To promote my new flower shop. I had one place print my business cards and another print my brochures and a third my signs Now my roses aren't red my violets aren't blue my geraniums look dead, and I don't know what to do Staples can help your business stand out with sign spanners and brochures that are a true reflection of your company And now with staples spend $50 or more on print and marketing services and get $5 off your next in-store purchase Now my business is blossoming and I'm spending less green exclusions apply in store only and 623 18 The financial crisis what happened and why? lecture 2 Good afternoon everybody. I think my voice is starting to Disappear so Hopefully it'll stay with me for one more day And and we'll be able to get through this Just to recap recap where we were yesterday We talked about interest rates. We talked about how interest rates were really really important To a healthy economy that the interest rates reflect these time preferences and preferences in terms of consumption versus saving that Everybody has you know, and then they send signals to investors In terms of what kind of investors to investments to make and they provide incentives to savers in whether to save or not say interest rates are crucial to a well functioning economy and As we mentioned because of Federal Reserve intervention, we really have no free market in interest rates interest rates are not Determined through a market process interest rates are determined By a Fed influenced or Fed determined process And the Fed decides on what at least a short term interest rates is going to be and it dictates that and it adjusts the money supply In order to achieve that goal and as a consequence Interest rates cannot serve That positive function that they do in a free market and what they do If the markets treat them the same way which I think markets do because they have to they have no choice They still need to use an interest rate and there is no real interest rate that they can extrapolate from something else They have to use the existing interest rates as a consequence that distorts the decision-making process of the market It distorts our decision-making process as consumers and savers and it distorts the decision-making process of investors Savors and investors, you know across the entire spectrum of types of investing and again because it's interest rates It affects everything and affects everything across time And it's not that a one-time event It's not like we have this bubble because the Federal Reserve really you know the Federal Reserve messed up No, the Federal Reserve in a sense messes up all the time Interest rates are always wrong It's meaningless to talk about a price sent by a central planner as being the right price that has no meaning It's a price we're forced into Dealing with it as a price, but it can't be that right price because the right price Can only be determined through a process an objective process in the marketplace Okay, so these prices are not objective. They reflect the whims You know whims justified by a lot of math and a lot of sophisticated econometrics and a lot of statistics and a lot of mumbo jumbo but it's still whims of Some central planner some committee of central planners and again there they're very sophisticated about this I'm not going to deny their sophistication and their knowledge and how brilliant. They've been Anki is he's really really smart guy He just doesn't have a clue what he's doing So it doesn't matter how smart you are when you don't have a clue what you're doing and so These interest rates are distorting. They're distorting in a sense all the time what happens when They are extremely You know extremely distorting is that you get extreme events and we're experiencing right now the outcome of At least one extreme event one could argue. We're experiencing right now the consequence of a series of extreme events the period between Alan Green's right took over the Federal Reserve in I think it was late spring 1987 The period between 1987 and just before this financial crisis happened has been called the great moderation the great moderation The business cycle according to this theory was moderated You know don't worry be happy everything was fine Didn't have a lot of inflation had a little bit but not a lot Had a few recessions, but they were mild remember there was a terminology of soft landings Yes, there was going to be recession but Greenspan had the secrets and we were gonna have a soft landing an idea was The business cycle while everybody accepted it has to happen was going to be smoothed out It wasn't going to be extreme. It was pretty Moderate and that's why the great moderation and Greenspan has called it The era of great moderation and he takes a lot of credit for it I believe we're paying for that great moderation right now. We're paying for 15 years of physical policy targeted at avoiding recessions and and Trying to avoid price inflation and neglecting the other impacts of monetary policy can have on an economy Like what we talked about last time all the misallocations all the malinvestment all the bad incentives that that monetary policy those wrong interest rates create and As I said last time I think to some extent We are still paying for the internet bubble which while it Burst right during March of 2000 it started when the Nasdaq started to go down And it went down through 2003 Sometime between 2002 and 2003 It didn't really fully You know wash out through the system what needed to happen was a was a really a restructuring of capital in the United States a Lot of capital misallocated need to be needed to be reallocated And what happened is because of the re-inflating because the feds spent significant amounts of Resources through spending our money and through lowering interest rates to the lowest in history up to recently What we got was basically a return to a bubble like economy very very quickly instead of really paying the price for Misallocation of capital that happened during the 1990s And I'm not saying everything was misallocated obviously I've got an iPhone so good technology came out of that period good real Increasing productivity happened good economic stuff happened The problem is that on top of that a lot of waste also happened And if you live through that period particularly if you're in the Technology business or in the venture capital business or in the financial business you saw it on a day-to-day I mean stuff was getting funded and people are pouring money into ridiculous absurd business ideas because There was plenty of money and because everything seemed to be winning and you know and people people lost their sense of Reason but they were motivated by that. I mean We made an investment Well, I advised on an investment of somebody else's money unfortunately We met an investment in a company in 1990 Early nights. No, it was late 1999. So this was in October of 1999 in a company that There were two options for this company and it was clear and in the investment you're low right up We did the two options one is That the internet bubble continues and Within a year the company goes public and we make a lot of money an Option number two was that the internet bubble doesn't continue this company makes no money and probably goes bankrupt And we lose everything those were the two outcomes and you could put a probability estimate to which one you thought was most likely but those were the two outcomes and Was it irrational for us to invest? With the idea that the bubble would continue. Yeah, but exposed. It's easy to look and say too late You should have invested six months earlier in a company, right? But who knows when it's gonna boost, right? So we actually did invest now Because we realized we were in a bubble. We also shorted the Nasdaq at the same time So we made back when the company did go bankrupt because the bubble did boost and we lost everything We made back about 60% of our money because we had shorted the Nasdaq and at some point We actually contemplated shorting the Nasdaq two to one because we believe the probability of the bubble bursting was much higher than the bubbles Staying on course But we didn't land up.  Okay, shorting of stock is you borrow the stock from somebody owns it and you sell it and Then you have to return it at some point so you buy it and give it back The hope is that when you buy it, it's cheaper than when you sold it So it's a way of making money on the decline in a stock So when I say we shorted the Nasdaq we borrowed in a sense a basket of stocks. We sold them With a promise to give back the stocks so it's some future date We bought them back at 60 at a 60% lower and Gave them back to the person we borrowed it from and these kind of things happen all the time in the marketplace people are shorting stocks all The time they're borrowing selling it's a way that reflect your estimate that this stock that you you would like to sell it if you had it But you don't own it and you know, you think it's gonna go down You're gonna make money off of it declining in value. No, it's it's a form of speculating speculating could be You're speculating on a stock going up or you're speculating a stock going down That's the way speculating on a stock going down manifests itself is shorting. Okay, so So even in the when you're in the midst of the bumble It sometimes makes rational sense to participate because there's a lot of money to be made If you're doing it rationally you find ways to protect yourself and you you think it through and you take an estimated guess And if you lose you lose but you realize what you're doing But it's not irrationality necessarily that drives people to do it. Yes Well, you're making money, you're not creating wealth maybe but you're making money, right? I mean if the company had gone public I Would have maybe doubled my money tripled on my money, maybe ten times more money I would have had more money, right now even if the company had gone bankrupt ultimately I still would have been wealthier because I would have sold So there's no no they wouldn't have been necessarily there wouldn't have been more wealth in the economy But I would have made money Still cash in my hand You mean in the sense of making? Yeah, because because I actually was engaged in you know, I don't think what what I was doing was unproductive right now it's it's in a sense a mirage because Because of the kind of the macroeconomic parameters, but those are given to you as an investor You have no impact on them. The question is how do you do the best that you can as an investor within those macroeconomic parameters? So the point is there was a huge mess of location stuff got invested in that shouldn't have been invested in it didn't all clear out of the system the Federal law the Federal Reserve then lowers interest rates dramatically And just to give you another another this is just another picture of the same trend. This is the Dow Jones industrial These are the M1 so this happens the bubble, you know, the bubbles boost The Federal Reserve is decreasing interest rates by increasing the money supply You see that M1 increasing at 10% here all the M's they increasing at 8 to 10% And they stay really high, you know in terms of these are the percentage increases for year to year through that period This is annual changes in M1. You can see that it hits 10% over here and these are short-term interest rates so interest rates go down to 1% in 2003 and they stay there for a year and that's the lowest rate The Fed funds rate has ever been again until recent times when now it's at zero Now what happens when interest rates are 1% by the way? You can see they kind of that all bond rates declined long-term bonds followed short-term bonds This was not just a short-term phenomena all the bond rates went down during that period Now, how can we tell that that's too low because I made the argument happy making the argument? We can't tell we don't know what the real rate is. We don't know what that natural rate is well in this case we can tell because One thing we know is that in a free market You don't get negative rates of return. You don't get negative interest rates. What's a negative interest rate? well a negative interest rate is That I pay you to borrow money from me Instead of you paying me to borrow money from me. I pay you to borrow money. That's a negative interest rate It doesn't make any sense. It's just irrationally logical can't happen Well when interest rates are below the rate of inflation when interest rates are below the rate of inflation It's close to the equivalent of Negative rates of return negative interest rates. I could keep the money and You know buy something that goes up in price with inflation gold You know a lot of goods products And I would get 3% which is what the rate of inflation was back then Or I can borrow money At 1% well the ideal I can I can make a risk-free return here, right? I can borrow money on 1% and Lend it or buy something linked to inflation and I've made 2% with no risk and Financed by the government in a sense by the Fed so when rates are negative as they are Here, this is what the 70s and as they are here 2003 2004 It's negative here in the 70s. What did we get as a consequence? High price inflation huge price inflation, right and it's negative here 2003 2004 now Basically, what's going on here is the Fed Was what was? paying us to borrow money Incentivizing us strongly to borrow money they were willing to lend money at below the rate of inflation I Guess what people will do if you pay them to borrow money? They borrow money And by the way a good inflation hedge. What's a good inflation hedge? Well gold. Yeah, but what's a what's another good inflation hedge housing? Housing if you look historically, and I've got a chart. I'll show it to you housing prices are flat historically inflation adjusted They keep their value from inflation perspective So surprise surprise when you offer people interest rates below the rate of inflation They borrow like crazy and buy an inflation hedge houses and at 1% Which meant Pretty low mortgage rates everybody borrowed Bought a house, but everybody borrowed generally right how I was getting credit cards daily was zero percent whatever And if somebody's offering me a credit card at zero percent, that's free money, right? I'm never gonna broke load up, you know And I did I I always paid it back, but I'm sure some people didn't But the temptation is there and how can the banks off of zero percent because they're not paying any interest really and They're hoping of course that you won't pay it back and it'll go into the higher percentage rates But even a higher percentage rate want that high and it's zero percent or one percent or two percent three percent four percent These really really low interest rates. I can afford a lot of really cool stuff. I Can buy that big big television I can buy the huge home I can buy the big car because my monthly payments on the little debt is so low I Can really afford it Now yes, one day interest rates will go up and one day I might have a problem paying it back But that's one day and we'll see that there are a lot of forces in place to convince me that not to worry about that And to spend my money now So We've got very low interest rates which I incentivizing consumers to consume just because they're low and Incentivizing them not to save because the rate of saving is very low So again to consume and they're incentivizing investors to invest in long-term projects Now, how does this relate to housing? Well, what's a long-term project? building a house What's it can some you know a consumption good from our perspective? Well, it's not necessarily the house but think about all the home equity loans We took out on those house in order to buy the consumer goods that we wanted So it would became a mechanism by which we could fund our consumption our homes of debt Really the debt on our homes it's not our homes because as we discovered recently the value of our homes didn't really go up, right?  This is what happened to mortgage rates during the same period This is the period we're talking about 30 year loans went down 30 a fixed loans went down That's these numbers To historical lows or it lows not seen since the 1950s 1950s there was no inflation Here there was still inflation Okay, so these are these are from our real real interest rate perspective. These were historical lows 15-year rates go down and look at the one-year adjustable rate mortgage rates They go down to three and a quarter Now again at three in a corner we as consumers Can afford stuff that we can't afford at five six seven eight nine? You just can't And the temptation is to go out there and borrow money at three and a quarter and in you know buy a home and Many people go and buy homes and what happens when lots of people go buy homes Home prices go up and as home prices go up the incentive to buy homes grows because it seems like it's not just a great place to live But now it's a great investment So more people buy homes as investments and some people buy second and third and fourth homes My the woman who cuts my hair Who can't make a lot of money, right? I Mean I don't know I I tip 20% I don't know So she you know I give her 36 bucks. That's including the chip right to cut my hair. It's a lot Yeah, it's twice what you pay, but you can't make a lot of money cutting hair She during this period bought two homes one in Las Vegas and One in Temecula, which is across them. They're kind of the hills the mountains It's kind of growing area not far from Orange County, but a much much cheaper area two homes with almost zero down We'll talk about why she could get away with almost zero down, but almost zero down You know, but she could afford the payments because the interest rates were so low There were three and a quarter, but you know what they were offering teaser rates at 1% You could have like six months at 1% and a 1% is almost nothing So you can see the dynamics of why this generates a housing bubble because everybody can afford all this All this house that they couldn't afford before and everybody wants everybody gets into and the temptation is really really high and You might ask well, but particularly these adjustable rate mortgages well Wait a minute didn't people realize that interest rates are gonna go up and it weren't gonna stay three and a quarter And you know, I got a five one for a fix for five years and then adjustable Well, you know, that's pretty short-sighted. It's only five years or probably lived a longer, you know How did why did people buy into this? What's what's going on here? Did you know going back to Peter's talk today? Well, you know why and people Rational and thinking long-term. Well first these are complicated issues. What are interest rates going to be? For the average person, you know interest rates all what they are. I don't know that they're gonna go up Unless I've got some minimal training Most people I mean, that's the beauty of the marketplace the marketplace the interest rates is a signal Right. It tells you something about the real world about real preferences about long-term Planning, but no now interest rates are just telling you what the Fed wants to do to stimulate the economy right now They're not reflective of those long-term type of decision-making So we all act as if we're in a marketplace because it looks like a marketplace to us And we go in and we assume that interest rate is really reflective of some long-term phenomena, but it's not it's just a manipulated number and Just to make sure we get the point Alan Greenspan tells us in February of 2004 And I'm courting You know because there's this issue of long-term rates the 30 a fixed rate or the adjustable rate mortgage and he says indeed Recent research within the Federal Reserve suggests that many house owners might have saved tens of thousands of dollars Had they held adjustable rate mortgages rather than fixed rate mortgages during the past decade Though this would not have been the case of course had interest rates tended sharply upwards Greenspan never says anything without but of course American consumers might Benefit if lenders provided greater mortgage product alternatives To traditionally fixed rate mortgages To the degree that our householders are driven by fears of payment shocks But are willing to manage their own interest rate risks the traditional fixed rate mortgage may Be an expensive method of financing a home now Greenspan is very good at saying might maybe could be But you get the gist he's saying you're pretty stupid if you get a fixed rate mortgage, right? Because you over the last decade you would have paid tens of thousands of dollars more So here's the chairman of the Federal Reserve the guy the smartest guy in the world the guy that everybody listens to The guy who's responsible for these interest rates, right? He gets to set them telling you get a variable rate mortgage and not only that insurance Mortgage brokers mortgage bankers and so on you should be offering more alternatives None of this 30 a fixed one year on there should be a whole menu And then of course when they come out with a teaser rates and no money down and all that stuff who gets blamed not Greenspan for Suggesting it they get blamed for offering it Hey, but this is 2004 just as this is really, you know, the housing bubble is going into overdrive So people are financing this, you know and notes Outside of housing the misallocations that are going on. So we're financing a home or Refinancing the home or getting out a home equity line of credit. And then what do we do with that money? We consume it so we go by automobiles Automobile sales go up during this era general motors people feels pretty comfortable So they build new plants, you know, we go out and buy second-third refrigerators exercise equipment All of this stuff right and somebody takes that as a signal what American people on the prosperous They you know, they have a preference for consumption, you know And these companies try to expand and they build more factor, you know, and you can see that there's real investments So that when this all collapses There's all this capital that is now Dead, you know, it's going no way All this investment that is assumes that this is rational that this is based on real economics Has to unwind and that's why this crisis is so bad It's bad. It's so bad not just because of housing But because of all the industries and all the elements that are being affected This is again one year one year arms relative to 30 and taking back to 84 And you can see the systemic downward trend, but you can see how rates Particularly in the arm, but even on the 30 a fixed or the lowest in In 20 some years This is growth in adjustable rate mortgages, right Alan Greenspan in 2004 right here tells us this is a good idea It looks like people paid attention People clearly shift towards adjustable rate mortgages now partially it's because they're so cheap They're so low but partially because the signals that we're getting From government officials from the people who are supposed to know are this is truly an era of low interest rates Don't worry. Be happy go on and spend and if you remember even even a president Bush right after 9 11 in January of 2002 in his address to the nation didn't tell us to prepare for war and You know and you know prepare for for maybe some cuts in our Standard of living because this was wartime and they required, you know significant effort to defeat the enemy. No, he said go and shop Those are the words in the state of the union address in January 2002 go shop Behave like nothing happened Things are normal, you know, but normal means shopping right consumption consumption drives the economy. They tell us to go and consume so we did This is what happened existing home sales So this starts in 94 and you can see it peaking in 06 and That's that's a huge increase This is what happens to new home construction new home sales And you can see that generally the 90s were good period, but there are a number of inflection points You know, this has a pretty steep yield, but look at look at that look at that curve starting in 2002 How steep that that slope is That's those low interest rates Which are encouraging home builders to go out and Build homes and consumers to go out and buy homes and look at the decline. It's about as steep as a decline You'll see in anything That's home values So you can see that this is from 1890 Till today or close to today You can see that home prices You know declined if anything during and not during the depression during the teens They stabilized during the 30s and 40s they increase sharply during World War two Right after World War two and then they stabilized and they stayed flat And this is adjusted for inflation, which makes sense Adjusted for inflation houses should be flat on average, right? If demand increases immigration comes in what happens? You build new homes Supply adjusted demand There's no reason why a home a home's not an investment. What's what's in nature? Why is it that the stock goes up? What is it that makes a stock go up? What is it? Yeah, more production the fact is that that that the stock is generating cash flow In a sense that the company that the stock represents is actually engaged in productive activity And if I mean just to simplify if the company Doesn't grow its profit then the stock's not gonna go up if the company's profits decline then the stock's not gonna go up It's probably gonna go down, right? so it goes up because It's increasing The amount of stuff that it makes Your home doesn't make anything Your home just sits there land You know unless when does land really increase in value when does land go from being very cheap to very expensive? Well put aside inflation on a real basis with no inflation When well when it's improved, but the land itself changes when it changes its use So for example when you switch it from a good cultural use to homes It increases in value homes are more valuable than agriculture land in the US not everywhere not at all times And then if it switches from homes to maybe a mall or to an industry It might increase in value again because again the land is becoming more productive But that's it if it's a home all the time Then its productivity is the same all the time, you know You might build a bigger house on the hot on the lot, but the land hasn't changed in value Nothing's it doesn't any better Right, it's the same piece of land So in real terms an inflationary terms a house should never be an investment and if it is some things wrong So in California real estate prices started going up in the 70s. Why did they go up in the 70s? Land use controls Again, everything I was saying is adjusted for inflation. They go up in the 70s because of land use controls Because now if you were artificially restrict supply What happens? Well, you've still got demand people still moving into the Bay Area, but you've restricted supply prices have to adjust and You can you can look at every metropolitan area around the country and those metropolitan areas that saw an increase in prices It was initially driven by land use regulations So if you look at home prices that went up from the 70s to the To before this boom It happened in those areas in the country with the greatest land use restrictions in northeast California coast Phoenix and Vegas relatively late got the land use restrictions, you know, you don't want to don't upset the desert environment You know whatever whatever Creepy quality things live there It's when we when when the supply was restrained. That's when thing the prices of homes started to increase There were no increases in these areas before that What would happen so let's say two million people come into an area and What happens the first thing happens prices of homes go way up, right? And then what are entrepreneurs do? They say cool. There's great opportunities. They all build houses and Then what happens as the new houses are added prices come down and as more houses added prices come down And then when everybody is in the place Right, then prices are back to where they used to be If there was a limited supply of beachfront property, but there isn't in California if you ever driven to California coast There's plenty of supply of land from beachfront property. The only thing that restricts it is Government you know and you might say you there might be alternative uses so example in in in In Manhattan, you're not going to have single-family homes But when did prices of condos start going through the roof in Manhattan? when they impose price controls rent controls and Building restrictions and there was huge building restrictions started in the 70s when the supply this is part of why they're homeless people Out there if you've read books about the homeless phenomena part of it is a result of the fact that you can't build cheap housing anymore Because of housing regulations you can only build expensive housing and homeless people can't afford expensive housing Right, they're poor people so you price them out of the market by only building a certain type And this happened in massive scale when they when they tore down all those public developments in New York And they built up nice high rises which they couldn't afford So the poor people who lived in the developments now couldn't afford the housing that was supposed to be much better much improved for them Because it was much better much improved So housing restrictions are what led to the increase That was the first increase then in 1997 Capital gains taxes were basically eliminated or almost eliminated on on on homes So you could you could keep up to the first five hundred thousand dollars a profit on a home was tax-free for a couple and for a single is two hundred and fifty Thousand but that's a lot of money for single-family home profit, right? It's a lot of money. So most homes You know Basically was a kind of investment you made in 1997 you see a spike and Then I think the next big spike is the low interest rates of two thousand two two thousand three Now You can see how prices get completely out of whack. I mean, that's not normal by any standard And this by the way case Schiller. They're very good at and I do not recommend economist Robert Schiller He's he's a really bad economist, but you know, he's a behaviorist like Peter Schwartz talked about Talked about today, but this index of home prices is very good because they standard They both correct for inflation, but they have to correct for the type of house So they make sure that you're measuring oranges and oranges and not apples and oranges This is just for Washington DC from January of 2000, right? It was a hundred, you know, that's just a standardized number. Basically home prices went up two and a half times two and a half times two hundred fifty percent during this period in Washington DC I have to think you'll see a rebound there because as government grows the demand will increase dramatically for housing in DC So one area in the country that's probably doing well economically right now. I mean, this is Just not Right. There's something going on here and what's going on here is clearly This combination of a boom in housing generated from the land use restrictions a boom in housing Because there's a there's a bias in terms of investing towards housing and then the effect of interest rates. This is what it does This is this is the ratio of home prices to household income. You can see how that's going up dramatically, right so debt So that's home prices. This is the debt to income ratios of households You see how much debt we're taking on But surprise surprise you're almost paying us to take on the debt This is home. They you know in a sense the mortgage share of your total household debt Well, yeah, why buy anything with a credit card? Why buy anything? Let's say when it was really low credit cards were paying 8% You had to pay 8% of the credit card debt when you could take it out of your home at 4% It just didn't make any sense. So when I got credit card debt what I would do is take out a equity line of credit on my home at three and a half percent Right and pay off my credit card debt You take the cheap money where you can get a cheap and you pay off your expensive money So it's not surprising at all given interest rates and given the way interest rates Were rigged that this is going on and Why is it that interest rates on a mortgage are cheaper or lower? Sorry lower than interest rates on a credit card Yeah, because they're secured the interest rate on your home The mortgage on your home the debt on your home is secured by the home and home prices always go up They never go down Greenspan said that as well. He said You start either only be local declines and you know never as they be in a national since the Great Depression There's I mean a national And you saw the graph right the Great Moderation and home prices. They always stay pretty much flat So if they went up they'll go down, but it's no big deal. That's what Greenspan said so The house is collateral I can afford to give you a low on rate credit cards are unsecured They if I default to my credit card, it's hard for them to access my other assets They can force me in a bankruptcy. They can go after me, but it's not obvious what they've got whereas if I default to my home They own the home right it's this so always secured credit is cheaper than unsecured credit We'll get to all that. I haven't even started with Fannie and Freddie and APHA and all the other ways government Hooded us into housing versus other investments. This is just without even all that you've already got a mess on your hands This is private construction spending And the blue is commercial real estate or non-residential and the red is residential and you can see where all the investment is going And again, this is long-term investment. It's completely consistent with the Austrian theory of the business cycle Okay, and you can see in all these charts the bubble boosting Starting in some way in 0607 You know and it takes a while for all of us to feel it and by 08 we feel it Okay, but it's clearly prices starting to decline in late 06 at least across the country Okay, so let's look a little bit at At housing Because there's more to housing and there's certainly more to government intervention in Housing than what we've talked about right. We've talked about kind of this business cycle really geared around interest rates And I think that business cycle would have happened no matter what? But there's also this phenomena that most of what happened this last cycle went into housing most of the increases on housing, you know most of the collapses in housing and related areas and Indeed a previous bubble was in the internet was in technology stocks So this can go in a variety of different ways and I did say that bubbles tend to piggyback over booms But I think in a case of housing there was there was more that was going on that helped all This money flow into housing and I think helps explain why The behavior of many participants in the marketplace was pretty short term Explains the behavior of the mortgage bankers and the bankers because a lot of those guys by by 2007 for example 100 mortgage bankers were gone. They were bankrupt. I mean that industry was basically annihilated in 0708 a Lot of banks landed up losing a huge amount of money and Going bankrupt or almost going bankrupt or being bailed out By the federal government So there were a lot of bad decisions being made Along the way now I'll argue and can all argue that given the perversed the perverse nature of the Federal Reserve Setting interest rates the way that it does you're gonna make bad decisions It perverses the it perverts the incentives And bad decisions are going to be made because it's hard to tell what a good decision is But it's still a little unusual to see what we saw in housing Given the history of housing and given the kind of spike that we saw in prices and in construction I mean after all you could imagine that in technology more than you could in housing technology is unknown You don't know what the next big thing is you don't know what eBay is going to be and somebody had come to you in 1997 or eight whenever was that eBay got its funding And and said we're gonna we're gonna basically put the classified ads on the web and you know turn attack kind of a fun auction Process, I mean how many of us would have given the money and yet the guys who gave them money Made thousands of percent returns in terms of annualized returns on that money It's probably one of the greatest investments ever was the initial investors in Benchmark capital did it the initial investment in eBay was one of the greatest, you know returns in history so with technology There's a sudden Credibility to this idea that you know, you don't know there's a lot of unsudney you take huge amount of risk So you're willing to just put money into it because there's a huge upside and there's a huge unknown There's real uncertainty but with houses and Even with interest rates, I mean Some people knew interest rates would go up at some point. I mean it wasn't that much in spite of what Greenspan said It was kind of obvious interest rates would go up at some point So what else was going on in housing that allowed for for this kind of This kind of cluster of errors this kind of intensity of mistakes if you will Well community risk factor is one of many things. I think if we had to give it a big title, I'd say it's government housing policy There was no government internet policy luckily for us Probably saved the internet but there is government housing policy and there has been government housing policy since 1933 since FDR came into office and the basic idea of The housing policy is To increase the amount of home ownership in the United States Hornish it home ownership is good Now the question is how is gonna the government going to make it possible for us to own homes? This is right out of Peter Schwartz's talk this morning, right? Some government bureaucrat decides it's a good thing to own a home Now the question is how do we nudge you into that home and all kinds of tools to nudge you into the home? And why is home ownership good? What's what's good about home ownership? No, it's not an investment What did I spend all that time on? Why is home ownership a good thing? I mean it became an investment That's the problem and politicians even view it as an investment and that's part of the problem What was the what do you think the original reasons were? Stock market wasn't dude. It's a making tree, but no, I mean that's way too benevolent No, I mean think sociology. What's what's good about home ownership? What why was bush about the ownership society was this because you believe in capitalism? Or did he have some other agenda behind the ownership society? What was the agenda of the ownership society? Yes, and they get credit now you mean to cynical yeah, I mean it's true, but it's a little yeah Yeah, people commit more It encourages families keeping up with John's this well, that's not only the government encourages that You know the American dream and all this with all these yeah, but there is a whole theory in sociology Yeah, this skin in the game you become an owner you own something you take care of it You know there's plenty of research supposedly I don't know that any of this research is valid or anything that people who own stuff like homes commit fewer crimes Neighborhoods of homeowners are nicer than neighborhoods of renters Less crime families Families a good thing right family values everybody likes family values Families are more likely to develop in homes that are home in homes that are owned rather than rented There's a whole social theory Which both the left and the right both conservatives and liberals buy into About you know we just behave and this is this is bushed down the line This whole ownership society had nothing to do with capitalism Had everything to do with if you own stuff you get a sense of responsibility you become a better person It's a way to to manipulate your values.  You know why capitalism is good capitalism is good because in capitalism People are forced to participate and to adopt bourgeois values And what are bourgeois values, you know punctuality If you don't get to work on time you get laid off so people become more punctual under capitalism. That's a good thing, right This certain sense is a personal responsibility You know so to them capitalism is a way to make them all people It's not an expression of morality It's a way to manipulate people into behaving in the way that they want them to behave And the same thing with home ownership home ownership is a great way supposedly to make people behave in the way that these social theorists Believe that we should behave and this goes back to the 30s the liberals held it then But today if you read the neoconservatives, this is throughout their literature, Irving Kristol and Michael Novak and and Wilson I forget his first name all these conservative thinkers It's nudge Right, it's how do we change the structures so that you behave better And one way for you to behave better is to become an owner if you own stuff Then there's again, there's all this pseudo science or supposed science that suggests that people's behavior changes Is your basement or garage full of old house paint that you know, you'll never use? I know mine is avocado green Hot pink antique white. That is a nice shade of white though You know, it's easy to recycle your leftover paint stain and varnish all over california Most paint care drop-off locations are paint and hardware stores that take back leftover paint Keep what you need and recycle the rest find a drop-off site near you at paintcare.org Yeah, I should say actually read that even back in the 20s Herbert Hoover when his commerce secretary started a big probe of He was a republic Yeah, I think that's right Well, I guess it's not surprising goes back to Hoover of all people Yeah, so these the intellectual roots of these ideas go way back and indeed Hoover As a response to the great depression, I think the beginnings of the great depression was encouraging home ownership And fdr did as well and fdr set it really in motion by creating a whole series of agencies responsible for Increasing americans ability to own a home increasing the number of americans own homes and As far as I remember before the great depression home ownership was under 40 percent under 40 percent of americans owned a home So during the great depression we got HUD The housing and over development department, which is a cabinet level position in the government We got the fHO bank the federal home loan banks We got the FSL. I see the federal saving loans insurance corporation The whole idea of a saving uh saving a loan industry. Well, why do we have saving and loans? Well, we don't anymore right there or in bustin eighties, but what did we have saving and loans? The whole purpose of saving loans was mortgages Saving loans by regulation could only lend money for one purpose and one purpose only and that's a home mortgage And only one kind of home mortgage a 30-year fixed home mortgage So in the 19 I mean found the great depression until 1980 saving and loans Lent out money at fixed rate 30-year mortgages and borrowed Borrowed money into saving accounts that were regulated by the federal reserve the interest rate they could charge So they had a nice income They borrowed money, let's say at four percent from savers And then they gave out mortgages at six percent and they made two percent That was that was the business SNL's win and they were set up like that I mean they'd always existed, but they were regulatory forced To have that exact structure You know to enable home ownership because they became experts at 30-year fixed rate and they you know Assured that there would always be a supply of these type of mortgages Now what's interesting about the snl crisis is what happened in the 1970s The real era of the snl crisis everybody thinks of the 80s, but the real problem happened in the 70s inflation occurred and Alternative investments occurred money market funds began offering people a way of earning a higher interest So people began withdrawing their funds from the snl's and the snl's to compete had to eventually Pay more than they were receiving on the long term mortgages. So think about what happens in inflation What happens to 30-year mortgages in inflation? You have to start charging a very high interest, right And what do you have to do in order to attract people to put money in your snl? There's competition for money markets, but just because of the inflation people are not going to accept 5% So you have to start giving them. So you issued a mortgage in 1965 at six percent Mortgage rates right 30 years. So you're still getting six percent, but now The money you have to pay The depositors is 10% maybe 12% in the late 1970s. You're losing six percent It's flipped You can't raise it at five and do it at seven. You're now Getting the seven and raising it at 12 13 She'll losing money on every single transaction Now you're trying to make it up by issuing Mortgages during the 70s, but who is buying homes in the 70s? With inflation people want So snl is basically entered 1980 bankrupt They had lost money for a decade Not their own fault They were just stuck with these 30-year mortgages from the 50s and 60s inflation hit which is a government creation And they lost huge amounts of money. And then what did the government do? The government said don't worry We're going to save you and the way we're going to save you is We're going to increase the positive insurance Which will attract more money to you Because it all become a guarantee. So it was increased from 25,000 or 100,000 and we're going to allow you to invest that money In whatever you want. What was some caveats, but pretty much whatever you want.  They are What are they going to do? They're going to go start swinging. They're going to go buy a lot of e-tickets They're going to go drill oil wells. They're going to build High-rise projects where high-rise buildings are not needed They're going to build they're going to build they're going to build to this day You can drive in Dallas and you'll see housing developments that are You know 25 years old They were built in the 80s and never finished because they weren't attractive in the 80s the areas and they're still not attractive to this day So nobody ever picked it up and did anything with it You know there was this huge boom But basically because the government gave them free money, which is deposit insurance will guarantee all this money So the snl is the whole snl crisis has to do with housing policies snl's wouldn't existed in the way they existed Wouldn't have done everything that they'd done up until 1980 if not for the way they were regulated and the way they were established and built during the great depression during the 1930s in a sense You know all of our problems date back to Either wilson administration or fdr's administration All the entities that we have problems with today almost all of them a few few like antitrust don't fall into this you know the Federal reserve which is a wilson and income tax, which is a wilson creation those two And then everything else is fdr and we suffer the consequence of those of those regulations of this day And so that's kind of the the snl industry he created the Freddy uh, no fanny fanny may was created and we'll talk about what fanny may does And the fh a was created So all these entities you know half a dozen to a dozen new entities were created in order basically to facilitate Mortgages subsidizing mortgages making getting mortgages easier ensuring mortgages All of this stuff You know was passed during the 1930s to make home ownership home ownership increase and indeed it did And one of the reasons that chart goes way up of prices goes way up after world war two Is because huge amounts of money and subsidies went in to getting the gis coming back from world war two homes Into homes and indeed the number of americans who own homes after world war two shot up To somewhere around between 60 to 65 percent from below 40 Before the great depression. So let's look at some of these some of these entities the fh a Ensures long-term mortgages. So the idea was There was a certain portion of the population that is not getting mortgages because the banks are fade their default So what if that portion of the population could buy an insurance policy? So that if they defaulted the bank would get the money The bank would make up the difference between what the home was law or was worth And what and the mortgage so it would ensure the bank against the default Okay, but the homeowner would buy it and of course, well, it's a government entity. So we'll subsidize it a little bit And originally they they did it very conservatively And you had to have a very large down payment and only certain homes and as you could expect with social policy These standards slowly eroded over time And if you look at for example down payments again pre great depression down payments on homes Were often in the 40 to 60 percent range 20 percent was unheard of that being that low People put up up most of the money And then slowly over time As this insurance became more prevalent as the insurance was willing to take on more and more of the riskier loans 20 percent was that became the acceptable rate And the fh a only insured loans that had 20 percent down payments for years But then they got some private competition some private parties entered into the insurance business and they competed with them And suddenly they weren't getting as much revenue as they you know, the government had been accustomed to getting out of this this agency And they so they decided well It looks like the people who can put down 20 percent down are being covered by private markets So we should tend to the you know, we should take care of the people who can't put 20 percent down And today The minimum you have to put down to get an fha insured mortgage is three and a half percent three and a half percent So you want to buy a hundred thousand dollar home I don't know where there is a hundred thousand dollars a half a million dollar home All you have to put down is what's three and a half percent of a half a million One percent is five thousand three percent fifteen thousand What's that That's right in Detroit you could do it. So there it's three and a half thousand dollars, right So to buy a hundred thousand dollars house in Detroit you actually you can buy a ten thousand dollar house in Detroit Not a joke, that's that's true right now the neighborhoods in stroy without you can just walk in I'll hand you the keys But a hundred thousand all home all you have to put up is 3500 bucks a million dollar home all you have to put up is 35 thousand dollars and the government will insure the mortgage If you qualify, you know, you're below a certain income and so on But what is the homeowner then? You know he's got almost no money in the house If the price goes up what happens He scores huge gains right if I put up 3500 dollars in the house Right and the price of the house goes from a hundred thousand to a hundred and fifty thousand I've taken a 3500 dollar investment and made 50 thousand dollars off of it right I can sell the house for hundred and fifty thousand pay off my mortgage and I'll have 53 and a half No, yeah three and a half 53 and a half thousand dollars in my pocket on a three and a half thousand all investment That's a beauty of leverage What happens at the price of the house goes down just a little bit You're wiped out and what's your incentive Walk away leave the house to bank That's what leverage does and look who's encouraging leverage Look who's encouraging leverage fHA three and a half percent a government sponsored entity There was a hand up there Okay, so And and fHA is by the way Right now as of june of 2009 as of last month 25 of all new mortgages issued in the united states had fHA insurance in other words our our insurance taxpayer We're backing 25 of all the loans being made right now. There's a huge mortgage business going on right now Huge amount of mortgages being issued with with government guarantees Right now because they're encouraging to refinancing of all these foreclosures They're encouraging people to stay in their homes. They're encouraging people to buy new homes All with shareholder backing Yeah, if I understand what you said even for the crisis They also We're lending to the people least likely to pay back Yes, but you think about it when prices are stable when home prices are stable. It's not that big of a risk So it's it share taxpayers have never really needed to step in and bail this entity out because it's not a big risk Because the house is collateralized by the house right the mortgage is collateralized by the house Plus there's insurance It's not that big of a deal, but it just provides another marginal incentive for people to take on more risk than they would otherwise Because banks now are willing to lend to people that the the margin they would never lend to So there's just this and you'll see this in everything and every one of these government programs There's this it's not a big break. It's not suddenly, you know, we go from zero to 70 home ownership. This is a creeping little thing The standards deteriorate the type of people, you know get Poor and poor unless able to afford it, but it's gradual Now as we'll see because In 2002 you mix up all these government policies with these very very low interest rates You suddenly get an explosion, but it's the combination But up until 2002 all this stuff has been happening Right, it's just going along slowly in small steps to promote my new flower shop I had one place print my business cards another print my brochures and a third my signs now my roses aren't red My violets aren't blue my geraniums look dead and I don't know what to do Staples can help your business stand out with sign spanners and brochures that are a true reflection of your company And now with staples spend $50 or more on print and marketing services and get $5 off your next in-store purchase Now my business is blossoming and i'm spending less green Exclusions apply in store only end 6 23 18 Yeah, has anybody done any analysis to suggest that there might be the same kinds of Broadsters corruption etc that were going on in snl Going on in in housing loans like this because I can imagine if you were as group who is enough You get together a bunch of criminal investors essentially pay a guy off the street To claim that he's destitute enough that he can pay a large amount of money wait for a small increase in the price of the house Take a killing pay the guy to walk away and just keep cycle cycle cycle finds out if things like that were going on Yeah, so there's this idea that you could get a group of investors to find a Low-income person to buy a house in a sense for you with these government guarantees Wait for the house to increase and keep flipping houses And I wouldn't be surprised if that was going on i've heard stories of that actually happening And it's on the other side as well again once this industry becomes All these little incentives all these opportunities to make money off of government guarantees All this money flowing in what type of people are going to enter into the business both on the investor side and on the banking side On the on the on the mortgage brokers a lot of these mortgage brokers A lot were not honest people I mean there was fraud committed let you know But it wasn't a marketplace right a lot of bad people saw a huge opportunity to take advantage of other people and they jumped into it But the opportunity was created by government policy Both on the investment side and on the and on the broker side There were a lot of unscrupulous people who took advantage just like in the snl's when the snl's got The permission to go gamble a lot of gamblers entered the business A lot of people you wouldn't want to typically running a bank suddenly were running banks So you create the environment government creates these environments in which crooks flood in And then of course the crooks get blamed on it and the markets get blamed on it because look see with free markets free way With free markets crooks come in and run things and free markets get blamed for it but There's no free market here at all so by 1995 Home ownership rates are starting to increase By 1997 they start increasing even faster And by the peak of our bubble Home ownership was at 70 percent seven zero 70 percent of all americans owned their home Which was by the way the goal of the bush administration. They had named 70 percent as a goal in 2003 2004 We've talked a little bit about tax policy, but tax policy also Really encourages home ownership now it used to just encourage debt So i don't know how many of you remember these days, but before 1986 You could deduct interest on any kind of debt from your taxes credit card debt The mortgage the interest was tax deductible 1986 ronald reagan passed the tax simplification act That's a joke, but you know, but he did pass the tax and simplification act and that's what it was called And as part of tax simplification the idea originally was to eliminate All interest as a deduction you couldn't deduct anything But then people started yelling well, what about homeowners and home prices will crash and it's not fair and so on so they kept the interest deductibility of Your mortgage some mortgages The interest on mortgages is deductible from your taxes Now that is pretty cool If you own a home with a big mortgage on it Because you're basically being subsidized by those that don't so let me just take this opportunity For all of you people who rent homes Thank you And even more a bigger thanks to all all you people who irresponsibly paid off your entire mortgage and own your home scot-free You are subsidizing my mortgage I have the biggest mortgage I can get Where I can get the biggest tax deduction I can to take full advantage of your subsidy So but that's true, right?  You're getting penalized for not having debt There you go So I've got a million dollar mortgage Maximize the redistribution in your direction. That's that's what the welfare state teaches you, right? um I mean, that's what that's what the interest on mortgage does it encourages you to take on debt to buy a home It provides you with a strong incentive I mean when you're paying and the higher the taxes are and we're going, you know in california, they're pretty high The higher the incentive to get a mortgage And to get a big mortgage relative to small mortgage So that's that's a huge reason Why home ownership increased It's a huge reason why there's such a flood into home ownership And then if you add to that the fact that if you view the home as an investment and it does go up in value You don't pay capital gains taxes on it. No other asset. No other investment you have Do you have that benefit up to half a million, right? Stocks you pay it bonds you pay it Any capital gains is capital gains anywhere else except housing people flooded the market with Money into housing So that's so there's government insurance. There's a tax break And then there's fanny fanny and then uh, it's cousin freddy And fanny was established by f dr in 1934 in 1938 sorry 1938 an idea was That one of the ways you would get banks to loan out more mortgages Is if you created an entity that bought these mortgages from the banks So fanny's purpose was to go out and buy the mortgages from the banks That would give free up capital to the banks. They could go out and more and Lend more mortgages Fanny would buy them and you can see the cycle of continuous new capital being provided And fanny would how would fanny fund itself? How would it get the money in order to go out and raise? All the idea was That you know initially it was set up by the government, but the idea was it could borrow in the markets And it would take the money that would be borrowed and buy mortgages And it would be pretty safe so the interest rate that it could get was pretty low In 1968 fanny was spun off as a private company Got shareholders it was in a sense sold got shareholders. They got a board of directors It was an independent company regulated by it had its own regulator But it was supposed to be a private company And at the same time fanny was created To provide fanny with competition because competition is important, right? We like competition. We don't want monopolies So they created a second entity called fanny In order to provide fanny with competition Both entities though were government sponsored entities. They were they had special special charters They had special regulations. They were separate from the market And Everybody knew although all politicians denied the fact That they had that they had a government guarantee on their debt So that when you lent money to fanny when you bought their bonds You lent the money If they ever failed the government would bail you out So it's like the positive insurance, right just for freddy and fanny and they borrowed billions and billions and billions of dollars And everybody knew and how do we know that they knew what would be the way if if if a bond is Guaranteed by the government. What do you think how would how will its interest rate? Change it'll be lower than a similar company without a guarantee And freddy and fanny's debt always would it was it's it's slightly higher than government securities So it wasn't quite as low as the u.s federal government, but it was a little bit higher So it was much lower than any private company out there Because it was safer for the investor because there was an implicit in barney frank assured us There was only implicit there was no explicit guarantee For freddy and fanny, right All the way until the government took them over and made the implicit guarantee explicit by basically paying everybody off Which is what happened in 2008 They were created at government entities they didn't have shareholders They were literally run as a government bureaucracy and then in 1968 They were sold to shareholders shareholders put up capital, you know, and they were and supposedly The government had no no intervention, but of course they had massive intervention in in what they would do It had representatives on the board, but they want minority they want the majority but they but the regulated the regulatory agencies the primary way in which the government controlled it and You know freddy and fanny what they did is they basically borrowed money at a government rate So they were like a god they were like the federal government borrowing money and buying mortgages I mean think about that way the federal government not freddy and fanny were buying mortgages And that's allowing banks to continuously now if they were raising capital at such a low rate What could they how did that how would that affect what they're willing to pay for mortgages? They could pay a low low rate Which encouraged the banks to lower their mortgage rates So mortgages on loans that the banks knew they could sell to freddy and fanny was significantly lower Then mortgages on loans that they couldn't sell to freddy and fanny And you can see how now there's a subsidy Directly on the mortgage rate The mortgage rate is being subsidized Through freddy and fanny through this government guarantee So mortgages in the united states They qualified under freddy and fanny and to qualify they had to be Smaller mortgages so lower, you know smaller homes Cheaper homes lower income homes homes up until up until last year was 430,000 I think anything under 430,000 could qualify Had to be 80 20 down But all those homes that qualified got a interest rate subsidy And therefore again more people In that income group were likely to buy homes That they wouldn't wouldn't have been able to afford if not for the subsidy that freddy and fanny provided them And we'll talk about then what freddy and fanny did with those mortgages because then they securitized them And we'll talk about the securitization market, uh, probably uh, probably tomorrow But so we've got freddy and fanny now On top of the fact that they're subsidizing all these mortgages Starting in 1996 They regulator starts putting pressure on them to increase the number of loans they make to low-income families explicitly so In 1996 the target was That 42 of all mortgages had to be to borrowers with income below the median For that particular geographic area where the mortgage was made 42 of mortgages to borrowers Which had income below the median income in that specific geographic area By 2000 the target was 50 percent And by 2005 the target was 52 percent And freddy and fanny met those targets Every single year So you can see they're getting into the the lower and lower income Brackets in terms of the loans that they are making Because 430,000 while in california won't buy you anything In much of the country 430,000 is a decent house So 430,000 was was mortgages to middle class. It wasn't just a low income But by restricting it to by saying you have to do 42 52 percent of low-income people people below the median In that particular area not nationally You are making sure that they were providing mortgages to low-income individuals The higher risk individuals That banks typically You know would be more cautious about lending to You They also had a special provision for Special affordable loans These were for people under 60 percent of the median So in the bottom 40 percent And in 1996 that was 12 percent in 2000 20 percent in 2005 22 percent of all loans had to be to this bottom 40 percent And again freddy and fanny met those goals Between 1997 and 2001 The clinton administration and then after 2001 the bush administration hammered away at freddy and fanny To get more into the subprime business. Now what are subprime loans? prime loans are low risk loans prime or low risk loans to lots of down a lot A lot of down payment People who can document their income and have plenty of income to support the mortgage And then there's subprime subprime is Low down payment ratios people with very low income or can document the income or just a high risk And then there's a middle. There's a middle which is You know alt a it's called so They're encouraged to do more and more the subprime of that lower tier throughout the Late 1990s early 2000s and indeed they increased they never become the huge play in subprime But they're clearly a bigger and bigger player in the subprime mortgage market throughout in 2004 They buy a third two-thirds of all the mortgages issued in the united states Are sold by the banks into the secondary market two-thirds Freddie and fanny buy a third of those So they are the biggest players single biggest players in this market Now by doing this the banks themselves And the mortgage bankers and all the people Care less about whether these mortgages ever pay off, right? Because they sold them to freddy and fanny. It's not freddy and fanny's problem and we'll see they then sell them on but so the banks Let's start lowering their standards because they Are not going to be responsible when these things default. It's the people downstream Who are going to be responsible for these defaults again? You see a watering down of the standards a lowering of the standards by the bankers by the mortgage brokers and the better bankers say In spite of that we're not going to touch these things, you know, like the bb&t's that never did the really really risky stuff They never did the subprime But that's okay because there are plenty of other people who are willing to do them And they you know There's a whole industry out there of subprime mortgage brokers who are willing to supply This stuff. They don't hold on to it. They sell it on two-thirds of all mortgages gets sold on between 2005 2007 freddy and fanny acquire about One trillion dollars worth of subprime subprime Or put it this way one trillion of non prime mortgages One trillion with a t Which constitutes now 40 of all the mortgages that they're purchasing now I'll just end on this at the same time as this is going on, you know, so they're increasing their risk and everything at the same time Nobody knows What's going on in freddy and fanny's books? It turns out in 2003 That their books are more messed up than n runs ever were That they that nobody really knows if they're making money losing money if they're losing money how much money How much debt have they taken on what's the true leverage the books are deemed to be Completely fraudulent. There's nothing there They've see all freddy and fanny have to resign. They bring in odd it is it takes them three to four years To clean up the books only when the next crisis happens Do we even know what was going on in 2002 2003 and it's clear by then that they were losing They've been losing money for a long time These entities were not making money. They were losing money and hiding it You know, they deny that it was on purpose and nobody's being charged surprise surprise But they've that they've been they've been hiding it for a very long time It's also the case that if you look at the amount of lobbying freddy and fanny do during this period Late 90s early 2000s. They are the largest lobbying entity in washington They are bigger than any corporation They're bigger than You know any any union or the unions combined.  I mean, this isn't This isn't some secret document some way. This is all public information And you know Until you know months just a few months before freddy and fanny go bust and the church re takes them over You know most of the guys running the most important finance committees and economic committees in the senate and house is saying Oh, no freddy and fanny are fine. They're gonna survive. They're doing well. There's no problems over there it's it's just one of the shocking things about The way this crisis is being reported is the fact that So many of the people in power have been wrong on everything All the time I mean, it would be it would be great if the walshy journal or the new york times or somebody new york times Just ran a list of quotes with dates And how every single one of the quotes from benanke from polson from uh, bonnie frank from waxman from You know from christopher dodd from uh, Geithner Throughout this crisis from 2007 every single time they opened them out. They're wrong You know they they said fanny fanny were fine. They want they said the banks were gonna do fine They want they said they needed this money to bail out this otherwise the world would end it didn't Every single thing and and it's as if it doesn't matter, right? And next time benanke speaks everybody will listen everybody will take notes and take it really really seriously As if the guy knows what he's talking about I mean, it's not that I don't like the guy I don't but it's that the empirical evidence suggests simple empirical evidence suggests that they don't know What they're doing And benanke, you know benanke's being throughout this and you can really track him and his statements are benanke and And some of the congressmen, uh, you know, it's just astoundingly false Any question one last question? Yeah Can um Do they still lobby or they sort of take that away now that they're taken over by the government official I think they're still lobby because now they're in receivership, right? Oh, yeah, so the question is do they still lobby now that they're being taken over by the government, right? Now they're a hundred percent Shoulders wiped out they are now owned by the government. They're under the so-called receivership But what's interesting is usually when you take something under receivership you wind it down They're growing like crazy right now And they and and they're explicitly losing money every single month taxpayer money because there is nobody else's money right now to lose And yet they're growing right now And I believe they still lobby they still have a mechanism You know, it's another interesting thing just in terms of media the cfo of fanny committed suicide You think that would raise some questions again. I'm not a I'm not conspiracy guy I don't believe in conspiracy but you know something's going on there this this this company has been You know it is committed fraud from an accounting perspective for a very long time They've been taken over by the government. They're part of the biggest You know the biggest collapse in housing in history They're losing billions and billions of dollars and the cfo commits suicide if this was on wall street Can you imagine what they would do if if goldman's cfo committed suicide tomorrow You know what they would do to that company? And yet this just went he committed suicide right right on not as if nothing happened And I you know One could speculate quite easily that the committee suicide has something to do with what was going on at work What's that he was exhausted. That's right. He was depressed because he was working too hard See you all tomorrow This course continues with lecture three Welcome to the total wireless store. 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Hi and welcome to the session. Let us discuss the following question. Question says, let the vectors a, b, c be given as a1i plus a2j plus a3k, b1i plus b2j plus b3k, c1i plus c2j plus c3k. Then show that a vector cross b vector plus c vector is equal to a vector cross b vector. Let us now start with the solution, how we know a vector is equal to a1i plus a2j plus a3k b vector is equal to b1i plus b2j plus b3k and c vector is equal to c1i plus c2j plus c3k. Now we have to show that a vector cross b vector plus c vector is equal to a vector cross b vector plus a vector cross c vector. First of all let us consider left hand side, now this a vector cross b vector plus c vector. Now we know vector a is equal to a1i plus a2j plus a3k cross vector b plus vector c is equal to b1 plus c1i plus b2 plus c2j plus b3 plus c3k, now cross product of these two vectors is equal to determinant of unit vector i, unit vector j, unit vector k, a1, a2, a3, b1 plus c1, b2 plus c2, b3 plus c3. Now this determinant can be further written as sum of two determinants that is determinant of unit vector i, unit vector j, unit vector k, a1, a2, a3, b1, b2, b3 plus determinant of unit vector i, unit vector j, unit vector k, a1, a2, a3, c1, c2, c3. Here we have used the property of determinants that if each element of a row of a determinant is expressed as a sum of two or more terms then determinant can be expressed as sum of two or more determinants, now clearly we can see this determinant represents the vector product a vector cross b vector and we will write this plus sign as it is, now this determinant represents vector product a vector cross c vector. Now clearly we can see this is the right hand side of the given expression, so we get left hand side is equal to right hand side, so we get a vector cross b vector plus c vector is equal to a vector cross b vector plus a vector cross c vector hence proved. This completes the session hope you understood the solution take care have a nice day.