The Forgotten History of the Global Financial Crisis – VisualEconomik EN

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I’m sure many of you have heard that the global crisis of 2008 was preceded by a huge real estate boom where banks started to hand out mortgages like crazy what’s more you’ve probably heard that this whole crisis started with the collapse of one of those legendary big u.s banks lehman brothers but did you know that lehman brothers never gave out a single mortgage

In its entire history what would you think if i told you that contrary to popular belief the global crisis of 2008 did not begin with the banks nor with the supposed greed of the financial system but that its origin its real origin was in a political decision taken from the 1990s with the aim of fighting poverty from here on visual economic fans the questions are

Clear what really created the financial bubble what did lehman brothers have to do with it all and above all why did the entire global financial system collapse overnight listen up imagine a political measure that would make it possible for even the poorest person in a country to own a house that would be nice wouldn’t it well don’t worry because you don’t have

To imagine it too hard that measure or rather that package of measures really existed and they were implemented in the mid-1990s in the united states under the clinton administration and contrary to what you might think this attempts to help the most disadvantaged was precisely what started the most significant real estate bubble in history how could things get

So out of hand how did such a seemingly good intention turn into such a nightmare to understand this we must first introduce you to two of the main players in the financial bubble which although they sound like the names of fast food or ice cream brands are two of the largest banks in the world freddie mac and fannie mae these two u.s banks were created for the

Sole purpose of providing cheap mortgages so that u.s citizens could own their own homes and the truth is that as intended when they were conceived for several decades these banks succeeded in making housing more affordable for american families however as you can imagine things started to go wrong with the arrival of the 1990s the reason the then young president

Bill collinton wanted every american who wanted to own a home to have one everyone without exception you could say that in a way he wanted to push the founding goal of freddie mac and fannie mae as far as possible well just like now before 1995 banks had restrictions for being able to give a mortgage they asked for a down payment that was at least equivalent

To 20 of what the house was going to cost for example if you wanted to buy a 100 000 house the bank could lend you eighty thousand dollars at most so the remaining twenty thousand dollars had to come out of your own pocket clearly this was a barrier to clinton’s plans not all families had the ability to save 20 of the value of their new home so let me ask you

A question what brilliant plan do you think president came up with it was very easy to eliminate this legal barrier in one stroke first by reducing the down payment from 20 to 5 and finally in 2000 to eliminate it completely we take notes because that wasn’t the end of it good old clinton came up with an even more radical idea so that everyone could own their

Own home this idea is what you may have heard referred to as ninja mortgages now then what on earth is a ninja mortgage in short ninja mortgages are nothing more than the result of clinton allowing the guys at freddie mac and fannie mae to give mortgages without checking or guaranteeing their customers ability to pay in fact the clinton administration prohibited

Institutions from investigating the credit history of certain customers thus giving rise to shall we say opaque subprime mortgages you had no idea what kind of lender was behind it but okay whatever what does this have to do with ninjas foreign well you see the word ninja apart from being the name of the legendary japanese assassins is used as an acronym for

People with no income no job no assets in other words after clinton’s reform people who would never have been able to get a mortgage were able to access them yes i know it sounds crazy but you know that reality is always stranger than fiction and if that wasn’t enough clinton also forced these two government banks freddie mac and fannie mae to make 50 of their

Mortgages ninja mortgages and take note because that’s not even the end of it it was not only about who signed these mortgages but how these mortgages were structured specifically some types of mortgages that became very fashionable at the time were mortgages with moratoriums and arms in case you don’t know what they are they are something like mortgages with

Reduced installments during the first years a very juicy type of mortgage used by bankers to attract clients are you tired of saving for a down payment too young to pay for a mortgage on your own relax we’ll give you all the money you need and for the first five years of the mortgage yes the first five years will give you a 50 discount on the installment this

Way you’ll have time to find a better job than the one you have and even if you don’t have the money to make your payments now you can just pay us later remember it’s already in the 21st century take advantage of our offer buy your house now and don’t wait for prices to go up the best time to buy your house is now so what are you waiting for remember that the real

Estate market never goes down and after this exciting advertisement we come to the most curious part of it all i mean it is true that the public banks under clinton’s orders started to give out ninja mortgages by the bucket load but it turns out that private banks had also joined the ninja bandwagon and i wonder why on earth would a private bank give mortgages

To people who they knew would probably not be able to pay them back did they want to lose all of their money the answer is obvious no they didn’t want to lose their money in fact they had a great strategy to earn even more and this is when we get to the ninja circle the ninja circle visual economic fans the ninja circle was nothing less than the strategy

Used by financial institutions to get rich at the expense of ninja mortgages first the commercial banks took it upon themselves to give out lots and lots of mortgages with no filter whatsoever due to this many people were able to access mortgages easily triggering the demand for real estate so the price of housing began to rise without the brakes on next if a

Ninja defaulted on his or her mortgage it didn’t really pose a problem for the bank because after the price increase the bank could resell the defaulters house and recoup the mortgage money at a profit and of course if the houses were resold it was because other ninjas bought them and they bought them thanks to the easy mortgages offered by the banks and so the

Circle was complete if you notice in order for this circle to work and keep rolling a fundamental condition had to be fulfilled the condition of the ninja creed in order for the circle to remain unbroken house prizes must be kept rising forever and ever and knowing this you may be wondering so did the system work to provide housing for everyone well yes it did

Foreign it turns out that in 2005 americans bought 6 million more homes than in 2000 to give you an idea six million dwellings would be enough to give a home to each and every citizen of madrid and berlin combined but where did all these houses come from well in fact many of them were newly built which in turn provided work for millions and millions of people

As an illustration in spain the tourist country par excellence during the real estate boom the construction sector provided more jobs than the tourism sector foreign visual economic fans i know what you are thinking that’s all well and good but in the end this whole house of cards arrangement ended up falling down so the question that we have to answer is

How exactly did the problem start what was the beginning of the collapse and above all what did lehman brothers a bank that was not even in the mortgage mortgage business after have to do with it well let’s find out the surprise packages if you have noticed until now we have not talked about a fundamental part of the ninja circle where did the money for the

Mortgages come from i mean yes banks usually have their own money but was it enough to be able to provide so many mortgages the truth is no the banks had a problem if they wanted to keep the ninja circle going and keep lending in droves and that is the money to lend was running out so what could they do to get a lot of money in such a short amount of time what

Kind of scheme do you think they came up with and it is here that the technique of the surprise package comes in or being a little bit more technical the mortgage package security and what do these packages consist of well imagine i’m a bank that has given out a lot of mortgages both to ninjas and non-ninjas but oh wow i’ve run out of money so i’m gonna do one

Thing if i look at all these people who owe me money i realize that in total i have given 100 mortgages to my clients and between them they owe me 10 million dollars that is money that belongs to me even though i’m not going to get my hands on it for a few years but of course the problem is that i need the money now to be able to continue giving mortgages in my

Ninja circle so since i don’t want to wait i can put half of my mortgages together in a little package and tell someone look at this all these people in this little package are going to have to pay me five million dollars in 10 years but if you give me four million dollars now you get to keep the little package of mortgages and you will collect the five million

Dollars owed to me in a few years this way you will earn a million dollars of margin and i will have my money now to continue with my ninja circle a perfect plan don’t you think well it turns out that in this perfect plan there is still an additional advantage and that is that by selling the packages i will be offloading many ninjas and i will be passing them

On to whoever buys the packages from me so if the ninjas don’t pay it will be the problem of whoever bought the package and not mine and now comes the fun part can you imagine who was one of those famous package buyers exactly this is where banks and investment funds come in banks like lehman brothers visual economic fans lehman brothers was not your everyday

Bank but an investment bank and what exactly is an investment bank in short it’s an institution that takes people’s savings and invests them to make more money now then how is it possible that a bank as important and seasoned in a thousand battles as liam brothers which survived the american civil war and overcame the crash of 1929 would buy packages that were

Full of little ninjas who were not gonna pay their mortgages at this point my friends is where the character that completes the triangle of evil comes in the rating agencies basically these agencies were in the business of telling you how safe an investment was or more specifically in this case how dangerous it was to buy one of these little packages and risk

Not getting paid by the ninjas and can you imagine what they did indeed they had no better idea than to give the best possible grade to the surprise packages completely ignoring the ninja danger inside them specifically it is estimated that by 2006 24 of all mortgages were sub-prime to give you an idea this is more than double the total of 1998 when subprime

Mortgages accounted for only 9.8 and yes i know you are wondering why did the agencies rate these surprise packages so highly well obscure theories aside which would be enough for an entire video of its own the truth is that the ratings agencies had no experience in valuing these types of products which were quite new in the market and which were really difficult

To assess what’s more no one at the time knew exactly how dangerous the ninjas were nor how many of them were in each packet however as we all know the ninja spring came to an end triggering the biggest financial crisis to date but what exactly first the bubble for what exact reason could the ninja circle not be maintained forever what drove lehman brothers

Into bankruptcy we’ll find that out right now the arrival of the crisis remember the great ninja mortgage credo in order for the circle to remain unbroken house prizes must be kept rising forever and ever well as we all know the ninja creed died a sudden death in 2007 and at that very moment housing prices stopped rising in any case the question is why what

Was the exact event that stopped prices from rising and started the crisis think about it even if access to credit is easy and everyone can buy a house the price of housing reaches the limit where people simply prefer to stop buying and rent but first let’s go back a bit in our story it was not only about who signed these mortgages but how these mortgages were

Structured specifically some types of mortgages that became very fashionable at the time were mortgages with moratoriums and arms in case you don’t know what they are they are something like mortgages with reduced installments during the first years a very juicy type of mortgage used by bankers to attract clients by 2007 many people who had taken out these types

Of discounted mortgages had to start paying the full amount of their mortgage payments well all of a sudden many ninja customers were unable to afford their new mortgage payments so they had no choice but to put their homes up for sale and here comes the big question what happens when everyone is selling houses at once but far far fewer people want to buy them

Well indeed housing prices plummet look at this graph plummeting prices meant that the ninjas who could not pay their mortgage could no longer sell their house in order to pay the mortgage and obviously the bank could not keep the house and sell it itself much less if that house was in one of those small packages that lehman brothers had bought but what do you

Think happens when an investment bank like lehman brothers has dedicated itself to massively buying up ninja mortgages that no longer pay can you guess lehman brothers fails for bankruptcy the collapse of lehman brothers led to a full-blown banking panic that caused investors to turn off the credit tap worldwide yes that’s right the whole thing shut down that

Meant that the bank’s completely paralyzed their activity to such an extent that well-known entities such as barclays lost half of their value in the stock market in just one month and you’ll say well what happens if the banks stop lending to begin with what happens is that construction companies and workers in this section are gonna be flipping burgers because

New houses are no longer being bought next if banks cannot lend to any more companies in other sectors more people in other industries also lose their jobs in the united states alone more than 8 million people became unemployed at this point many of you may be wondering if the banks ran out of money to lend and on top of that their customers were not paying them

Back wasn’t that a direct path to bankruptcy for the entire banking system what would happen to all of the money that people had in savings if they went bankrupt well visual economic viewers that’s a question president bush was unwilling to find out the answer to this rescue effort is not aimed at preserving any individual company or industry it is aimed at

Preserving america’s overall economy it will help american consumers and businesses get credit to meet their daily needs and create jobs in order to prevent a financial collapse in the united states and americans from losing their savings president bush pushed through the emergency economic stabilization act of 2008 or in other words he bailed out the banking

System with public money specifically this act paved the way for 700 billion dollars of which 426 billion dollars was ultimately invested but how do you rescue a bank did bush just give the money and that’s it no in short what the government did was to buy a good proportion of the ninja mortgages from the banks in this way it achieved two things the first was to

Eliminate the risk of non-payment of these mortgages and the second was to give money to the banks so that they could withstand the pull off the crisis without going bankrupt unlike other countries such as spain this bailout recovered 441 billion dollars over the years which adjusted for inflation served to compensate for the initial investment in any case that

Move provoked great controversy which prompts the question should bush have bailed out the banks knowing that they acted irresponsibly is it an appropriate policy to bail out the banks well if you think that a bailout other banks with public money is indeed a bad idea relax because you are in luck there are alternatives to saving the banks along with everyone’s

Money alternatives that could help us in the next financial crisis and strategies that would solve one of the great problems of the economy after all why would banks avoid bubbles if they know that they will be bailed out when it all goes wrong however the alternative methods to the bank bailout will be explained in an upcoming video until then you can leave us

Your thoughts on the matter in the comments as always don’t forget that here on visual economic we release new videos every week so subscribe to this channel and hit that little bell icon so that you do not miss any of our updates all the best i’ll see you next time foreign

Transcribed from video
The Forgotten History of the Global Financial Crisis – VisualEconomik EN By VisualEconomik EN