credit crisis
DESCRIPTION
When the economy fell apart, this slide show explained the basic economic principles at work and offered up some terms that were appearing in the paper at the time.TRANSCRIPT
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