Implications of a giant pool of money.

One of the messages that needs to be heard in all of the advertisements trying to loan you money is that there are a lot of investors trying to find a return on their wealth. There is a giant global pool of money (GGPM) looking for a good investment. Get Rich Slowly will get you up to speed on this describing The Giant Pool of Money: Anatomy of the Subprime Mortgage Mess.

In the early 2000s, there were $70,000,000,000,000 ($70 trillion) of global capital looking for low-risk, high-return investments. This giant pool of money discovered the U.S. mortgage market, which drove demand, which led to relaxed rules, which led to a boom in subprime lending. And here we are today.

Why did the crisis occur? Because all along the financial chain — from bankers to brokers to borrowers to investors — people deluded themselves. They thought they could throw out the old rules of money. They thought they could cut corners to make a quick buck.

The old family value was to purchase a house one could afford and then build up equity in that home until retirement. If career advances provided for being able to pay more for housing, you might upgrade the house. You did not depend upon inflation of the house value to help you with your cash flow. You made sure you could handle your lifestyle cash flow needs with career income.

The new family value, for some, is to buy more house than one can really afford by taking advantage of the GGPM and an expectation of gains in the house value. As the gains occurred, refinancing and home equity loans were used to supplement a lifestyle more extravagant than the career income would otherwise allowed. Building equity was sacrificed for lifestyle. That worked as long as the house value continued to appreciate at a good rate.

That GGPM seeking a secure and high rate of return investment ‘bought’ into some people’s dreams. Those dreams were for housing they could not really afford. The result was in reducing the number of people per household and also in the luxury of the housing for those people owning houses. Eventually the investments started seeking actual cash returns and when that occurred, the ability provide it was found not to exist for many who overextended their risks.

So now we have a market adjustment that provides the media the opportunity to highlight the misery and misfortune of a few plus the business losses of those who helped them get into that position. It’s a two’fer for the doom and gloom propagandists! Be sure to see through the hype, provide appropriate reference, and avoid being mislead yourself.

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