Housing Market | The Habitation of Justice

I’m basically a schnook when it comes to money, not really understanding what went down on Wall Street other than the sensible fact that if you loan massive amounts of money to people with poor credit, bad things tend to happen.

My boy Casey though does a great job of writing a primer on how the banks screwed us over:

I recently used this example explaining things to a friend of mine. Just to warn you, this is a very simplistic view of how the banking and monetary systems work, but it’s basically the way it goes. Let’s say you have $100,000, your life savings. You go put it in the bank to earn some interest. The bank says they’ll pay you 3%. The next day, Jim Bob walks into the bank, and requests a loan for $100,000, to buy a house. Jim Bob has only mediocre credit. But the housing market has been so great, the bank gets greedy and says, “Hey! He may not be able to pay, but then we’ll just sell the house for a 25% profit! Everybody wins!” The bank tells Jim Bob he’ll have to pay 6% interest on the loan. He agrees, and the bank gives him your $100,000, and he goes and buys the house. Here’s the current situation. Jim Bob pays 6% annually on the loan. The bank pays you 3% on your deposit. The bank gets the difference, 3%, as profit. That’s how they make their money.

Now, Jim Bob was stupid, and got a variable rate mortgage…so as interest rates go back up, his payments begin to go up too. Jim Bob can’t seem to get enough money to pay his bills, so he defaults on his loan. The bank repossesses his home. Poor Jim Bob. But wait… the bank now has lost the income it was getting from Jim Bob, but they still have to pay you 3% on your money. They try to sell the house, in order to get your money back, but the real estate prices have dropped, instead of rising, so they can’t get your full $100,000 back. They can only get $80,000. In the meantime, you’ve been watching the news, and decide that you don’t want to keep your money in the bank, because you’re scared it will go under . . . and you’ve got a little over the $100,000 FDIC limit in there now, so you better move quick. The bank only has $80,000 of your money left, so they have to take $20,000 of their own money (or borrow it from another bank) in order to pay you all they owe you. Imagine this happening nationwide, and you have what happened last Wednesday night. The economic system freezes up . . . people won’t lend money to the banks, because they’re concerned about them collapsing, and the banks don’t have enough cash to pay out to their depositors.

Go read the rest.

Tags: bank, banking, banks, cash, credit, FDIC, home, housing, housing market, interest, monetary systems, money, mortgage, people, primer, Wall Street
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