As we are painfully aware now, there is a complex science to lending money. In the old days, though it was still a science, it also had an element of art. Why do you think one of the original Three C's of Credit was "Character"? Lenders had to evaluate the trustworthiness of an applicant during the loan interview. It wasn't a science - it was an abstract ability to decide whether you felt the money you were about to lend would be paid back as agreed.
Of course, in those days, the funds that bank received in order to make loans came from bank deposits. It was pretty simple - the more money you took in deposits, the more you could lend out.
Things are different today. Here is a video that visually captures how the current credit crisis evolved. I introduced it yesterday at our annual MoneySmarts teacher conference and the teachers told me that it is succinct way to help kids understand the complexity of the terms being thrown around in the news. See what you think.
One final point - whenever we get out of this recession, we need to remember the flow of money will have to be some variation of this. The old days are not coming back.
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Overall, this is a very well-done piece, but one part strikes me as both inaccurate and objectionable – but nevertheless offers a teachable moment.
ReplyDeleteAround the 7:20 minute mark, the narrator draws a distinction between “responsible” Prime borrowers and irresponsible subprime borrowers. The former are represented by a slim couple with a single child and a dog. The narrator then uses a clear verbal intonation to communicate his distaste for the latter, who are “well, less responsible”. They are graphically represented as an overweight, cigarette-smoking couple with four small children. This screams pejorative stereotyping, which opens the possibility of a teachable moment regarding who subprime borrowers really were and what got them into trouble.
One of the subtexts during the NHJSC Conference this year was how ill-informed people are. Trish Regan herself said that she and her husband were confused, to some extent, by the documentation associated with the mortgage on their vacation home. And several people during the Q&A following her address spoke about regular people not understanding certain financial products and getting into trouble.
While some people were undoubtedly trying to game the system, the video suggests with authority that most subprime borrowers were similarly motivated. This, it seems to me, obscures the truth and uses a pretty ugly stereotype to make that point.
For a somewhat different take on this issue: http://www.bread.org/BFW-Institute/asset-building/subprime-loans-foreclosures.html.
These views are my own.
You perspective is very interesting.
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