Brief explanation of the Morgage crisis

Sheep: Hey, can I have a loan?

Lender: Hmmm. We used to want proof that you can pay it back, but we don't need it. The cost of your house is going to keep going up. So, we'll just give everyone a loan, no matter how much. And no one will have to prove they can pay it back.

Sheep: Really! Cool! My job sucks, so that works for me. Those morgage payments would be a pain in the butt!

Lender: Here's a cool deal. No morgage payments for 2 years! Don't pay any loans.

Sheep: 2 years?! Wow. That works, because . . . uh . . . I can pay it then. I'll probably move up the ladder at my job by then. And . . . my house will be worth 50% more . . . so there's nothing to worry about . . . .

Lender: Nope! No worries. Here's your loan.

Sheep: Thanks!

Sheep leaves.

Lender: Should I secure the loan? Nah . . . the bank will take care of it.

Bank 1: Wow! That's a bunch of loans you're giving there. I don't see any income from the loans, though. So, let's give out more loans! How do we get more capital to give more bad loans?

Bank 2: Well, we can sell the loans we've got already as assets. Let's promise that the loans 'will be' paid back, since the houses are going to be worth more in the future anyway. If the houses are worth more, the loans are worth more! So, we'll sell them, and people will buy a bunch, since they're worth a bunch. Also, we'll call the best of the bad morgages AAA, and give all the morgages different names! The really bad morgages are BBB. AAA and BBB sound better than just saying 'really terrible morgages', anway. The worst morgages don't get a name. Let's give people great interest rates on those securities!

Bank 1: Good idea! So as people buy more and more of the loans, we get more and more money. And the more money we have, the more money we can loan again! But wait a second. If all the morgages really are bad, aren't we just slitting out own throats? In the short-run, we make money by selling the loan; but in the long-run, it seems like we're digging our own graves!

Bank 2: Stop with your worrying. We don't think about the future! We think about next quarter! Why? That's what OUR investors think about. And keep in mind that the price of houses will always go up! If not, the government will be our safety net.

Bank 1: How do you know the government will be there?

Bank 2: Well, duh! We and government are in this together. If we go down, we all go down.

2 years later . . .

Sheep: Hmmm. I still can't pay this darn morgage payment. And my house isn't worth more; it's worth less! Wait a minute. My morgage is worth more than my house! So, let me get this straight. I can default on my morgage; I can then get another morgage for a BETTER house for the SAME price. I'm not paying these stupid morgage payments.

Back at the bank . . .

Bank 3: I just bought a bunch of morgage-backed securities, but their not worth anything. What the heck is going on!

Bank 1&2: Oh. Yea . . . A bunch of people bought those. People all over the country and the world. Ummm . . . . We might have started a tiny, massive global recession.

Great.