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Giant Pool of Money

This American Life did an excellent radio show on the chain of money that was part of the real estate collapse; from the real estate brokers, to the investment bankers who packaged and sold the mortgages, to the naïve investors, it was a gold rush with a lot of fool’s gold in the end. The radio show is called: The Giant Pool of Money, and the transcript is here.

From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn't possibly afford, no matter what the mortgage machine tried, the people just couldn't swing it. By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they'd almost never seen before. People would close on a house, sign all the mortgage papers, and then default on their very first payment. No loss of a job, no medical emergency, they were underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped.

The terrible aspect of a crash like this is how it even hurts those who aren’t greedy, those who weren’t sucked into the real estate market but still see a decrease in the value of their own homes when the home across the street is being foreclosed.
Do Americans ever ease out of an investment strategy when they see it’s overblown? Do things always have to end in a bubble burst? Do human beings ever cut their loses rather than doubling down?

For many, this is the first time they’ve gone through a drastic downturn in the economy, while others have lived through the Depression and are used to pinching pennies and being cautious with their investments. Even still, everyone is punished when the financial market falls, and it shows just how interconnected we all are, more so today in the global economy where the world is flat. Goods are made in China and jobs are outsourced to India, so when one country suffers, we all do.

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