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.
Very interesting episode. I enjoyed it very much. There is one good thing about the “mortgage crisis” – all of the dodgy brokers will go back to selling mobile phones…
May 16th, 2008 at 4:12 am #
I love it.
May 16th, 2008 at 8:04 am #
On a structural basis there’s nothing so extreme in Australia but dodgy loan practices, of course, especially when there’s commission and discretion involved. When we went for a mortgage the lender did all his calculations on my gross income. My net income, after taxes and HECS, was under half of that; in the end we had to put the brakes on how much we took out – I think the bank guy would have given us anything in order to meet his targets for the month.
Then again, in research on separated mothers we found that the only way some got an extension on their mortgage loan was because they had known their brokers and bankers since high school, and the guys knew they were good people who would try to pay it back. So they were kept out of a brutal rental market, though at a pretty high cost – many were struggling to make the repayments.
May 19th, 2008 at 9:05 pm #
Hi Kris. It’s a minefield; with the deals that some brokers were pushing we would have had trouble making our payments from day one, let alone leaving any buffer in the event that fortunes changed. We got on top of it by figuring out how much we could really afford. That was the hardest part; after that a lot of things fell into place.
May 20th, 2008 at 10:46 pm #