Dow Jones index lost 777 points today, setting the new record high percentage drop in a single day since 1987. What does that mean? I think it means whoever pulled their money out of the stock market 6 months ago had a hell lot of luck.It all started with a bunch of stupid home buyers, who were super optimistic about the housing market, but didn't have enough money to pay for a conventional mortgage. Then came a bunch of stupid bank people, who were also super optimistic about the housing market, and wanted to take advantage of those stupid home buyers. The results were a collection of ridiculously conditioned mortgages. There were 1% interest rate mortgage, which was way below the banks' cost of fund. There were also mortgages with monthly payment that were less than the amount of interest owed. So, stupid home buyers took these mortgages, and prayed everyday for their home prices to up 20% in 1 year. Then they would sell their homes, realized the profit, enjoyed a year of unrealistically low interest, and admire themselves for how smart they were. On the other hand, the banks were hoping that after the first year of the mortgage, they would up the interest from 1% to more like 10% (or more). Then they would either enjoy high interest payments from these buyers, or forfeit the home if the owners couldn't pay the high interest, and the banks could profit from the increase home price. At the end of the day, bank people thought they couldn't lose either way.
To me, it all sounds a little like messing with a margin account in stock market. You are betting on some future, unrealized profits that you are hoping to get in order to pay back the debt that you take right now.
Well, all are said and done now. And who would have imagined that a bunch of stupid home buyers and people from a few US banks could drag down the whole economy around the world.
