This American Life Episode: “Giant Pool of Money”

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Table of Contents

Introduction
The Beginning
The Giant Pool of Money
The Crash and the Consequences
Conclusion

Introduction

World economy and trade is an important but difficult topic to understand for the majority of people. The global movements of the market, trends, corporate developments, and schemes aimed at gaining profit are all a part of the economic process and making sense of the events occurring simultaneously on a large scale can be almost impossible. The podcast episode in question, “The Giant Pool of Money”, is concerned with the 2008 financial crisis, or more specifically, its relationship with the housing market and bank loans. The economy at the time was quickly growing, in large part due to a variety of recent developments in the world. With businesses flourishing, and the wealth of the corporations quickly growing, the housing market was rapidly rising in value, with prices peaking in early 2006. After that, the market suffered from one of the biggest crashes in history, due to a variety of factors. These factors are precisely what the podcast in question is centered on, making the housing market of the early 2000s its primary point of discussion. The hosts talk about the events of the time, of people who were involved with it, and the underlying reasoning behind the events of the time. This exploratory piece seeks to better present and explain the events leading up to the financial crash, as well as its financial causes. In this analysis, the general aim is to recount and overview the points of interest brought up by the hosts and weigh them against some of the theories posted on the same topic. During the course of this work, a better understanding of the issue will be found.

The Beginning

The financial market during the period before the crash was practically booming. The global economic development and trade have guaranteed that most first-world countries have experienced a period of unprecedented growth and development. Much of it was in thanks to the industrial growth of such countries as China, India, and Saudi Arabia, among others, which has increased the availability of global resources and possibilities for future development. In this climate, there were a number of individuals and companies that sought to increase their profit by using the tools and tactics available to them. Investors, especially, saw that as an opportunity to multiply their funds and quickly gain revenue. The process further drove the world economy, forming what is known as a financial bubble.

The Giant Pool of Money

One of the key concepts to understand when discussing the financial crash, as the hosts imply, is “The Giant Pool of Money”. This specific term is used to colloquially describe the collective pool of money in operation in the world at the time. This money is saved and stored by a variety of organizations, such as banks and firms. Having the money stored away means that the interested parties can use it to further increase the amount saved, through the process called investment. By carefully spending money on ventures that are said to be worthwhile, an investor can double, triple, or even quadruple their initial sum in a short period of time. One can invest in a large variety of fields, including construction, stocks, government projects, as well as other types of business ventures. During the time nearing the financial crash, however, entrepreneurs were largely incentivized from investing in government affairs, as the returns on investment were too low to effectively profit from. The situation was approved by the Federal Open Market Committee, which issued a statement saying that the rates will be fixed to ensure the correct functioning of the economy. In response, many investors turned to more profitable ventures to earn more money. One of such directions for investment was the housing market, as the prices were steadily rising and the projected profits seemed to be very alluring. When trying to gain profit from the housing business, there is a particular scheme to be followed, involving mortgages. By batch-buying mortgages from banks, investors essentially gained a stream of constant revenue from making a fixed initial investment. The approach allowed them to gather large sums of money by helping to provide housing to those that were approved for it, gaining a mutual benefit from it. However, problems started to arise as the need to earn higher profits overshadowed the number of people qualified for a mortgage at the time. Most people simply had already taken a mortgage. This, in turn, led the mortgage firms to start signing a contract with less qualified people, as a way to amass more profits. With each passing month, more and more mortgages from underqualified individuals were approved, and agencies further lowered their standards on a constant basis to keep up with the competition. In the beginning, one had to show that they had a stable source of income, and ability to produce a sufficient amount of money, and a certain amount of savings stored at a bank. Slowly, all of these requirements were abandoned in an effort to approve more mortgages and sell them into the hands of investors. This process, then, was replicated on a national scale, quickly exacerbating the issue throughout the country. Generally, investors based their decisions on scores from credit rating companies, who were in the business of measuring the profitability of a pool of mortgages, as well as their likelihood of being paid back. The main issue, however, was with the fact that the measurements they used were astoundingly incorrect, overestimating the safety of many of the pools. Other types of companies, the CDO’s, were occupied with buying up all of the more low-scoring mortgage arrangements and re-arranging them again for further reselling. The process allowed them to present baches with low scores as ones with a higher value, making money and future problems for the entire economy to deal with.

The Crash and the Consequences

Much like any other bubble, the housing market bubble of 2008 of the time was founded on a pretty simple basis. Banks started to give loans to people with low chances of paying them off and approving a large number of loans. This, in turn, led more people to take out loans in hopes of being approved without proper procedure. Batches of people unable to pay back turned into toxic assets for the economy, pools of mortgages that did not turn up any profits. Other people saw the rising prices for housing as an opportunity to make money themselves, buying and reselling housing for extreme prices. The problem arose from the fact that the rising prices of housing were not accompanied by the subsequent increase in profits, simply because most newfound homeowners had no incentive or ability to pay back. With increasing numbers of people becoming unable to continue or even start paying for housing, the market once again became flooded with available housing, which was now not in demand, driving the prices into the ground. Smaller banks involved in reselling loans to investors got caught up in trouble, as they had no funds of their own to buy loans, having to borrow from bigger banks. Then, as more and more people were realizing the severity of the situation, decided against buying mortgages from the little banks, making them unable to pay back on their own loans. The process led to banks and smaller firms defaulting on their loans and going out of business. In the wake of the whole affair, common people were left to deal with the aftermath of the event, having to manage to afford to stay in their own homes, as well as to make constant payments to the bank. The events of the financial crash have changed the perspectives of Wall Street investors and entrepreneurs. Having experienced the danger of creating an economic bubble, now, safety and stability are more preferred in the business of money-making. The effects of the event were overarching, impacting the entirety of the world economy. The growth of the economy was severely stunted, with a hard hit to the job market and employment.

Conclusion

In conclusion, it can be said that the financial crisis of 2007-2008 was a result of a complicated and layered process, owing to the desire of many investors to make a large profit using a booming market. Exploiting the need for housing, mortgages were packaged and sold in large quantities, allowing some to make constant profits from their initial investment. With a variety of organizations and firms becoming involved in the process, the need to keep making money drove all the participants to forego the proper procedures for checking the safety of their business ventures and secure speculated profit from those unable to pay back. Furthermore, millions of people who were promised high-quality affordable housing got left with mortgages they are barely able to support, putting them in line for financial bankruptcy.

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This American Life Episode: “Giant Pool of Money”

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