Thursday, October 13, 2011
Why people are protesting on Wall Street.
One of the reasons people are mad at the banks is something called "mortgage crisis".
People in the past used to buy houses because it was a very safe investment. Banks would allow people to borrow money from them because it was very safe and It was very rare that someone would not pay the bank back. The banks would charge a low interest rate because it made a lot of money, but the loan would be for up to 30 years.
Then, someone started selling mortgages. Lets pretend that you have $5 and I don't have any money but I want to buy lunch. I borrow the $5 from you and promise that for everyday that I don't pay you back, I will owe you an additional $2. You know I won't pay you back for two days, so you know you will get an additional $4 from me. Instead of waiting for me to pay you back, you tell Mike that I owe you $5. So you tell Mike that if he gives you $7, then you would sell him my debt. So Mike agrees and gives you $7. Now I owe Mike $9 after two days. So you make $2, Mike makes $2, and I get lunch.
You are making a lot of money doing this, so you do this a lot. You let people borrow money off you and sell their debts to other people. People are paying off their debts so everyone is making money except for the people paying, but they get a house.
This is making you so much money that you start letting people with no jobs or source of income borrow money too. These people have no chance of paying you back because they have no job. So the people you sell this persons debt to will not be getting paid because the person that owes them money has no job.
The banks let people borrow money who had no way of paying them back, then went on Wall Street and started selling these mortgages for a lot of money claiming that they were "safe". People couldn't pay their mortgages so they lost their houses and the people who bought the mortgages lost their money, but the banks still made money.
Basically, the people who took mortgages out shouldn't have taken out mortgages they couldn't pay back and the people who bought the mortgages should have done better research on what they were buying. You could blame anyone but the banks are the ones who didn't lose much and got bailed out.