big bundles of promises! And since house prices were going up, investors world-wide thought they might return a lot of money. But, the thing depended on most homeowners making their mortgage payments. Then, the house buying teeter tipped back up. Some house payments became a lot more expensive, And some people who´d promised mortgage payments couldn´t afford them. They basically had to jump off the end, and you know what happens when someone does that: house prices dropped and the "boom" disappeared. But the other end propped up the investment totter. The collateral houses weren´t worth as much as a loan term mortgage payments. Without these, banks had to use their own deposits to pay investors. After a while, they just ran out. When a bank runs out of money to meet its promises, it has to close down. That´s just what happened. Now the Government is trying to decide what to do: help homeowners, banks, investors? It´s a world wide problem. Meanwhile, the back and forth of money and promises, that keeps the economy moving, is slowing down. It affects currencies, businesses, hospitals, households, and everything. Credit is like air going in and out of a body. We can´t keep running without it. We changed the rules to modernize our financial system, but we didn´t get the job done! How do we fix this and restore responsible balance between money and promises? Transcription: dreig: http://elcaparazon.net

Video Details

Duration: 4 minutes and 9 seconds
Country: Spain
Language: English
Producer: SayItVisually
Director: SayItVisually
Views: 20,001
Posted by: dreig on Oct 4, 2008

Having difficulty understanding the 2008 US Financial Crisis? Here's a short animated video that explains - visually!

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