Wealth Destruction 2발음듣기
Wealth Destruction 2
And frankly, there were probably more people who wanted to buy houses then but they couldn't get financing.발음듣기
And that was in place for a reason; because you had to prove yourself worthy to get the financing.발음듣기
But anyway, 10 years go by, financing gets really cheap because you have this dynamic of rising home prices; people downplay risk; people are willing to give loans to more and more people.발음듣기
And you have in 2005, at kind of the peak of the bubble, someone buys house number one for $1,000,000, with no money down, subprime loan.발음듣기
And then, a year later, they foreclose and the house is auctioned off and it only gets $300,000.발음듣기
But between the time that the house was bought for a million dollars and auctioned off for $300,000, let's say that that's in - I don't know, let me do that in year, let me say this is 2008, now.발음듣기
And in the meantime, all of these people - let's say all of them - took $500,000 home equity loans, right?발음듣기
So they all have $500,000 of debt from the home equity loans, plus whatever they have left from the original $80,000 loan, so, maybe, $580,000; if they were only paying interest. It may be a little bit less than that.발음듣기
And at first, maybe in 2008, they all say, you know what, this is temporary, that was just a fire sale price, and these auctions don't really reflect a market reality.발음듣기
So we're just going to sit tight and wait for our housing prices to go up because this wasn't a real transaction.발음듣기
But let's say 2009 comes along, and this individual, house number two's owner either has to move, has a different job in a different city; or maybe they just get laid off and they can't pay their mortgage anymore and they need to sell their house.발음듣기
Well they try to sell their house a little bit and it's no coincidence that they sell for $600,000.발음듣기
[? line ?] for awhile, and [UNINTELLIGIBLE] starting up, because you have a lot of people trying, at least, just be made whole on their loan when they sell their house.발음듣기
They go to the bank and they say, hey bank, can I do a short sale where if I sell it for less, then I don't owe you any debt.발음듣기
So a short sale would be like this guy has house number two, has let's say a $500,000 mortgage.발음듣기
And if he were to sell his house for $480,000 and the bank were to agree that $480,000 is all he has to pay back, then that would be a short sale.발음듣기
Right? But the bank says, no, you either sell your house or we're going to foreclo - You either pay us for the debt, or we're going to foreclose on you.발음듣기
And so the bank says, OK I foreclosed on it and the bank realizes in a few months that was a bad decision.발음듣기
Because now, when they auction the house, they don't get even $580,000; they don't get $480,000 for it; they get $250,000 for it.발음듣기
Things not that different than what I'm describing happened in places like Modesto and Stockton, California, and parts of Miami and Nevada and Arizona.발음듣기
Now everyone in the neighborhood gets scared because this guy, house number two, made an honest effort to sell; couldn't sell; tried to do a short sale; couldn't do a short sale; and when the bank auctioned, they actually auctioned it off for less than house number one, it was $250,000.발음듣기
I'm working three jobs to pay a $500,000 mortgage on a house that's probably worth $250,000.발음듣기
And if someone really were to be rational about it, $250,000 isn't some crazy lowball price.발음듣기
They paid $100,000 for it. Maybe, if you adjust that for GDP growth or inflation, that $100,000 in 2009 dollars might be $150,000 or $200,000.발음듣기
But anyway, all of these people said, why do I keep working so hard, being an indentured servant to this mortgage?발음듣기
This bank that thought that they had made a prudent loan, this is house number three, I think.발음듣기
And also, this person has also lost all of the equity in their house that they originally had.발음듣기
Well the bank had given $500,000 of real capital, real money that could have been used to build a factory; to plant some crops; to work on research and development that might have developed new materials or new technologies.발음듣기
Well, they lost, by entering into this transaction, essentially, they lost whatever equity they originally had in their house.발음듣기
Well, they had, let's just say, they had $20,000 of equity before they did this transaction, right?발음듣기
We know, even in this quote, unquote, tough real estate market, they could have sold it for $250,000.발음듣기
So they really had, let's see, they had an $80,000 loan, a $250,000 asset, so they really had $250,000 minus $80,000, that's $170,000.발음듣기
So they did build some equity through housing appreciation, just the house didn't go from $100,000 to a $1,000,000, it went from $100,000 to $250,000.발음듣기
So their equity was actually $20,000 plus the $150,000 that they got from just the increasing asset value - if they didn't enter into this transaction.발음듣기
So they would've had a another $170,000 of equity that they lost. So the homeowner lost $170,000.발음듣기
Well, it was consumed. It went into these granite countertops and these hardwood floors and the vacation; the vacation is pure consumption.발음듣기
You could argue, maybe, some of it's investment if it helps you become more productive, but for the most part, that's pure consumption.발음듣기
Things like wood floors and the two more bathrooms and the granite countertops, there is some value there, but that value is definitely not equivalent to the amount of money that was spent on them.발음듣기
They were depreciating assets; they're luxury goods; they're probably according to the taste of the person who did it.발음듣기
But anyway, the whole point of this video is, is when you have these asset bubbles, like in real estate, and you have this downplaying of risk, and this psychology that an asset class can only go up.발음듣기
And then people start to have an inflated notion of what the assets are worth, and start to borrow against those and leverage up against those inflated notions, you have to have a misallocation of wealth and, essentially, a lot of resources end up getting destroyed.발음듣기
Resources that could have built factories, could have built schools, could have built roads, whatever, ended up building granite countertops and sending people on vacation and making them feel good to go start shopping at Williams-Sonoma or Neiman Marcus or whatever.발음듣기
So it just disappears. And I want to make this point because we have a government now that somehow thinks that it can legislate away real wealth destruction.발음듣기
It thinks that, you know what, if we just somehow buy this loan from this bank, this $500,000 loan, and if we were to hold on to it long enough, maybe the underlying asset - the house got foreclosed on, so we don't even have the loan anymore, we have the house.발음듣기
So maybe the government says, oh what if we just buy this house and hold it long enough, maybe it'll get back to a million dollars.발음듣기
It may get back to a million, if our population increases so much that, one day, that might become a productive asset again, or becomes a high demand asset.발음듣기
Or, it might not ever go up; it might be a house that was built in the middle of nowhere that's not really useful to anyone; and, if anything, it's going to become a place where squatters start to come and the whole place turns into an empty neighborhood.발음듣기
Who knows? But the bottom line is the government somehow thinks that once things get bad, it can step in and try to not let people realize that they have destroyed wealth.발음듣기
And reality is something it's very hard to do anything against, whether you want to legislate against it, or speak against it, or perceive a universe that's not in accordance with it.발음듣기
But with that said, I don't want to seem like one of these defeatist people who says that there's no solution to the credit crunch.발음듣기
In the next video, I'll give you a proposed solution that was actually suggested to me by a friend from business school.발음듣기
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