Michael Moore’s film “Capitalism: The Love Story” gives rich food for thought. Even if you do not understand economic models, I advise you to watch this film, at least, for the sake of general development. This love story ended with a loud “divorce.” The film examines the first causes of the global financial crisis, talks about manipulating the money of American taxpayers. Denounces the banks and corporations, top managers and politicians who committed, according to director Michael Moore “The biggest robbery in the history of his country.”
In this film, the producer, convincingly, shows: who is at the head of the entire government, in whose hands, for whom the last word remains. Not without the humor of Michael Moore and his amusing, but relying on serious problems. This time he decided to make civil arrests and return money from banks, to the treasury of the United States.
Michael Moore describes capitalism as a “system of free enterprise” and “giving and taking, but mostly taking.” The American sociologist, Neil Fligstein wrote “ One of the most interesting and important aspects of the crisis remains understudied — fraud among the largest financial institutions. Fraud was diverse. Mortgage originators deceived borrowers about loan terms and eligibility requirements, and sold loans they knew were likely to default. Banks that packaged mortgages into securities misrepresented the quality of the loans and the extent of their due diligence.” His words support the main idea of the film. Many people do not even guess that the banks hide behind the “canvas”. People see only what they need to see, but not what is hidden in reality. Financial crisis like earthquakes destroy the stable life of people.
After my in-depth analysis in the sphere of fraud with home loss, I can give an example of how it all works. Let’s return in past years and imagine that you are an investor. You have a huge amount of money, but you, like any person because of our nature, want even more money. Where to invest money? You can buy government bonds, but the interest on them is too small for you and you will not get much profit from this venture. In addition to you in the market there are standard families who would like to have their living area, but due to many circumstances, insufficient amount of money, they do not have it.
To put it superficially, the Fed is an analogue of our central bank, it raises interest, gives loans to commercial banks, and they, in turn, give out loans for a slightly larger percentage of the population.
Have you not forgotten about the family, who very much wants their housing area? What are going to buy in a commercial bank and take a mortgage there on bail at home, which are going to buy. That is, if suddenly the family stops paying the mortgage, then the real estate will pass to the ownership of the bank. Although our family is conscious, it repays the loan on time. And even if it stops suddenly, the bank is not afraid, because it can easily resell the house without problems, and property prices are one of the most stable, there is absolutely nothing to worry about. As prices began to decline, homeowners who planned to sell their property at a profit were unable to do so. Other homeowners found that the outstanding balance on their mortgage loans was more than the market value of their homes. This condition, known as a mortgage, has reduced the incentive for homeowners to continue making mortgage payments.
Do you still remember that you are an investor with a huge pile of money? One day a great idea comes to your mind. You call the number of a commercial bank, and tell that you want to buy all the family’s debt obligations, which they took from them a mortgage. The bank agrees. Now you are the owner of all promissory notes. And the money, that families pay to a commercial bank – goes to you.
It is important to note that the credit lever allows you to buy a lot of debt. The credit lever is a loan of funds to increase the profitability of the transaction. Here’s an example of how you can raise a lot of money with a credit lever.
In a typical transaction, a $10,000 company buys pies for $10,000 and sells for $11,000. Profit is $1,000. Not so bad. But, using leverage, the company with $10,000 goes to the bank and takes $990,000. And then he buys pies worth $1 million. Then, the company sells pies already at $1.1 million. Now the company has $1.1 million, of which $990,000 it returns to the bank.
You take and put all these obligations in a box. Then you divide this box into three parts – safe, normal and risky. After that, you connect these parts back and call them bonds secured by debt.
Now you go to the rating agencies that put the bonds on the appropriate note, backed up by their authority. The AAA rating means that the bond is as safe as possible. BBB is also very good. In general, for us this rating is more for clarity.
All that is further is a matter of technology. You sell these bonds in bundles, earning tons of money. Necessarily, you give the share of the Fed to borrow for the credit lever.
So, what would you do on the site of investors next? You would take even more loans from the Fed and buy back even more debt. And then they would earn on selling bonds that would be secured by such debt obligations.
One day, when you wanted to buy more obligations, the commercial bank refused. Just because everyone who would take a mortgage has already taken it, so that there are no new debt obligations. Then you tell the bank of any way to get more customers, because such a delicious feeder should flourish further. The bank thinks a little and agrees. He starts issuing subprime loans. These are loans for which no down payments are needed, you do not need to confirm your income, and in general no documents are really needed.Do not rush to reread, to understand what you just read. The main thing – postpone in your head that you can issue securities on the security of other securities. This is a real pyramid.
Naturally, no subprime mortgages were paid, they were issued initially to unemployed people. Over time, the number of people who did not pay a mortgage became more and more. There were too many houses, and there was no one to sell these houses.
Now we remember what happens when there are many offers, but little demand? The simplest answer is that the price falls. Now let’s return to families who did not take subprime loans, but normal, with income confirmation and down payment. These people used to pay a stable mortgage earlier. Let’s say they took it for 400 thousand dollars. And then they find out that the house next door is now selling for 100,000. What will they do? They will send the bank to the pedestrian erotic journey. They will stop paying the mortgage and buy the same house for 100 thousand.
Imagine what happened to your cash flow? The whole financial system is frozen, and over it dusk is gathering. A wave of bankruptcies begins.
The world’s largest investor, Warren Buffett, described “The 2008 US mortgage crisis is the largest speculative market bubble ever seen.” He stated this in 2011 during the testimony in the Commission to investigate the causes of the crisis. To the Commission’s questions, he stated that the whole of America and the whole world had convinced themselves that the rise in property prices would continue forever and there would never be a fall.
The American mortgage crisis, which began in 2007 with massive non-repayment of housing loans, due to the thoughtless use of derivative financial instruments, soon spread to the entire US financial sector, and later to other countries. A lot of companies went bankrupt or suffered serious losses, which led to a sharp decline in lending. The mortgage crisis in the United States was that banks issued loans larger than the market value of real estate that the person planned to purchase. The slogan “Take it now – pay later” seems was true, and people will have to pay for you more than one year. Very relevant would be the slogan “You take, but all will pay off.” Granting loans to any borrower, almost without considering its solvency, banks exceeded all the permissible risks, while losing the ability to manage and control debtors. This once again proves the viciousness of the entire world economic system, its vulnerability.
The consequences of the mortgage crisis in the US were difficult. The whole world financial system suffered. Humanity in the last quarter century has not doubted the effectiveness of the capitalist system. Many countries have declared default, many major insurance companies and international banks were devastated. Among them are the world-famous Lehman Brothers and Bear Stearns. Many announced a merger. Private savings and savings of US citizens have declined. The crisis affected all spheres of the US economy, which entailed a global crisis. About a million Americans were unable to service loans. They were forced to leave housing for the bank. The huge real estate funds were thrown on the market. Entire streets and neighborhoods literally “died out” after the crisis.