The Realist Idealist

Why and how have banks made half-million dollar loans to people without jobs or income?

In keeping with the recent Realist Idealist theme of sharing information that has been incredibly useful in my understanding of the world, its history, its processes, and how things have unfolded (so that we can do something about it if/when it’s appropriate), I hope you’ll take the time to listen to This American Life’s recent podcast “The Giant Pool of Money.” It explains the above question, as well as others you wouldn’t even know to ask.

The 1 hour radio show is incredibly engaging (as the show always is, but this one in particular), and both explains more succinctly and fully in 58 minutes the current credit crisis (not housing crisis, mind you), than a year of reading the business sections of major newspaper.

Essentially, the Giant Pool of Money (GPoM) is the measure of the world’s fixed assets and is roughly valued today at 70 trillion US dollars. That number has almost doubled in the last 8 years from 36 trillion.

The reason the GPoM has doubled (and why it will likely decrease again very quickly) is more or less because in order to create more wealth, the managers of the GPoM need things to invest in - or in others words, ways to use their money to make more money - and around 2000, those managers were running out of places to invest.  About the same time, Alan Greenspan essentially boxed the GPoM managers out of high security investments like US government bonds (or at least made them completely unappealing) with one sentence that kept the Fed rate at a ridiculously low 1%, and indicated it would stay that way for the foreseeable future…

So the managers went “shopping” so to speak.

What the fund managers landed on were US housing mortgages - which at the time were secure and could generate steady returns of 5-10% as opposed to the 1% Mr. Greenspan was promising. The interweaving and inter-dependent systems and financial tools (things like CDOs) created or tweaked to make the investment possible of, let’s say a GPoM manager in Abu Dhabi, in literally hundreds of thousands or millions of mortgages is what has essentially led us to where the US and world economy is today.

As usual, Alex Blumberg and Ira Glass compose a brilliant narrative that not only delineates each piece of the puzzle, but puts a very human face and personality on each piece.

Take the time to understand this issue because it’s one that will effect virtually everything our country does for at least the next several years.