This American Life: The Giant Pool of Money
by Danny Fisher
It was just announced that the This American Life episode “The Giant Pool of Money” was among this year’s Peabody Award recipients. Here is what the Peabody Board said in honoring the piece:
- The first-ever collaboration of “This American Life” and NPR’s news division, this report was impressive for the arresting clarity of its explanation of the financial crisis we’re in, and even more so for its having aired so early – May 2008.
Because the financial crisis is difficult to grasp in many respects (hence my own hesitance to say too terribly much about it), and the This American Life episode so clear in its exposition, it seemed valuable to point readers to it. You can listen to the full episode here.
The financial crisis isn’t very difficult to grasp, if you know a bit of economics.
Goes like this:
1. Banks must keep something on hand – “in their vault” if you will, in order to lend out money.
2. Those banks were keeping mortgage backed securities as their "something on hand," which, unlike cash, might not have been worth anything if homeowners couldn't pay their mortgage.
3. So they had to get insurance against homeowners' default.
4. That something was "credit default swaps" (CDSs)- something that paid off in the event a mortgage backed securty was worthless. From AIG.
5. CDSs and mortgage backed securities (and other "derivative securities") were traded like baseball cards amongst brokerage houses, banks, and hedge funds.
6. The mortgage bubble burst and the economy went into recession (the latter 'cause economies are cyclical).
7. The CDs's shot up.
8. The mortgages started to be in default.
9. Steps 7 & 8 went on for quite a bit.
10. And eventually AIG was essentially bankrupt, and the banks were insolvent, save for government interference.
It's quite beautiful actually.