Wealth Destruction 2

[OnlyWay93]

Sal, you need to endorse Ron Paul!

[abvmoose87]

So the lesson is don't take home equity loans?

[PunjabiSikhRajput1]

He learned this from Peter Schiff

[tIs4gatorbait]

its not like money spent on consumables is thrown into an incinerator, it goes to those providing the good/service who then in turn spend it on something and so on. in all likelihood it is invested at some point. ive so far failed to see the problem

[mjaeger311]

Like Peter Schiff says, once China realizes they don't have to make our crap anymore and turn their production inwards towards their own consumption, China will be the new global superpower and frankly won't need the USA for anything.

[mjaeger311]

Awesome assessment and good points re: government. You must be a Ron Paul fan!

[evilsidd]

did no one notice him going through puberty between 2.20 - 2.30

[tIs4gatorbait]

@evilsidd

I thought I was the only one. The audio is messed up a bit

[MrBipBipp]

How was exactly the wealth destroyed? When using lent money to go on vacations or to "improve" your house, it goes to whoever sold you those goods and services o.0 Did I miss something?

[mjaeger311]

@MrBipBipp It goes to the service economy. It does not go towards production of anything, rather it goes to a contractor who is probably getting rich in these boom cycles. That's fine, that's capitalism, but Sal is saying that 500k loan would have been better utilized by a new medical startup company that would employ people for example. I'm pretty sure that new countertops do not boost GDP numbers.

[FortNikitaBullion]

Why don't we just make people liable for their poor decisions, let them pay back what they're underwater by. No bailouts, no moral hazard, and people will wake up overnight and stop taking ungodly risks.

[degauze]

Mind blowing. 

[tekcuriousjoe]

Plain and simple: GREED, GREED and GREED.

It's part of the capitalism, everything goes up must eventually comes down.

If one failure to identify when is the peak or over value, will pay the price.

Gov't shouldn't step in bail them out. They deserve it.

[llarose]

I attribute this problem mostly to the baby-boomer attitude.

[D4niZeDog]

So what went wrong here? I don't have the answer, but I think people are very busy trying to point out who is responsible (though i reckon it should be done), or to say that the "system" is wrong and will lead us all to an unavoidable and painful end. But I think few people try to make this system work correctly (like you would learn to drive a car). So thanks again for explaining these mechanics.

[D4niZeDog]

If I follow your point, and correct me if I'm wrong, but basically companies create wealth, and consumers destroy it. If there is no need to consume then there is no need to produce, that's offer and demand. And like you say, there is nothing wrong with consuming, indeed we at least need to eat, drink, and breathe, and to eat you need to cook and for that you need a frying pan, but also something to store your food, etc. and all of this needs to be produced (or we could go back to stone age)

[darkdavegmail]

What if the U.S government provided incentives for wealthy foreigners to buy up all these richly furnished houses at bargain prices? That way foreign funds can be injected into the U.S economy and these funds can be used to invest into productive investments? That way the funds used to furnish all these houses to raise their value wont be a completely wasted.

[noxure]

@darkdavegmail I think we foreigners could buy a house in the US if we wanted to, but why would we want to do this? It's not really smart to buy a house on the other side of the world if you're not going to live in it. Buying a house for mere speculation would actually drain money out of the US anyway.

And what if the dweller of the house doesn't pay his rent or damages the house? You'll have to fly over there and find a lawyer... doesn't sound like fun at all.

It's a lose, lose situation.

[darkdavegmail]

@noxure I thought a lot of people dream about living in the U.S.A even rich people who can afford to immigrate for a "better" life. For example lots of wealthy Russians are being prevented to immigrate because of ultra stringent immigration rules. If these rules were relaxed a lot of wealthy people who just want to live in America nevermind a job can buy these houses? Im sure the legals issues is something of a contingency that in most of their minds may never be needed?

[centurion180ad]

Keynesian Economics is an oxymoron.

John Maynard Keynes was an insane inbreed criminal psychopath related to Darwin, a key member of the eugenics Secret Society. What his capital criminal organization has inflicted on the world, is a mass murder political system. Anyone that speaks well of or approves of Keynesian terrorist-theft, is an ENEMY.

[auctionmusic]

The part I dont agree with, having gone through an actual foreclosure, is the part about the house rising in value from the original price of 100k to 250k. In my case, I bought the house in 2000 for 290k, with 20% down, and I could not sell it for 240k, or 230k in 2010. I had to drop the price to 205k to get a short sale offer, and that was rejected by the bank. The bank foreclosed and is trying to get 270k and no buyers are showing up..

[flywithabel]

legislating against reality ... I like that!

[FortNikitaBullion]

I often argue that the worst form of wealth destruction is when people knowingly harm their own health, for example eating junk foods, excessively watching TV, if not outright doing drugs. I'm surprised you didn't make this example.

[MrLtk007]

I had a question.. Maybe im wrong.. thats what im trying to understand.. u wud count the 500k in the exaample as wealth destruction.. but doesn't that money go to the vendors whom we bought the granite for or the carpenters, plumbers who build the extra bathrooms.. it goes back into circulation.

granted it doesn't "create" wealth like factories, institutions but doesn't seem to destroy.. the bubble itself i wud agree destroys wealth, but the reason i see is defaulting.. where the money vanishes.

[D4niZeDog]

@MrLtk007

Hi Sal,

First thanks for the videos and the time you put in making them.

About this series I have the same question than MrLtk007 here; you say roughly that the householders who contract loans only to consume destroy wealth, you even say that vacation is pure consumption. But then what about the airline company that gets the plane ticket fee? Couldn't it be one of the various corporations you use as examples throughout your videos?

[notme222]

I feel like the whole "productive assets vs non-productive" bit here is a distraction. You could just as easily have wealth destruction in a factory as well, and consumer spending can be economically stimulative. Basically Wealth Destruction is just the flip side of Wealth Creation via lending and asset valuation.

[SinticFire]

Economics seems pretty weak here. Consumption is presented as bad, but every consumption is some enterprise's income. Khan says money could have been invested in a factory. Well, it was - the factory that built the flooring, or whatever other household improvement.

[w7geek]

@SinticFire Consumption is not presented as bad, it's presented as not being an investment. When you're buying wooden floor, you're not creating wealth, you're merely transferring $X to a company. Surely everything is intertwined, without consumption there can't be investment. But we have to draw the line somewhere, otherwise I might justify my frequent visits to strip clubs; a lap dance could be considered an investment since the strip club might afford sexier strippers.

[tealmarlin]

in 1992 My father bought a house in florida for 68,000, in 2004 we sold the house to move to a different country becuase we knew the bad times were coming like a wave on the horizon. In 2004 we sold the house for 199,000 and when he paid off his taxes + mortage, we were left with $40,000 (not to bad) In 2005 a house across the street from us sold for 350,000 now that house is worth about 200,000 and our house that we sold for 199,000 is now worth about 150,000 I thank God we got out just in time

[thegoonist]

i thought the wealth disappeared because of market forces? prices change due to demand supply changes so the wealth is lost primarily from that? sure the consumed vacations do help in destroying wealth but can someone clarify if its mainly due to price change?

[rob3c]

I don't think the wealth disappears completely from the economy as you assert. You seem to ignore the benefit of the low prices to the homebuyers in the transactions. You also seem to ignore the profits to the entire supply chain of goods and services behind those granite countertops, bathrooms, wood floors and, yes, even the vacations.

[Nikrou]

Hey mate, I love your vids, Youre a great teacher!! I would have loved to see you mention something about the fed keeping inerest rates artificially low for too long then all of a sudden hiking them which then disrupted things even more.

[glitchyt]

ok, they did get a 500K loan..the question is what did they do with the money they borrowed from the bank? Did they spend it? In the economy? Did they put it in a mattress?

Even if they spent the whole 500K on home improvements the money went into the economy. The only one who suffers are the people who don't get paid.

If the homeowner blew the money and goes bankrupt it still goes into the economy.

You call yourself an economist???????

[MinGophers]

@glitchyt But the point is the Bank doesn't get it's money that it had valued it at first.They lent out that money thinking the house was worth 1 mil. However the house fell to 250K and the owner"gave back the keys"to the bank, shorting the bank 750K it had intended and shorting them 250K of actual cash. This causes the bank to run at a loss and begin to freeze loaning,leading to the whole bank debacle,with the bank giving out 250K it didn't have.Try thinking things through for once in your life

[ILovePaylessshoes]

what happened to "Bailout 14: Possible Solution"

[sca2la]

The home loans were based upon the MBO CDO rating agency fraud and you say that the poor homeowner who was GIVEN a LOAN for NOTHING is at fault?

SO Moral Hazard is just the home owner - the banks get bailed out the CEO's get bonuses etc. and the HOME BUYER caused all of this?

Come on - this is inconsistent with all of your other lessons about economics.

[sca2la]

This is not valid - the homeowner cannot lose equity POTENTIAL unless that potential was in the equity loan which was lost by the bank - the home owner AND the bank cannot lose the same money.

[StncRev]

Yes...Dick Cheney DID step in on the video around 2:28 for a few seconds.

[hifhif123]

2:28

is it just my computer, or does the sound start to Darth Vader at around 2:28 ;-)

[personova]

Well, if the loan was backed by a GSE there was no real risk to the bank. Just like FHA today.

[rogerandgunner]

Audit the FED and you will understand that people stopped paying thier mortgage because there was not enough money in the system to pay both principle and interest on all the loans. Cut off the supply of money: Destroy the economy.

[mike11022]

Everyting was good and fair until you started talking about the government actions. It was like all of sudden you got high up in the clouds.

[Ntone606]

The credit freeze isn't the crux of the issue - it's the solution. The issue was the massive credit bubble originating in 1980.

[pjblabla]

Price is an illusion

[jwfcp]

appraisal is a scam. if theres no unaccountability for the valuation, it is worthless.

[dsws2]

At the point where you leave off, it's not clear that wealth has been destroyed. The houses still exist. They haven't been foreclosed, put up for an auction with no buyers, boarded up, and allowed to fall into ruin.

Ill-advised consumption has taken place. Instead of investing for their retirement, people have counted on their house value to sustain them and thus have considered themselves free to spend all their income on current consumption. But that's not the same as wealth destruction.

[gillian2301]

I am a stay at home mom. I need to learn about wealth and the terms related to it on a beginning learning level. These two classes are great. The instructors voice is pleasant and clear. Thanks for these two great classes!

[frother]

@gillian2301

yeah we know we just watched the video

this isnt a review box

[jgposner]

...continued

When using fiat money to measure wealth. It is easy to creat illusions of wealth simply by printing more and more, making it cheaper and easier to obtain. People and governments buy things, bidding prices up, and when the system can't sustain it any longer, the prices adjust and the illusion is gone and people are left with reality that their asset column dissapeared and all is left is the liability side.

The Federal Reserve is like steroids for capitalism.

Any thoughts?

[jgposner]

Sal, I've only seen a few of your videos and I am totally psiched. I am excited to learn more from them. Expect a doation from me soon. Can I get your feedback on this point? It is a different way of looking at money. Money is wealth because we know we can somone else will give me something of value for it. Here it is: If all the money in the world was destroyed the total amount of wealth would remain unchanged. Money is an idea, concieved in the mind of man. Continued...

[eNathan314]

Your on the right track. On our money is printed "In God We Trust." This is true.. God help us if people no longer believe in the value of the dollar. Or, in this situation, the exact opposite. People believed too much in the value of the dollar instead of the real wealth. As was pointed out in the video, people DID gain real money (even including inflation), but the banks thought it was worth more than it was in reality.

We need to stablize the market somehow. I say, build more homes....

[romish12]

what are you trying to say, i dont understand. money is something so you could exchaing for something else that has some or more value. without money how would you buy food?

[ermeni]

Im a little confused as to how consumption (is this the same as spending) on granite countertops, hardwood floors, etc. leads to wealth destruction. My best guess which I think is wrong is that you mean spending on a vacation as opposed to spending/investing on something that leads to future profits (build factory or through financial intermediary) causes wealth destruction. But in this case doesn't the wealth just transfer to hardwood floor and granite countertop makers? Thanks for your video.

[mentall007]

Thank you for this. Can you exapin to me about the subprime market and how it effect the world.

[ThatIsNotDeadWhich]

In the current US case, it is even worse, because there is a political dimension that often fails to come across: The asset bubble permitted the US political economy to camouflage declining median real incomes. Why did median real income decline? Because your oligarchs - sorry, *tycoons* - moved much of your industrial base to China and other low-wage, low-regulation countries (i.e. countries that have no problem with pollution and slave labour).

[ThatIsNotDeadWhich]

The bubble (and the IT bubble before that) permitted people to ignore this reality for a while - which meant, of course, that more of your industrial base got moved abroad than would have otherwise been the case.

When Russian oligarchs do that, it's called "asset stripping."

[DavidAKZ]

What do you call it when American Hedge Fund managers do the same thing ?

[ThatIsNotDeadWhich]

I call it asset stripping.

The commercial press calls it "financial innovation," "globalisation" and "dynamic, flexible Anglo-Saxon capitalism" (as opposed to "Euroschlerotic" Germany which doesn't allow nearly as free a hand for the people involved in the rape-and-run version of capitalism).

[mmoore7]

Well, i'm sure purchasing all those marked down assets, and getting them off bank balance sheets should get lending (money creation) back on track. It's true though, no matter how they're financed, once money is consumed, the opportunity cost (investment) has been paid. Unless you're running some kind of socialist state where people can't buy luxuries that's always going to happen. I'll take our system over that any day, I love my Playstation and Lakers tickets.

[khanacademy]

Nothing wrong with consumption when you know its consumption (and an argument could be made that it makes you happier which is the best return).

[Roshibear]

Amen.

[bryandunn0214]

Hi Sal

Given the governments measures that seem bound to fail, how long do you see declines playing out? And what factors will bring about the bottom to this market. i.e. when will we know know that its safe to buy again?

[khanacademy]

I assume your talking about real estate? If that is the case, you should wait until inventories stabilize (stop growing) for a few months. If you're talking about the stock market, we could see some rallies but stocks tend to over-correct relative to fair value implying that we could see some significant downside over the next 1-3 years (punctuated by sharp rallies).

[fearlessprince]

Dear Sal.

I am very new to the banking / financial sector and I cannot afford to goto college or the time to read books as my current job is so demanding. I needed some urgent knowledge on the banking / financial system and I came accross your videos, I am learning so much from your videos, as well as becoming more and more confident in myself to follow my dreams. Thank you so much for your wonderful training.

[cbot141]

The Wealth Destruction topic and the mark to market comments earlier have an embedded inconsistency. If housing loans were based on rent/cash flow model the values supporting loans would have been less frothy.

If MBS values were priced on preforming cash flow model values would be less battered. During highly volatile periods lightly traded, unique assets are more accurately reflective of value when modeled. In WD you note the market mispricing upward, but resist doing so for downside of MBS.

[khanacademy]

Many of the of the MBSs probably do look cheap based on current performing cash flows (I don't know, I'm not directly involved in this market). These cash flows, however, are deteriorating every day and the underlying assets (houses) are also going down in value quickly. Your point is well taken, however, one could probably find some good deals here.

[khanacademy]

I'd also add that there is no shortage of sophisticated investors with 6-10 year time horizons with cash so there is probably good reason for them to be taking a pass on this stuff. Its also hard to know what the underlying assets look like/are worth.

[ThatIsNotDeadWhich]

Another thing is that (more or less) the only people who have money to buy stuff with are the people who stayed in cash during the bubble - everybody else is seeing their margins wiped out. And the people who stayed in cash during the bubble are probably either risk-averse or think that this area is outside their competence.

[LoneOarman]

This video better explains the situation, where bad loans were insured, created the whole mess:

v=0Y9A0C45KZI

[ThatIsNotDeadWhich]

That's a pretty good description of the *proximate* causes. But if you want to know the real reason for the Bush Depression, you should go here:

v=akVL7QY0S8A

See if you can spot Ronnie Raygun's presidency in her graphs...

[facloneagle]

Hi Sal

I agree that by 'investing' and riding on the housing price rise, ppl ended up making wrong bets, like the houses and the bank in this video.And i agree with u that wealth got destroyed in the story.

Where i tend to differ is that the 500k tht was used to buy floors etc. was wasted.According to me,it was still used to buy goods,so those guys who sold floors etc. got money & net net some flow of money happ. in the eco.The wealth got destroyed just because the housing bubble finally burst.

[masakmerah]

Sal, i think you forgot to add 80K on total loss borne by the bank (the loan house #3 on 1995).

[gambuzo]

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