The Bubble


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An index of key economic terms and concepts covered in THE BUBBLE

Adjustable Rate Mortgages – Mortgages where the interest rate can vary based on certain benchmarks. Many of the home mortgages during the housing bubble were adjustable rate and had higher interest rates after the first two years of lending.

American Recovery and Investment Act – A $862 billion dollar stimulus program signed by President Barack Obama.  It was passed to boost government spending on pork spending such as construction projects.

Austrian Theory of The Business Cycle – With artificially low interest rates and excess credit, asset bubbles are created in certain sectors of the economy. After a credit crunch, the bubble pops.

Bailouts – In 2008, the Federal government bailed out AIG, numerous banks, and the major auto companies.  Not only did this use taxpayer money, increase the national debt, drastically increase the monetary base, it also sent the message to banks to continue risky behavior in the future.

Bank Runs – When too many depositors of a bank all simultaneously attempt to withdraw their money at once.  Without the FDIC, banks fail when they are exposed for fraudulently promising money to two people.

Community Reinvestment Act – A bill passed by Congress that required mortgage lenders to fulfill a quota for low and moderate income home buyers in certain communities.

Deflation – Price deflation occurs as the economy grows, since more goods split between the same amount of money means prices have to go down.  Monetary deflation occurs when the actual supply of money decreases.  This correction is needed to fix the businesses that rely on fake money.   The Federal Reserve always attempts to fight both kinds of deflation by creating money out of thin air.

Discount Window – To help banks that are low on liquidity, the Federal Reserve has a special rate for short term loans to banks. The discount window was used to help struggling banks during the financial crisis.

Economic Stimulus Act of 2008 – A fiscal stimulus bill signed by President Bush in February 2008. The bill was passed after the Countrywide mortgage crisis as an attempt to help the housing market.

Entitlement Crisis – As the current generation of Americans retire, there is a crisis for funding Medicare and Social Security. The projected costs for upcoming Medicare and Social Security spending is over $100 trillion dollars.

Fannie Mae and Freddie Mac – Government Sponsored Enterprises that subsidize and guarantee home mortgages.  Their liabilities were implicitly guaranteed by the government.  The government took them over in September of 2008.

FDIC – The Federal Deposit Insurance Corporation. This government created entity insures public bank accounts.

Federal Reserve – The central bank of the United States.  The Federal Reserve manipulates interest rates by increasing the money supply.

Fractional Reserve Banking – The process where a bank loans out customer’s deposits, while promising to redeem their deposits at any time.

GDP – Gross Domestic Product is a government statistic that tracks spending and output in the economy. The statistic does not take into account borrowed money or government spending.

Government Debt Bubble – The current levels of government spending are unsustainable.  When the spending is lowered, assets and sectors of the economy propped up by government will be replaced with businesses that satisfy actual consumer demands.

Housing and Economic Recovery Act – A 600 page bill signed by President Bush in July of 2008. The legislation expanded Fannie and Freddie’s lending authority, gave the federal government the power to take over Fannie & Freddie if they ever needed, and increased the national debt limit by 800 billion dollars.

Inflation – When prices increase due to an expansion in the money supply. This is caused by the Federal Reserve borrowing and printing money which debases the currency.  Even when prices generally stay the same, monetary inflation is still occurring, robbing people of the fall in prices they should have been rewarded with as the economy expands.

Interest Rates – Interest rates reflect the supply of savings and the demands for loans.  The rates reflect people’s time preferences on whether they prefer consuming now or later.  The Federal Reserve can also artificially lower the interest rate by creating money out of thin air.

Government Spending Bubble – A bubble that props up certain assets and sectors through government spending. When the spending is lowered, these assets and sectors will become devalued.

Greenspan Put – The widespread belief in the market that Alan Greenspan would intervene to bail out the financial sector whenever threatened.  This was based on his reaction to the Savings & Loan Crisis, the bailout of the Mexican Peso in the 90’s, the bailout of LTCM, the liquidity approaching Y2k, and his actions forcing the interest rate down to 1% for a full year after September 11th.

Money Supply – The amount of currency in the economy. This can be increased by printing and borrowing through the Federal Reserve.

National Debt – The current national debt is approaching $16 trillion dollars.  That is over 100% of GDP and equates to over $50,000 for every man, woman and child in America.

Nontraditional Mortgages – Mortgages that did not follow the traditional lending standards of having good credit and a 20% down payment.  Adjustable rate and no doc loans are also considered nontraditional..

Quantitative Easing – When interest rates are pushed so low they reach the barrier of 0%, the Federal Reserve has attempted quantitative easing.  Instead of targeting an arbitrary interest rate percentage, the Fed just chooses an arbitrary amount of dollars.

Rating Agencies – A cartel set up by the SEC that rates the technical quality of bonds and securities on Wall Street.  Rating Agencies rubber stamped the housing bubble.

Stagflation – A stagnant economy with high unemployment and inflation. This occurred during the 1970s in America when the money supply increased along with government spending.

Stimulus – A government attempt to improve the economy by increasing spending. Both George W. Bush and Barack Obama tried this.

Subprime Mortgages – High Risk Mortgages made to individuals with low credit scores and low down payments. These mortgages were the first to fail during the housing bubble.

TARP – A 442 page bill signed by President Bush that allowed the Federal Treasury to buy toxic assets from banks.  Once it was passed, the federal government used the $700 billion to force banks to take loans and give partial stock ownership to the government.

TAFs – Short term loans created by the Federal Reserve to stimulate lending between banks. They were auctioned off twice a month to provide cheap liquid cash between banks.

TSLF – A program created by the Federal Reserve to issue loans to struggling banks in exchange for mortgage backed securities. Many of these mortgage backed securities were considered toxic and likely to fail.