The Giant Pool of Money
Update: This American Life aired a follow-up episode on October 6 about the financial crisis, and the show’s creators have started a podcast called Planet Money.
Excellent episode of This American Life last week, The Giant Pool of Money, examines the development of the mortgage and credit crisis. Alex Blumberg and Adam Davidson tell the story of the $70 trillion “global pool of money”—the savings held by insurance companies, central banks, and the like. In recent years the pool has grown at a rapid rate, almost doubling in size since 2000, generating a demand for places to invest that has outpaced the growth of good investments.
According to the report, an increasing number of investment managers turned to residential mortgages because they weren’t getting a high enough return on more conventional securities. In 2002 Alan Greenspan reduced the Federal Reserve funds rate to 1% (down from 3.5% before September 11, 2001), further increasing the time to make a return on investment in U.S. Government Treasury bonds.
Before too long a couple of things converged: traditional prime mortgages with a low risk of default were in short supply, and mortgages were being held for much shorter periods by lenders because they were being sold on Wall Street as fast as possible. Enter the no income, no assets mortgage.
The interviews in this piece brought to mind some of the shady characters that Elena and I met around a year ago, when we were looking for a house.† I asked one broker on the phone why he was offering us a particular deal. His response, “Because I like you.” If that’s mildly amusing, you won’t want to miss Glen Pizzolorusso’s story… The episode is available to download without charge until Sunday.
† We ended up finding a great mortgage broker in the end. Happy to compare notes with anyone who’s interested.