|The Financial Crisis for 5-Year-Olds
||[Mar. 1st, 2011|10:31 am]
This morning I had to go to the bank. 5-year-old D-Mac was with me, and he asked me what happened to the money he put in the bank. I explained that the bank let other people who needed it borrow it.
"The bank charges them a fee," I said, "and a little bit of that fee they pay goes back to you. That's why your money grows when you put it in the bank. Banks help people save money and loan money to people who need it."
Thinking about all the bank failures of the past two years, I added, "That's what good banks do, anyway. That's what our bank does." (It's a local credit union.)
"What do bad banks do?" asked D-Mac.
"Bad banks gamble with the money. Gambling is when, like when you're at the horse races and one person says 'I bet you a dollar my horse will win,' and another person says, 'I bet a dollar my horse will win,' and whoever's horse wins gets a dollar from the loser." We go to the Steeplechase every fall, so I thought he'd understand the horse racing analogy.
"Have you heard the words 'financial crisis' on the news Daddy and I watch on the TV? Or on the radio? They keep saying 'financial crisis,' 'financial crisis.'" D-Mac gave me a blank look. "Well, if you listen," I said, "you'll hear it. They say it a lot. The financial crisis happened when a lot of banks took all their money and gambled with it and lost it.
"Only, they didn't gamble just a dollar. They gambled all the money they had. And they didn't bet on horses. They bet on house prices. They made a bet that the house prices would keep going up, and for a while they kept winning. They won so much money that they kept gambling more and more. But then house prices went down, so the people who bet that the prices would go down won. And they said to the people who bet that prices would go up, 'Pay us our money.' So the banks lost all their money."
"Why did they do that?" D-Mac asked.
"They were greedy." By now we'd arrived at the bank. We went in and I did my business. The customer service lady let D-Mac pick out a lollipop.
As we headed for the door, D-Mac stopped to look at CNBC on the bank's TV. I explained that the graphs showed the prices of oil and copper and gold. A graph of the S&P popped up, and I said that showed how much everything cost.
"Well, no," I corrected myself, "actually that's the amount of money people are gambling. Not all gambling is bad. It's OK as long as you don't spend more money than you have.
"That's what the bad banks did. They gambled money that they didn't even have. It's like, if you had $100 and you bet $1000 and you lost, you wouldn't have the money to pay. If you were at the horse race and you bet $10 that your horse would win, you'd better have the $10 or else you shouldn't make the bet, because then you couldn't pay what you owed and you'd be in trouble. That's what the bad banks did. Pretty dumb, huh?"
D-Mac looked at his lollipop. "They were dum-dums," he said.
I laughed. "You're right. Dum-dums."