“The Giant Pool of Money”

$70 trillion dollars.  That’s all the money in the world, or to get technical, the subset of global savings known as fixed-income securities.  And it almost doubled from $36 trillion in just six years.  How did this happen?

The Federal Reserve presided over the creation of what we have learned (the hard way) is a monster of unregulated investment vehicles run amok, resulting in the global credit crisis.

In the words of National Public Radio’s international business reporter Adam Davidson, “What he (former Federal Reserve Chairman Alan Greenspan) is saying is he’s going to keep the Fed Funds rate at the absurdly low level of one percent.  It tells every investor in the world:  you are not going to make any money at all on U.S. treasury bonds for a very long time.  Go somewhere else.  We can’t help you.  And so the global pool of money looked around for some low-risk, high-return investment.  And among the many things they put their money into, there was one thing they fell in love with.”

Investment companies fell in love with securitizing mortgages, bundling them into enormous pools – in some cases, pools of as many as 16 million loans — and selling them in shares to investors.  To make the pool of mortgages even larger, they created vehicles like adjustable-rate mortgages (ARMs), subprime mortgages and no-income, no-asset loans that allowed people to buy homes or take out home equity loans that they simply could not afford.  Last September, this house of cards came crashing down, setting off the global credit crisis and making an ongoing recession the worst in a generation.

Listen to the full “The Giant Pool of Money” podcast from “This American Life” to learn exactly what happened and why.  I know of no better description of how the recession happened.