Our Financial Crisis

Credit

1. An arrangement for deferred payment of a loan or purchase

2. A reputation for sound character or quality; standing

mortgage

A temporary, conditional pledge of property to a creditor as security for

performance of an obligation or repayment of a debt.

$100,000 loan from the bank….at 5.0% annual interest….

= $3,333 (principal) + $5,000 (interest) = $8,333 a year

Over 30 years that adds up to…= $150,000 total interest

TOTAL PAYMENTS= $100,000 + $150,000 = $250,000

credit check

$8,333 a year mortgage payment.

1/4 of your take-home pay.

$100,000 mortgage = $33,300 take home pay.

Steady income!

sub prime credit

$200,000 mortgage

$16,666 a year mortgage payment.

1/2 of your take-home pay.

$200,000 mortgage = $32,300 take home pay.

Mortgages go bust

Bank has no

money

Bank cannot loan more

money

Businesses cannot get loans; close

People get laid

off

How Interest Works • You deposit money in bank.• Bank loans money to borrower

(company, mortgage, car loan, etc.)• Borrower pays back loan, plus

interest.• Bank pays you interest on deposit.

Fear #1: Bank Loses Your Money

FDICFederal Deposit Insurance Corporation

Fear #2: Companies Unable to Get Loans

Loans go bust

Bank has no money

Bank cannot loan more

money

Businesses cannot get loans; close

People get laid off

People buy more stuff; pay taxes.

Government creates

jobs

Workers have

money

Workers buy things

Private sector jobs are created

Private companies

need workers

New Deal

People pay off current loans; pay

taxes.

Government covers bad loans

Bank has some

money

Bank can loan more

money

Businesses get loans; stay open

People keep jobs.

Current Plan

Citizens vs. Wall Street

Fear #3: Will Markets Learn Lesson?

Insanity: Doing the same thing over and over and expecting different results.

Government Action Best Case Worst Case

Bail out banks Economy back on track Banks repeat mistakes

Bail out banks with regulations

Economy back on track; Rules keep it so

Restrictions hold back growing economy

Take over bad loans Banks saved; Home owners get second chance

Bad debt now government’s; Government goes broke.

Money to taxpayers People pay off debt People repeat bad mistakes

Do nothing Weak die, strong become stronger

Economy tanks; misery for all