Giant Pool of Money part deux

by Ouida on April 6, 2010


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I just finished listening to “This American Life’s Return to the Giant Pool of Money”. They originally broadcast this episode one year after the collapse of Lehman Brothers in September 2008. What’s a girl to do after a hard day’s work but come home and listen to grim economic news? Several months ago I posted This American Life Rocks on the Economy and indeed it does.

The world has changed. We are considerably more interconnected than before and behind the scenes is the Global Pool of Money, investment capital looking for a return. It would have been happy with any old return until Alan Greenspan, erstwhile head of the FED, signaled to the Global Pool of Money that interest rates would remain low, essentially eliminating returns from trustworthy treasuries and setting the stage for the relaxing of lending standards, the housing bubble, CDOs, CDSs and what ever economic innovation came down the path.

I just finished watching the Lord of the Rings Trilogy and Alan Greenspan is beginning to look a lot like Saruman and the banking industry is beginning to look a lot like Mordor. Mortgage brokers like orcs and the role of Sauron goes to….okay, I’ll stop.

The point: is any investment “safe” with all of these behind the scenes machinations going on? I am beginning to think not and that, for the sake of safety, I should move into Steve’s or Warren’s basements.

The story laid out by This American Life in conjunction with Planet Money is a tale of suspense, greed, corruption, blindness with more than a generous sprinkle of outright stupidity. And it will happen again. CNNMoney featured an article today: With Caution, Americans Still Want a House.  I read the article and thought OMG!  It took roughly 20 years for us to forget about the Savings and Loan mess and jump into the subprime housing mess.  In another 20 years where will we be?

In part deux This American Life caught up with most of the folks featured in the first installment.  They are all sorry, really they are.  The guy who created and sold CDOs lost a bundle, the guy who created and sold mortgages lost his home and is living with his parents, the guy who took out a home equity line 10 times his income is still living in his home rent free mortgage free, the banks too swamped in paperwork and awash in TARP money to actually foreclose.  I realized while I was listening that the natural desire for retribution and criminal prosecution is really pointless.

I, like Aragorn, could scream, “Let the lord of the Black Land come forth! Let justice be done upon him!”  But honestly what would that do?  This was a bottom up, not a top down crisis.  People bought homes they knew they could not afford, using mortgage contracts they lacked the financial literacy to understand, and used home equity lines to give the appearance of wealth they did not possess.

Without the actions of consumers, the banking industry could not have acted as it did.  A friend of mine bought a house during this most recent boom and she bought it using a 30 year fixed mortgage.  I asked her why she bought using that loan product and she told me to paraphrase, that she bought a home she could afford using a mortgage she could understand.  She did not understand the other loan products being offered and she figured they could not be good for her.  Reading a mortgage product is a lot like reading a label for processed food.  If you cannot understand the label, put the food product down.  Imagine that, buying a house you can afford using a loan product you understand.  All of our consumer education should be focused on increasing financial literacy and fostering that set of values.

What are your thoughts? Please comment.

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