1. How we got here and what it means

2. I. Lending Standards – Banks were lending too much money to people who couldn’t pay it back. + II. Interest Rates – The “extra” money you pay a bank for giving you the loan. = III. The collapse of large investment banks (Bear Stearns, Goldman Sachs, etc)

3. It begins with houses You want to buy a home. What do you need? Mortgage: A loan from a bank to buy a house. Usually, to buy a mortgage you need to show that you’re “good for it.” You show them your income, assets, etc. to make sure that you can make your payments.

4. But banks started giving out bigger loans to more people 2000-2006, people are getting bigger and bigger loans and showing less and less income NINA Loans: No Income, No Asset Why do banks do this? Pressure from the government to increase home- ownership in low income areas. (Called Subprime mortgages) High demand for mortgages Mortgage Backed Securities – Mortgages are “pooled” together by investment banks and sold on Wall Street like stock. The interest payments go to the mortgage holders Clip: “Giant Pool of Money,” Chicago Public Radio

5. To Make Things Worse… Many of these mortgages are Adjustable Rate Mortgages ARMs – after 1-3 years, your interest rate can change. It is low initially, but you don’t know what it might be down the road. So, many people are making payments on houses they really can’t afford. What do you think happened to those rates a few years later?

6. The “Fed” changes interest rates Federal Reserve – The central banking system of the U.S. Among other things, it sets interest rates. From 02-04, rates were relatively low From 06-08, rates on ARMs began to rise What do you think happened?

7. What happens if you can’t pay your mortgage? You “default” and the bank gets the house Usually not a problem for the bank– (baseball card example) But if housing prices dropped (which they did), the bank loses out.

8. 2008: The Collapse As more and more people defaulted on mortgages that were worth more than their homes, large banks began failing. What happens when banks fail? Businesses can no longer expand – nobody can borrow money The economy gets worse and worse as people spend less and less.