Good story bro. lol

You actually have to back up a bit further to gain the whole picture. Clinton’s zeal to balance the nation’s budget caused a shortage of Treasury bonds and investors went looking for other safe harbors for their excess cash. One of the safest repositories of money has always been the US housing market and much of the cash landed in mortgage bundles. No problem, right? Let’s look closer.

With the government pulling money from the economy during record importing due to the tech boom (imports are also a currency drain) and loose credit the people had to use their homes as ATM cards. This generated a lot of mortgages, but still not enough to absorb the global cash glut, so investment brokers began selling derivatives, mostly default insurance on the mortgages that were now so in demand for bundles that loan originators began popping up all over and were even cold calling for prospective borrowers.

Of course, all this activity drove most real estate markets higher and, as always, many thought it would never reverse course and began flipping houses, which drove the markets higher again. With personal debt over-leveraged and not enough security in equity (many loan initiators straight out lied about most loan criteria to generate nothing down loans they could turn and burn) the whole fad market began to look a bit shaky to investors and GW was in the White House generating Treasury bonds again, so banks tightened up rather suddenly, which left a lot of people holding an overvalued home they would never sell at purchase price and an ARM to boot.

This was a recipe for defaults on a grand scale, but surprisingly, the new Obama administration jumped into bailing out banks with both feet and leaving borrowers to fend for themselves. They attempted to kick start lending again with QE, which only put on display how little they knew about banking. Banks never loan from reserves, so asset swapping bonds for reserves did nothing to entice them to loosen up. They simply used the excess reserves to buy bonds again since Obama was creating them at a record pace.

Reserves are liabilities to banks, and the Fed must issue reserves to match new loan principal anyway to enable interbank transfers, so the banks just said “Thanks, but no thanks”. QE did allow some big primary banks to palm off many risky bonds they still held, and since the Fed shares a balance sheet with Treasury they would simply disappear into accounting to all except the most astute deep divers in Fed reports.

I have friends who are economists and several of them put the total cost of the bailout somewhere north of $30Trillion. At no time did mortgage defaults ever go above 5% of total loans and the banks didn’t even have that much invested. Bank failure is kinda like sex. If bankers knew it felt that good they would have done it long ago, and will surely do it again soon.