Subprime Meltdown Driven By Nouveau Riche Countries With Too Much Money And Nowhere To Put It

The fuel and engine for the sub-prime mortgage meltdown and the credit crunch was Allen Greenspan and the doubling of the global monetary supply, according to the This American Life episode “The Giant Pool of Money” I just got around to listening to. Basically, a bunch of poor countries got rich all of a sudden selling TVs and the like, and in 6 years, doubled the worldwide supply of money. The giant pool of money was hungry for places to invest itself.

At the same point, Greenspan told them that the interest rate on Treasury bonds was going to stay low for a long-ass time. The giant pool of money went to Wall Street to buy mortgages and there just weren’t enough mortgages to go around, unless, somehow, more mortgages could be created… Plug this nugget into everything you learned from the Stickfigure Powerpoint Explanation Of The Subprime Mortgage Meltdown, and now you nearly know it all. The This American Life also does a good job of filling in the rest of the blanks of the bad decisions made by each person in the toxic money chain.

The Giant Pool of Money [This American Life]

(Photo: Getty)

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  1. lincolnparadox says:

    I run into the same problems with my HSX account. I know that it’s not real money, but eventually your will run out of good investments. So, you can either play it safe or you can buy crap and hope for the best.

  2. Zephyr7 says:

    “Nouveau”

  3. B says:

    They could have just given it to me. I’d have spent less than half of it.

  4. quail says:

    I heard that show and it was good. On BBC World one of their radio shows just aired today a piece dealing with wheat prices, oil prices, and commodities in general. (I’m hunting down the podcast now but it might not show until later this week.) They got to snooping into why the cost of these goods are rising so drastically when suppliers and retailers claim there’s nothing to justify the dramatic increase in cost. And it boils down to these index funds buying up commodities and squeezing them for profit. (Hmm, kinda like the mortgage funds.) Everyone on the show did concede that forces were pushing up the prices but not to the point where prices stand now. The crazy prices have nothing to do with supply and demand.

  5. ludwigk says:

    The real questions are:

    - How come all of this seems so obvious now, but noone questioned/did anything about this for the years that it was going on?

    - How can we use this knowledge to get filthy rich off of the next bubble, and cash out before the burst?

  6. fostina1 says:

    i heard this on npr a couple weeks ago. was very interesting.

  7. katylostherart says:

    or america buys too much crap and wastes too much of that crap that it buys and still and doesn’t want to admit that we might be able to help ourselves and blaming 3rd world countries won’t do a damn thing.

    yeah sure, china’s buying more cars and india gets better food, but america still buys and throws out a ton more stuff than them.

  8. BlackFlag55 says:

    Ho Ho. Just like 70s when the first OPEC crunch came ’round. Nations what formerly counted their wealth in goats and date palms suddenly had so much money their banks could handle it. Money flowed into our top banks like a tsunami. Which just about broke the bank because, where do you put that much money to work even if you’re only paying minimum return? Chase and others put it to work in Other Nations, lending to Third World countries. Anyone remember how close bad debt in Brazil came to crashing our banking system because of non-performing loans made with OPEC money through our banks?

    Keynes, at Bretton Woods, drove home the point of global money supply, and the need for ever expanding supply of cash. That global pool of free floating cash had to be absorbed somewhere, and well … there it is.

  9. jscott73 says:

    Insert “It’s still the damn greedy borrowers who borrowed too much and didn’t read what they signed and I won’t change my mind no matter what new information surfaces or anyone will ever say” comment here.

  10. CRNewsom says:

    I don’t care how much someone tries to convince me, if I make $2000 a month, there is no way I can afford a $1700 a month teaser rate mortgage.

    The borrower isn’t the only one to blame, but they should have known better than to get in over their heads, too.

  11. rmz says:

    From the headline, I thought this was about Nouveau Riche University at first.

    Bunch of MLM scammer bullshit.

  12. backbroken says:

    So Joe Smith at 123 Main Street can’t pay his mortgage because some people in Asia got rich making TV’s?

    Man, that’s some fine rationalization.

  13. jscott73 says:

    @backbroken: And that’s some fine simplification, if that is all you got out of the article try re-reading it a bit more slowly.

  14. @backbroken: I suggest you listen to the podcast. It was all about how one could get a better return from these bundled mortgages than one could buying T-bills. Demand for these bundles of paper led to creation of more bundles of paper of questionable worth. Eventually, ordinary people were setting up storefronts where they would create these increasingly worthless bundles of paper to sell to banks, and they got burned when the banks caught on that they were worthless and stopped buying them.

  15. KIbbit says:

    @jscott73: right below ya ;) fast!

  16. CRNewsom says:

    @KIbbit: Well, it was in response to his comment, so, I would call that “aptly timed.”

  17. noquarter says:

    @ludwigk: The episode does a pretty good job of answering your first question. It’s worth a listen.

  18. noquarter says:

    @katylostherart: @backbroken: I encourage you both to actually listen to the episode.

    One point of confusion may be that, while the episode points out the Nouveau Riche countries as a driving factor in the subprime meltdown, it did not in any way indicate that they were to blame for it. The blame lies with the people who rushed to respond to that driving factor and did so in financially irresponsible ways.

  19. cef21 says:

    It neglects to mention that at the same time, the Federal Government was pushing banks to make sub-prime loans under laws like the Community Redevelopment Act. Basically, the banks were told “if you don’t lower your lending standards, we’re not going to let you merge with other banks.”

    The perfect storm.

  20. privateer says:

    Um, I think it’s Alan Greenspan, not Allen. I’d hate for him to read this web site and get his feelings all hurt.

  21. Juggernaut says:

    @Zephyr7: I knew somehow this was going to get back to the French!

  22. chrisjames says:

    Ugh, scapegoating. Prepare to go through this all again in another thirty years. Hopefully it won’t be the collapse of agriculture next time.

  23. jscott73 says:

    @chrisjames: There is some talk that it is going on again right now with oil and oil speculators, just another high-return place to put money.

    The cycle keeps repeating, just in recent history it has been stocks, then houses now perhaps oil, but something is bound to be next, sooner rather then later.

  24. Canoehead says:

    This is pretty much true – in some cases the borrower is also at fault (if you don’t know what percentage of yout take home pay you can afford as a monthly mortgage payment and then shop accordingly, you’re a retard) – but the i-bankers were told to put this money to work, since their institutions were paying interest on it. Also, there is/was a lot of money from Europe and Japan that was looking for a “safe” home with a steady rate of return. Since growth in Europe and Japan has been very slow over the last decade, that money also had to go somewhere. America had fairly growth, though not all of it was as “real” as was hoped.

    [www.atimes.com]

  25. sirellyn says:

    There’s so much obfuscation and FUD it’s unbelievable. Doesn’t anyone read the M3 numbers? (Or at least DID read them when they were still printed..) US caused it’s own doubling of money. Heck they’ve done more than that. Every time the interest rate is cut they have to print more money. If there’s MORE of something it is valued less. This is simple supply and demand. Those people who are actually calling for currency to be tied to a commodity like gold may actually be right! That is unless having the US dollar becoming as devalued as the peso sounds like a great economic boost to you.

  26. Trai_Dep says:

    Since we’ll hollowed out our manufacturing capacity, I fear we’ll ride a series of bubbles, one after the other, each more increasingly desperate.
    While financial and service sectors are fine, laudable, even, you need diversity in an economy that provides for everyone therein. Same with incomes. Too much one or the other – and the accompanying reliance – and mad swings are inevitable.

  27. Trai_Dep says:

    @sirellyn: It’s very well understood in financial circles that simply printing money is a disastrous way to “spend” your way out of a problem. It results in a currency crisis, which is enough to keep sane, rational leaders from being irresponsible.
    However, considering which party controlled the branches of government, and who was leading it, the results speak quite clearly that they didn’t give a damn.
    The problem isn’t floating versus pegged currencies (really, they’re all floating to some extent these days, directly or indirectly), the problem is allowing insane politicians that ridicule learned intelligence, and of course the voters that put them in office to begin with.

  28. sirellyn says:

    @Trai_Dep: Most people still do not understand the simple notion that this current financial trouble boils down to the debasement of the currency. For now it’s enough to disagree on the solution as long as we agree on the problem.

  29. buzzybee says:

    @sirellyn: Might want to check your assertions, there hasn’t been any debasement of the currency.

  30. z4ce says:

    The guy who wrote the stick figures hasn’t been getting any credit. It was Eddie Johnson at Washington University in St. Louis he did it for a high-level econ class (ECON 497). Got an %90. If you see it being posted somewhere w/o credit be sure to acknowledge the source!

  31. Trai_Dep says:

    @z4ce: That’s extremely good information to know. Thanks! Heh, tell him to visit Consumerist – it’d be GREAT to have him participating!

  32. Trai_Dep says:

    @sirellyn: You really should listen to the podcast. It’s really entertaining yet educational. Really. It’ll be worth your time.
    The falling dollar is ruinous, but it’s based on the currency markets’ valid concerns about the US’ economic state. Less “printing money” (economies have been far more nuanced than that since feudal times) than a host of interrelated issues trending downward, some not in our control but most within it. What was within our control was horribly mismanaged.
    Remember the Baht crisis during the Asian Currency Crisis? They had a pegged currency – functionally the same thing as having a gold, silver or myrrh standard. They got killed. Pegged currencies have many more problems than floating ones.

  33. Trai_Dep says:

    Damn. Forgot to close the bold.

  34. backbroken says:

    @jscott73: Yes yes, I was being facetious. Mostly.

    And no, I can’t listen to this or any other podcast while at work.

  35. savvy9999 says:

    I have yet to listen to that TAL episode (I’m a big fan, btw, just don’t have time every week, usually stack ‘em up for a long car ride or plane trip)… but can anyone riddle me this… since when is TAL the fountainhead for macroeconomics edumacation?

    I’m not saying it could not possibly be correct, but I have always taken Ira Glass and Co. to be a source of entertainment about human interests, mildly informative, not the end-all, be-all, final say about something as big and complex as the mortgage crisis, Fed policy, and whatnot.

    All I’m sayin’ is, take it with a grain of salt. One nice piece of the puzzle.

  36. JustThatGuy3 says:

    @savvy9999:

    The piece is a JV between TAL and the NPR news dept. Ira’s almost totally absent – he was sick, and his voice was barely audible.

  37. savvy9999 says:

    @JustThatGuy3: Good to know, thanx!

  38. kilrathi says:

    I listened to that particular episode of “This American Life” just about a week ago with my fiancee, and it’s amazing. The information is presented in a way that just about anyone who is willing to sit and listen for an hour can understand.

    What really strikes me is this: Now that the mortgage crisis is here, the “Big Pool of Money” can’t invest as much there. It seems that the “Pool” has turned to the oil market. So far, it’s been estimated that some 30-60% of the current crude oil price can be attributed to speculation (Buy it for $1 now and sell it for $2 later). The “Big Pool of Money” has simply switched targets, and we have Allen Greenspan and the disastrous fiscal policy of the Federal Reserve to thank for making this all possible.

  39. kilrathi says:

    Further, I’d like to point out that people saying there hasn’t been a devaluation of our currency are absolutely delusional. There’s no nice way to say it. Our dollar is worth four *CENTS* what it was in 1913. When we went off of the gold standard completely in 1971, inflation skyrocketed.

    We put our trust in the hands of a group of *PRIVATE* bankers, and, “SURPRISE!” they put their own profits above the welfare of the country. The Federal Reserve is neither Federal, nor does it have any reserves.

    “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild, 1790

    “Banking establishments are more dangerous than standing armies.” Thomas Jefferson

  40. ELC says:

    This just blows a hole in one of the fundamental tenants of liberalism/communism/socialism: “Basically, a bunch of poor countries got rich all of a sudden selling TVs and the like, and in 6 years, doubled the worldwide supply of money. The giant pool of money was hungry for places to invest itself.”