So banks made risky loans thinking, “Aw, shucks, I know they can’t pay, but their house will be worth more then they owe, I can sell that when they don’t.”

The problem is that housing prices stopped going up.

When you loan someone money, there’s always a risk that they won’t be able to pay you back. People can go bankrupt, or die without enough assets for their estate to pay off their debts. Companies can go bankrupt too. You can estimate the risk that someone will be unable to pay, by looking at whether they have a job and whether they have paid off loans before. That’s what a credit rating is for.

So if you’re a bank, you try to take that into account. You refuse to make loans to people who are bad credit risks. Also, you make a lot of loans, and you charge a high enough interest rate that even if some people can’t pay you back, you still end out ahead.

But if a lot of people become unable to pay you back all at once, you’re in trouble.

(Not being able to pay back a loan is called “defaulting”, for some reason.)

You can also buy and sell loans, sort of. For instance, if I borrowed $100 from you at 5% simple yearly interest, that would mean that I owe you $105 at the end of the year. But if you needed money *now*, you could sell a bond backed by that loan to someone else. Basically, you’d be getting a loan where the lender expects you’ll pay it back with the money I pay you. That’s a “mortgage-backed bond”.

But then, still, if I defaulted, you could be in trouble; you’d have a bond to pay off that you didn’t have the money to pay it with. But you could set up the bond such that if I defaulted, you don’t have to pay it back either. So when someone buys a mortgage-backed bond, they need to take into account the chance that the borrower … whom they’ve never met! … will default on the loan.

So there’s still risk, and that means the value of that bond changes over time. And there are other things that affect it too. In a real-world mortgage, the borrower has the option to pay it off early, in which case they don’t pay as much interest. That would reduce the value of the bond, so the bond is a risky investment. And there are also adjustable-rate mortgages, where the interest rate on the loan changes over time.

Mortgage repackaging companies like Fannie Mae are in the business of buying bank bonds backed by mortgage loans and selling bonds that split the “risky part” of the deal away from the “less risky part”. Then they can sell the risky part to speculators, and the less-risky part to more careful investors. Adding investment money to the market makes it easier for banks to make loans, since they don’t have to take on so much of the risk that the loan won’t be repaid.

But this changes the way that the bank people think about making loans. They know they’ll sell the loan instead of holding onto it. So they don’t care so much if the loan is risky, because the risk affects someone else! They make “subprime” loans, which are so risky they can only be sold when they’re bundled up with others to spread the risk around. And they make it really easy for people to get those loans … even people who are unlikely to be able to pay them back.

And so, when things start to go bad, a lot of people can’t pay back their loans. Which means their houses get foreclosed on. And the bank sells the houses. Which drives the prices of houses down. Which means that people who took out a million-dollar loan to build a house now have a house worth only half that much.

Meanwhile, companies that invested in those bonds find out that they are holding a lot of bonds they thought were valuable, but turned out to be worth a lot less.

Fannie Mae seemed like a good idea because it made it easier for people to buy houses and cars and stuff. The problem was that once enough people defaulted on loans, the whole system stopped working.

Unfortunately, on the stock market, this can change from focusing on the value of the company to the value of the share itself, and buying/selling decisions made that focus on what the buyers and sellers think about the future value of the stock itself, totally separate from the underlying company. In other words, someone will buy the stock not because s/he thinks the company has good prospects and that s/he will receive a portion of the profits in the future, but that other people will be willing to buy those shares for a higher price than s/he is now paying–and the company’s actual performance may have nothing to do with that. When that happens, it’s speculation, and speculation has ruled the stock market for most of our adult lives.

So if you don’t quite understand the stock market, that’s understandable, because for a long time it has not really done what it is supposed to do. The dot com bubble and the housing mania are simply more extreme episodes.

I just hope enough people can overcome enough of it in time to do something about this and a whole lot of other problems in the world before it’s too late.

There are a number of things that I blame for the current shakiness of the global economy: one, the dependence on overly hyped “bubbles” of investment (the tech bubble in the ’90s, and more recently the housing, finance and security bubbles) that are inherently transient and unstable; two, the massive interconnectedness of financial indicators (that one is explained really well in this article, which unfortunately requires a subscription); three, the conflict between an economy that requires constant growth to be healthy and a finite world (seriously, even when companies fail to grow as fast as they were predicted to, they lose money somehow); and four, the tendency for the rich to get richer and the poor to get poorer.

The point is, this is huge. Everything I read makes me think it’s systemic, and direly in need of radical intervention if we want to avert a second Great Depression.

There’s a lot of greed in society – and that’s destroying the economy. What is good for *ME* may not be good for *SOCIETY*, but if I have the choice between doing something that helps others only a little bit but hurts me, or helps me *A LOT* but hurts others only a little bit, most people’s reaction (and mine, sadly, most of the time) is to worry about myself.

So in the dot com boom, people bought stock in companies that had no sales. But they thought they could keep selling the stocks for more money to the next guy. Eventually they ran out of next guys (like any pyramid scheme).

The housing market is the same. The big difference is scale – huge companies bought house mortgages the same way individuals bought stocks during the dot com era – “It doesn’t matter that the house is overvalued and they owner can’t pay off the loan, we’ll find another idiot to sell it to who will pay more than the last one.”

The strange thing is that no single person was doing anything wrong necessarily, but they were all acting in their own interests, not society’s.

But I’m not sure I could explain it even with the fact that I’ve spent hours talking it over with someone with a degree in that field. I’ll try though.

Basically it has to do with money that’s totally imaginary.

And I guess normally everything is juggled in a weird way so that everyone can ignore the fact that a lot of the money is totally imaginary.

But occasionally (and, as I’ve now been assured by two people, inevitably) the imaginary money is really obviously imaginary, and really obviously just not there.

And when that happens, banks start failing.

And when banks start failing, a lot of really bad things happen — people lose jobs, people lose money, people lose a lot of things.

And there are ways to correct that but they either take a lot of time or a lot of effort or both.

But it really strains my brain to even figure out how to say that much, and I am sure that my attempt at description might horrify someone who is very into the subject. In my head I am connecting these to as many concrete events as I can, but I can’t get the words around both the concrete events and the whole bizarre imaginary money thing.

So I hope I was not too vague — the main thing that I have been led to understand is that this is the beginning of either a recession or a depression. Those concepts I can grasp more readily than all the imaginary money stuff. I have been trying to just not let my brain try to think too hard about imaginary money because it will just lead to a complete stalling of any other abilities. (Sort of like Star Trek computers being fed paradoxes.)

Personally, I’m not a Democrat or a Republican (and in my state you don’t register with a party, you either participate in a political party or you don’t — but even where I used to live I wasn’t a Democrat or a Republican). And when it comes to disability I think they’re both likely to screw us over in ways that will lead to people dying. So if I based my vote purely on disability policy I wouldn’t vote at all.

Both Democrats and Republicans are very upset about what is happening to the economy, though.

There is a lot of quoting of Greenspan, who is a Republican.

For instance, here is a long set of quotes from him, including:

“First of all, let’s recognize that this is a once-in-a-half-century, probably once-in-a-century type of event,” Greenspan said on ABC’s “This Week.”

Asked whether the crisis, which has seen the US government step in to bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Greenspan replied “Oh, by far.”

“There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go,” Greenspan said.

And this is one where it says, “[Greenspan] described the current banking crisis as possibly the worst in a century – including the 1929 Wall Street Crash.”

So I know nothing about the mechanics of it, but I have been assured by people with more understanding of that, that this is Bad with a capital B. Exactly how bad depends a lot on what certain people do — regardless of their political affiliations.

But I completely don’t blame you for understanding less than I do, I would not have understood as much as I do now without a lot of repeated explanation that started when I was older than you are now. But the little I understand is practically nothing compared to what people usually understand.