Hello, in this lesson, we are going to look at the 2007 and 2008 financial crisis. So, the 2007 2008 financial crisis, I'm sure many of you have heard of it. Some of you may be aware of the ins and outs, but I find that a lot of people don't truly grasp what exactly happened and why it happened. So they were there was essentially a combination of two things. So it's a combination of two things. And these two things are debt and mortgage backed assets, both of these go hand in hand and something they have to know Is that since world war two so since World War Two, World War Two house prices and let me just draw a quick this can be the most amazing house they've ever seen drawn in a video truth on Windows.

This is the way I used to draw a school. I was just as bad then as drawing and the house exactly and no pero. So which is convenient, but house prices have been going up. The arrows pointing up high prices have been going up since world war two in the USA and in many countries as well. Overall the financial crisis was around the world. It ultimately started and was led by what happened in the United States and because the USA is so powerful in terms of its economic might whatever happens to Good or bad, especially the bad side has a trickle down or domino effect on all the other countries, especially its allies or countries that is closely linked with.

So since World War Two, the prices had been increasing, which obviously people love. Before we start talking about the houses in terms of people buying them in the 1980s in the 1980s, actually, this is something that people don't quite realize is that the financial crisis or any sort of financial crises really but especially the to fund 78 essentially spanned many decades the effects that ultimately led to it spanned many decades. So it's not something that happened like the two years prior to that period, like in 2005 2006. It had been going on for a long time money ultimately just collapse the system. So in the in the 1980s financial institutions and traders realized that you f mortgages, US mortgages were untapped assets. Were an untapped asset that they could make money off and if they can make money off it, trust me, they're gonna make muffin nut muffins out of it.

They might buy muffin using the money but they're gonna make money out of it. And traders. This is where we started. So obviously all a bank started doing it traders at Zelo men brothers and Drexel Burnham Lambert traded at Salomon Brothers and Drexel Burnham Lambert basically was looking They were looking, they were looking to expand the bond market because obviously, they can expand it, they can generate more money, which is obviously in there or is very, very good. So they were looking to expand the bond market. And what they wanted to do was essentially use this asset that nobody had thus far utilize.

And by utilizing the asset, they would be able to make more money. And obviously, by utilizing this asset, they needed to sort of restructure it essentially because the way it was at the moment, people weren't going to just like well easily make money off it. So what happened was they they noticed and scaled it up, they noticed that a steady, steady stream a steady stream of mortgage payments were coming in, obviously, by people mortgage payments because obviously people want to live in their houses. So they essentially are paying money every single month to be able to live in those houses because they have mortgages and what some clever bankers did come by if you hate them or like whenever they did good or bad overall they did bad in my opinion. But regardless of that, they are still smart for doing this just in terms of like what they was trying to achieve.

And they realize that They could be restructured so these mortgages could be re corrupt sure refer them spelled correctly restructured in, in demand bonds. And then these were sold. They were sold to investors, investors, such as big financial institutions, they bought these essentially mortgages that were repackaged into bonds. And they were backed by these subprime mortgages, which essentially, they would get, we're going to get money from after those people had paid up so they will get an interest from that as bonds usually work and one of the reasons People liked these mortgages or these bonds, because prior to this, investors could only access the mortgage market by either buying or even buying real estate is obviously a whole industry in itself and there's a lot of work or invest in investing in construction companies, which again, not everyone, not every investor wants to do. So they will essentially quitting out in a way the middleman and going directly to people weren't that we're already inside and we're already going to be inside of the housing sort of the the mortgage market and they were essentially buying the bond.

Now we're just movies essentially. And okay, this was going on for a couple of decades. And what happened was the government lowered, the government lowered the federal funds rate. And if you don't know what the federal funds rate it, it's essentially the rate that the government ideally wants banks to lend money overnight to each other. So banks to lend money to each other. And they're the rate that they ideally want the interest to be at, because the backup on that could not go into to lend it to another bank for free.

They want some interest. The government wants a particular rate and they change. They don't specifically say this is the rate. It's not like written in law or anything. The rate is just changed by the government either printing more money or buying back securities, and you do using these techniques they can increase or lower. The interest the essentially the federal funds rate over time.

So it was lowered, it was lowered from 6.5% in 2,006.5% in 2000 to 1.75% in 2001. So this is May of 2000 this is december of two to thousands as you can see, within a year and a half, the federal funds rate was almost cut by 75%, which is a major reduction and, and a hit hit effectively is lowest in truth in June 2003, and a hit 1%. So this is a huge decrease. And this was the lowest in 45 years, so lowest in 45 years, the lowest and 45 years. And all of this essentially meant bank we have to get money via low interest loans. And the loan that we're concerned with is a mortgage because some people will say it's not a loan and movie design.

It's like, they just rebranded it to make your fingers not alone, but it is a loan. It's just a long term loan. So low interest loans were easily accessible for the average person like you and I. So When I say easily accessible, I mean people with low income, even sometimes people with no income, which is obviously just ridiculous, with low a low number of perhaps one low number of assets, wherever that's a previous property or a business or a car, they had low number of assets. Sometimes people had no job at all, which obviously, if you're lending something to somebody, and you expect them to pay you back in some way with interest, if they don't have income, they don't have access simply to sort of protected web and they don't have any jobs to be able to get this income, then obviously, we look at it now and think this is ridiculous.

Why would you lend something to somebody if you if you're going to want it back? And we've interest if those people clearly just based on just the Based on their sort of situation, won't physically be able to pay you Bobby's in the short term. They was able to just repackage these mortgages and they were selling them off. So in the bank size, they were thinking, Well, yes, we're not necessarily going to immediately get the money from the people who are selling them off at bonds. So essentially then not our concern anymore. And the reason we mentioned the Roizen house prices, the reason house prices basically made getting a mortgage a good investment, because what they could do get a mortgage and if they could sort of paid the price of the house would just keep increasing the Lisa the plan for a lot of people and then they would sell it.

Even if they didn't sell it after the house was fully paid off. They could literally sell it during the mortgage. To make money, which for a lot of people was a very attractive prospect, or new people that were that wanted to do stuff like that. Well, I'm sure everyone did. I still know people that still think that essentially because of their, the way house prices have been over the last few decades been going up, apart from the obvious, obvious financial crises, that it's always going to be a good investment. And I've heard them say stuff about my sibling say this, that it's a rock solid investment and hypotheses will always go up.

It's just like, if you look at basic economics, I call happen, you can't just keep going up unless inflation just keeps going up. And then essentially, you're not making money, you're just sort of keeping in line with the inflation rate. So ignoring that, so what started happening afterwards, a few years later, near the 2007. And to further In a period, the interest rate so interest rates started increasing. And the way they started increasing was through on. And these, this is a key assessment of a mortgage.

It stands for adjustable rate mortgage. So people was getting these are mortgages. These were the mortgages that will lend to subprime. The lenders, the one, I mean, the subprime borrowers, the one that had low income, the one that actually had a low credit score, so they was doing like on a 30 year mortgage, first five years might be low interest rate, and then after five years, it certainly increases and they can't physically pay it. So what happened was the borrowers could not pay after a few years. So the mortgage holders so they mortgage the mortgage the mortgage holders were able to pay, which meant they defaulted on their loan.

So they defaulted. And I'm sure you've seen pictures you may have even seen in person that homes were getting confiscated. And a lot of people was basically left in a really, really bad way and buyer's bias of these subprime mortgage backed bonds. So buyers of these bonds that were nothing but subprime mortgages repackages started filing for bankruptcy because ultimately they had bought these bonds that are backed by subprime mortgages. The individuals that were getting the houses couldn't pay for them. So these banks and financial institutions that actually held over 1 trillion yes $1 trillion alone of these subprime mortgages that were repackaged into bonds, they started filing for bankruptcy, they went bankrupt.

And many of them actually went property went bankrupt. They actually filed for I think in it chapter seven bankruptcy there's chapter seven and chapter 11. Chapter 11, I believe is essentially the the one that companies use to restructure their assets the business overall is a good idea but they just need to restructure in chapter seven is the one on might have might have got them mixed up if I am sorry, but chapter seven, I believe is the one where the actual running of the business does not make sense. And they're not making money. So they essentially do shut down. So they filed for bankruptcy.

And they didn't get any of the money back. The government did step in, they try to decrease the federal funds rate, again, the discount rate, which is essentially the rate at which these financial institutions can lend from the actual government itself from the Federal Reserve. That didn't happen. The snowball had already started rolling down the hill and just got bigger and bigger, collapsed, the United States financial market, not just the housing market, but just the financial market in general. It really had a big part in crushing that and that ultimately led to the crash of a bunch of other markets around the world, and many other countries and just United States in general. hasn't been able to recover fully since.

So this has just been a pretty long video on the coupons there in 2008 financial crisis. There is a lot to cover about this. So I've just tried to do the best I can. In the time that I've got if you've got any question that if you're unsure about anything who would like more information, feel free to reach out, I'll help you as usual, and I look forward to seeing you in my next lesson.