Spring Break
The Financial Crisis Finally Explained
An In Depth Look at the Busting of the Ice Cream Bubble
By Brian Dutt (OE), Viewpoints Editor
Issue date: 10/6/08 Section: Features
My mom recently asked me to explain how this financial crisis happened. I didn't have a great answer, so I decided to draw an analogy and then take from there.
Subprime lending is kind of like an ice cream truck lending money to kids to buy ice cream during a hot summer - even if their allowances don't support that kind of spending. Then there are mortgage backed securities, the equivalent of a local dog track owner buying all those ice cream loans, and selling them as an investment to betters on the dog track. Sounds like it could work in a hot summer, however, always keep in mind…it is pretty difficult to control the seasons.
When a market is hot, you can always find a financial genius who can figure out how to make money out of more money.
Take the town of Wasilla, Alaska, which experienced the greatest heat wave in history this year. During the summer, temperatures were breaking 90 degrees, and you could fry a moose-burger right on the pavement. The market was particularly hot for one item. Ice cream. Kids were running through the streets chasing ice cream trucks with loose change and dollar bills, but some kids just didn't have the allowance to afford ice cream….Was there a way to take advantage of the heat of the moment?
Joey Countrywide, the owner of an ice-cream truck in town had a bright idea. He watched as Allen Greenham, the town finance minister, slashed interest rates on municipal bonds, making borrowing cheap for everyone in an attempt to revive the town economy after the crash of the Winter shovel bubble. Countrywide would borrow and borrow and borrow, and then loan desperate kids ice-cream using "subcone loans."
Subcone loans didn't require formal checks on what the kids did to get their allowance, or whether or not they actually owned a lemonade stand. They all offered up confusing terms like "variable melting option," and actually carried very high interest rates after an initial period - but these kids were just happy to be getting the ice cream that they had been dreaming about for their entire lives.
Subprime lending is kind of like an ice cream truck lending money to kids to buy ice cream during a hot summer - even if their allowances don't support that kind of spending. Then there are mortgage backed securities, the equivalent of a local dog track owner buying all those ice cream loans, and selling them as an investment to betters on the dog track. Sounds like it could work in a hot summer, however, always keep in mind…it is pretty difficult to control the seasons.
When a market is hot, you can always find a financial genius who can figure out how to make money out of more money.
Take the town of Wasilla, Alaska, which experienced the greatest heat wave in history this year. During the summer, temperatures were breaking 90 degrees, and you could fry a moose-burger right on the pavement. The market was particularly hot for one item. Ice cream. Kids were running through the streets chasing ice cream trucks with loose change and dollar bills, but some kids just didn't have the allowance to afford ice cream….Was there a way to take advantage of the heat of the moment?
Joey Countrywide, the owner of an ice-cream truck in town had a bright idea. He watched as Allen Greenham, the town finance minister, slashed interest rates on municipal bonds, making borrowing cheap for everyone in an attempt to revive the town economy after the crash of the Winter shovel bubble. Countrywide would borrow and borrow and borrow, and then loan desperate kids ice-cream using "subcone loans."
Subcone loans didn't require formal checks on what the kids did to get their allowance, or whether or not they actually owned a lemonade stand. They all offered up confusing terms like "variable melting option," and actually carried very high interest rates after an initial period - but these kids were just happy to be getting the ice cream that they had been dreaming about for their entire lives.
Viewing Comments 1 - 2 of 2
Jyoti Shukla
posted 10/11/08 @ 6:50 AM EST
During my recent first visit to USA, I travelled without a Credit Card - I did not have one because i did not need one in India. When I paid in hard cash, not all recipients were appreciative; some even wondered if Dollars were better than card. (Continued…)
Jyoti Shukla
posted 10/11/08 @ 7:03 AM EST
I couldn't stop sending this immidiate follow-up comment.
Why?
Because as the Harbus Web-site opened to inform me of inclusion of my comments; carrying the banner:
"REWARD YOURSELF. (Continued…)
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