Wealth destruction 2 | Finance & Capital Markets | Khan Academy

Wealth destruction 2 | Finance & Capital Markets | Khan Academy


So what happened in the
previous video? We had a nice, simple
neighborhood in 1995. Everyone prudently bought houses
with 20% down, they bought it for a $100,000. And frankly, there were probably
more people who wanted to buy houses then but
they couldn’t get financing. And that was in place for a
reason; because you had to prove yourself worthy to
get the financing. But anyway, 10 years go by,
financing gets really cheap because you have this dynamic of
rising home prices; people downplay risk; people are
willing to give loans to more and more people. And they kind of do that,
just to keep up with the other banks. And you have in 2005, at kind
of the peak of the bubble, someone buys house number one
for $1,000,000, with no money down, subprime loan. And then, a year later, they
foreclose and the house is auctioned off and it
only gets $300,000. But between the time that the
house was bought for a million dollars and auctioned off for
$300,000, let’s say that that’s in– I don’t know, let me
do that in year, let me say this is 2008, now. So 2008, this house get’s
foreclosed, and auctioned for $300,000. And in the meantime, all of
these people– let’s say all of them– took $500,000 home
equity loans, right? So they all have $500,000 of
debt from the home equity loans, plus whatever they have
left from the original $80,000 loan, so, maybe, $580,000;
if they were only paying interest. It may be a little
bit less than that. Let’s just say, it’s
roughly $500,000. And at first, maybe in 2008,
they all say, you know what, this is temporary, that was just
a fire sale price, and these auctions don’t really
reflect a market reality. So we’re just going to sit tight
and wait for our housing prices to go up because this
wasn’t a real transaction. But let’s say 2009 comes along,
and this individual, house number two’s owner either
has to move, has a different job in a different
city; or maybe they just get laid off and they can’t pay
their mortgage anymore and they need to sell their house. Well they try to sell their
house a little bit and it’s no coincidence that they
sell for $600,000. And no one [? call ?] [? line ?] for awhile, and [UNINTELLIGIBLE] starting up, because you have
a lot of people trying, at least, just be made whole on
their loan when they sell their house. But no one’s buying
their house. So at some point,
they give up. They go to the bank and they
say, hey bank, can I do a short sale where if I sell
it for less, then I don’t owe you any debt. But the banks are still pretty
confident then, and they’re like, no. A short sale is when you sell
something for less than what you owe on it. So a short sale would be like
this guy has house number two, has let’s say a $500,000
mortgage. And if he were to sell his house
for $480,000 and the bank were to agree that $480,000
is all he has to pay back, then that would
be a short sale. Right? But the bank says, no, you
either sell your house or we’re going to foreclo– You
either pay us for the debt, or we’re going to foreclose
on you. So the guy says, sure,
you know what, I have nothing to lose. I’ve just lost my job. Here are the keys to the
house, foreclose on it. And so the bank says, OK I
foreclosed on it and the bank realizes in a few months that
was a bad decision. Because now, when they auction
the house, they don’t get even $580,000; they don’t get
$480,000 for it; they get $250,000 for it. And all of this sounds like
a very extreme example. Things not that different than
what I’m describing happened in places like Modesto and
Stockton, California, and parts of Miami and Nevada
and Arizona. But anyway, so it auctions
off for $250,000. Now everyone in the neighborhood
gets scared because this guy, house number
two, made an honest effort to sell; couldn’t sell; tried to do
a short sale; couldn’t do a short sale; and when the bank
auctioned, they actually auctioned it off for
less than house number one, it was $250,000. So now, all these people
say, what am I doing? I’m working three jobs to pay a
$500,000 mortgage on a house that’s probably worth
$250,000. And if someone really were to be
rational about it, $250,000 isn’t some crazy
lowball price. They paid $100,000 for it. Maybe, if you adjust that for
GDP growth or inflation, that $100,000 in 2009 dollars might
be $150,000 or $200,000. So $250,000 actually,
isn’t a crazy price. But anyway, all of these people
said, why do I keep working so hard, being
an indentured servant to this mortgage? I’m just going to give the keys
back to the bank, that’s called: jingle mail. So you give the keys
back to bank. Let’s say this guy gives the
keys back to this bank. This bank that thought that they
had made a prudent loan, this is house number
three, I think. So they give the keys back
to the bank instead of paying off the loan. And this bank says, oh boy,
now I have this house. They auction it off;
they get $250,000. So what happened to the bank? The bank had a $500,000 loan
out, it got $250,000 back. And also, this person has also
lost all of the equity in their house that they
originally had. House number three
lost their house. So how much wealth is gone
from each person’s perspective? Well the bank had given $500,000
of real capital, real money that could have been used
to build a factory; to plant some crops; to work on
research and development that might have developed new
materials or new technologies. That was real $500,000
of capital. And now, they got a house and
they auctioned off that house and they got $250,000. Right? So they lost $250,000. And this individual, number
one, what did they lose? Well, they lost, by entering
into this transaction, essentially, they lost
whatever equity they originally had in their house. And what equity would they
have had in their house? Well, they had, let’s just
say, they had $20,000 of equity before they did this
transaction, right? So they lost that $20,000
of equity. And frankly, they could’ve
sold that $100,000 house for $250,000. We know, even in this quote,
unquote, tough real estate market, they could have
sold it for $250,000. So they really had, let’s see,
they had an $80,000 loan, a $250,000 asset, so they really
had $250,000 minus $80,000, that’s $170,000. So they really had $170,000 of
lost equity, if I’m doing my math right. But I think you get the point. So they did build some equity
through housing appreciation, just the house didn’t go from
$100,000 to a $1,000,000, it went from $100,000
to $250,000. So their equity was actually
$20,000 plus the $150,000 that they got from just the
increasing asset value– if they didn’t enter into
this transaction. So they would’ve had a another
$170,000 of equity that they lost. So the homeowner
lost $170,000. So combined, these two parties,
by entering into this transaction, how much
did they lose? Let’s see, 300,000, they
lost $420,000. $420,000 was just wiped out. It just disappeared
from the economy. And where did it go? It existed at some point, it
must’ve gone someplace. Well, it was consumed. It went into these granite
countertops and these hardwood floors and the vacation; the
vacation is pure consumption. You could argue, maybe, some of
it’s investment if it helps you become more productive, but
for the most part, that’s pure consumption. Things like wood floors and the
two more bathrooms and the granite countertops, there is
some value there, but that value is definitely not
equivalent to the amount of money that was spent on them. They were depreciating assets;
they’re luxury goods; they’re probably according to
the taste of the person who did it. But anyway, the whole point of
this video is, is when you have these asset bubbles, like
in real estate, and you have this downplaying of risk, and
this psychology that an asset class can only go up. And then people start to have an
inflated notion of what the assets are worth, and start to
borrow against those and leverage up against those
inflated notions, you have to have a misallocation of wealth
and, essentially, a lot of resources end up getting
destroyed. Resources that could have built
factories, could have built schools, could have built
roads, whatever, ended up building granite countertops
and sending people on vacation and making them feel
good to go start shopping at Williams-Sonoma or Neiman
Marcus or whatever. And all of that is, essentially,
just consumption that just destroys wealth. So it just disappears. And I want to make this point
because we have a government now that somehow thinks that
it can legislate away real wealth destruction. It thinks that, you know what,
if we just somehow buy this loan from this bank, this
$500,000 loan, and if we were to hold on to it long enough,
maybe the underlying asset– the house got foreclosed on, so
we don’t even have the loan anymore, we have the house. So maybe the government says,
oh what if we just buy this house and hold it long enough,
maybe it’ll get back to a million dollars. It may get back to a million, if
our population increases so much that, one day, that might
become a productive asset again, or becomes a
high demand asset. Or, it might not ever go up; it
might be a house that was built in the middle of nowhere
that’s not really useful to anyone; and, if anything, it’s
going to become a place where squatters start to come and the
whole place turns into an empty neighborhood. Who knows? But the bottom line is the
government somehow thinks that once things get bad, it can
step in and try to not let people realize that they
have destroyed wealth. I call that legislating
against reality. And reality is something it’s
very hard to do anything against, whether you want to
legislate against it, or speak against it, or perceive a
universe that’s not in accordance with it. But anyway, this is the
crux of the issue. But with that said, I don’t want
to seem like one of these defeatist people who says that
there’s no solution to the credit crunch. In particular, this banking
crisis we’re dealing with right now. In the next video, I’ll give you
a proposed solution that was actually suggested
to me by a friend from business school. And I actually think it makes
a lot of sense, if you think that the credit freeze
that’s going on is the crux of the issue.

83 Comments

  1. masakmerah says:

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

  2. Khan Academy says:

    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.

  3. Khan Academy says:

    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.

  4. Khan Academy says:

    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).

  5. Khan Academy says:

    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).

  6. Joel Posner says:

    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…

  7. Joel Posner says:

    …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?

  8. Gillian Stoettner says:

    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!

  9. dsws2 says:

    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.

  10. pjblabla says:

    Price is an illusion

  11. jwfcp says:

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

  12. DavidAKZ says:

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

  13. mike_1102 says:

    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.

  14. Roger Leonard says:

    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.

  15. Leo Avila says:

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

  16. rob3c says:

    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.

  17. Jon Sm says:

    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?

  18. Tiera says:

    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.

  19. Amala says:

    @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.

  20. notme222 says:

    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.

  21. MrLtk007 says:

    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.

  22. FortNikitaBullion says:

    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.

  23. Abel Joel says:

    legislating against reality … I like that!

  24. auctionmusic says:

    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..

  25. centurion180ad says:

    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.

  26. darkdavegmail says:

    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.

  27. noxure says:

    @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.

  28. darkdavegmail says:

    @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?

  29. J L says:

    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.

  30. degauze says:

    Mind blowing.

  31. FortNikitaBullion says:

    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.

  32. frother says:

    @gillian2301
    yeah we know we just watched the video

    this isnt a review box

  33. Nikhil Das says:

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

  34. Mike Jaeger says:

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

  35. Mike Jaeger says:

    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.

  36. Mike Jaeger says:

    @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.

  37. PunjabiSikhRajput1 says:

    He learned this from Peter Schiff

  38. abvmoose87 says:

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

  39. Zak Everson says:

    FUCKING GRANITE COUNTERTOPS! THE BANE OF OUR EXISTANCE!

  40. Empty Buckets says:

    No the banks didn't lose but the depositors did and so did all the 401ks and pension funds that bought the toxic debts.

  41. Dmi3 says:

    why did last video was removed? it sounds like the most important part of playlist. Mr. Khan, were you threatened for the content with solution out of this mess?

  42. UmTheMuse says:

    The problem is that the consumables are sunk into inefficient allocations and can't (easily) be reallocated. People bought consumer goods with the idea that they were *investing*.

    Yes, the construction workers et al made money, but it's only transferred money, not an actual increase in people's well-being. An equal amount of money got thrown out the window when the house was foreclosed, btw.

  43. 2Baiforev says:

    Well, in my opinion the pricing of many of the houses were grossly overinflated anyway, sometimes by as much as 25%-50%. I noticed in the early part of the 2000's lets say around 2001 on that the prices rose dramatically on many of the houses. New houses that had been selling for around $250,000 jumped up to 400,000, then 500,000 than up to 650,000, than as high as 850,000. Now looking at the location the materials put in the house and the average income of most people i knew it was overinflated

  44. galanoth17 says:

    The pension funds don't buy toxic debt. They only buy things with very high rating. AA or AAA. The banks weren't able to sell their toxic CDOs as explained by Mr. Khan in his MBS series. The banks kept them thinking that the housing price keeps increasing so nobody will default on their loans. That's why the banks are going bankrupt and the govt. wants to bail them out by buying those toxic CDOs essentially giving banks free money for their mistakes.

  45. galanoth17 says:

    Only the Fed Reserve can create money or print more money. The smaller banks cannot create money out of thin air, they only can borrow it from other banks or the Fed Reserve.

  46. ForeverRaiden says:

    I'm also wondering where that went (the last video where he talks about a solution).
    Someone please reply.

  47. stuffinhead says:

    If consumption is considered the ‘destruction of wealth’, what is the point of wealth anyway?

  48. Marianna Tsemekhman says:

    What is "equity"? I don't know about economics

  49. Marianna Tsemekhman says:

    also what is "asset"?

  50. Marianna Tsemekhman says:

    Only people with a big IQ would get this i think. I don't

  51. dejavu vu says:

    may be you are too young to understand

  52. relbinhas says:

    To the people that are asking if the countertop manufacturers profit from the sales during the boom, why was wealth destroyed: You are confounding wealth with money. The people that initially were prepared to invest money to become richer, did it in depreciating assets. The manufacturers won the same money as the consumers lost. But now a huge amount of consumers can't keep spending because they don't have the money anymore, and the manufacturers won't offset that cut in spending.

  53. relbinhas says:

    In order words, there there was no productive investment or advancement in the real economy. Some got richer and won't spend all the money they won, and many got poorer and can't spend anymore. That's why spending plunges after a bubble. Moreover the manufacturers won't invest that money if no one is willing to consume their goods anymore. They will sit on their new money, because there is no demand for their products, because the "consumer portion" lost all its money.

  54. relbinhas says:

    And now one could argue "but the individuals and companies that gained from the bubble put the money in the bank that gets fueled back into the economy". But who is asking loans from the bank? Individuals for consumption and companies for investment. Again, individuals won't borrow because they have no collateral, and firms won't reinvest because they have not enough demand to justify it. Moreover banks won't lend because they are afraid of further losses so they themselves will sit on money.

  55. Pavlos Nik says:

    There are two brilliant concepts in this video:
    1) Extravagant unsustainable consumption equals wealth destruction (disinvestment).
    2) Basic sustainable consumption equals wealth creation (investment).
    Is there any formal economic theory along these two lines that we could study further?

  56. 4bying says:

    How is wealth destroyed by purchasing consumer goods? The money goes from the bank to the loanee then to the person selling the consumer good. The money has just transferred.

  57. vettefever67 says:

    The solution is to take away the free money given by the Federal Reserve that blows up the huge credit bubbles. 

  58. James Ling says:

    Thanks Khan.But,I really wonder will the economy tank as bad as u try to paint?Its b'coz government can push to zero interest and thereby the rich are compelled to spend.Of course,government can once again lower the loan interest rate to make everyone back to the game unless some unpleasent events happen.
    The examples u gave,e.g,Miami arebasically places that properties price soars due to mere speculation without real economy there.If there are real economy going on,like Washington,Paris,prices will not plummet like that..Btw,this is my opinion.

  59. William Leung says:

    woah his voice gets extra scary at 2:30

  60. tai hung Au says:

    Misleading title: The interior designers and tourism industry in the destination of vacation would have benefited from the 500k the home owner borrowed from the bank, so wealth is transferred but not destroyed. The home owners have squandered their own wealth but wealth is not destroyed. Wealth is only destroyed during war when tangible assets are destroyed such as the Kuwaiti oil fires (burning oil fields). That is why money becomes 'paper' and is worthless as hyperinflation sets in.

    You should do an illustrated video on DJs getting paid extravagant amounts (like 300k usd per night) just to pretend to press buttons on stage. I think that's more like 'wealth destruction'. I guess the private jet and champagne companies like gulfstream and dom perignon would benefit from such extravagant spending.

    I have another theory: what if wealth is not destroyed but merely 'illiquidated' or frozen by 'hoarders'. This usually happens during deflation when cash is appreciating with respect to most other assets. The opportunity cost of this wealth freezing would be enormous since it could be used building factories or on research & development and would slow down the economy, hence calling for fiscal stimuli from the government.

  61. b8bpattson says:

    Re: destruction of wealth  If the government takes over worthless, toxic assets and offsets the destruction of wealth by printing more money, has theat wealth been destroyed?

  62. scottab140 says:

    Legislating against reality also involves the Unites State Government buying bad loan homes in order to protect home values for property tax. If the government would have not stepped in, every home owner, on the average, would probably be paying 25% -50% less taxes!

  63. Tushar Lalchandani says:

    I bet the person who disliked this video was a banker

  64. Taesu says:

    What is the next video called? His friend's solution.

  65. CzechRiot says:

    There was no wipe out, the money didn't disappear from economy. Wealth is a subjective abstract term. When you pay money to watch a movie, is this money "disappearing"? Also, a house is a house, if the person bought a house for 100k, and 5 years later that house is "worth" 500k, you can suppose the person had a "gain" in their wealth, as if there came 400k out of nowhere into the house (like a ghost spirit that's worth 400k). But this notion of wealth is abstract, the house is still worth "one house". The example at 7:25 of the 420k that "disappeared" from economy, only disappeared because it never existed in that sense from the start. The house is still "one house" and the 420k was money held by the bank, which may now be in the bank accounts of drug dealers, strippers, bar owners, car rentals, restaurant owners, hotel owners, etc.

  66. Vinoth Raja K says:

    How did the home owner gets a 500K$ loan when he is already having a 80K$ loan? How did the bank even sanctioned 500k$ to the guy who is already having a debt of 80k$ on the same property?

  67. Jemal Guillory says:

    Stockton, CA still has not recovered. The government is cosigning mortgages now through the H.O.M.E. program!

  68. Alex Z says:

    I don't agree that the 500k which was spent on improving the house was destroyed. It got paid to shops, logistics companies, warehouses, contractors, factories and probably helped all the people who are involved with the products purchased (such as the granite top, hardwood floor etc.) to earn a living for their family. I understand these are luxury goods we're talking about and they do not benefit society but the redistribution of that 500k doesn't end there. These luxury goods are just the first link. Anyway, a very very good video.

  69. Ritzking Sharma says:

    Spending from the 500k loan helped the businesses where this money was spent so its not a total destruction of wealth… It gets destructive though when the money gets spent on things we dont need like Humvees or Private Jets that pollute and destruct what nature gives us.

  70. Elämäm koulu says:

    Is my understanding of this correct? Wealth is destroyed as a combination of two things.

    1. People allocate their wealth on things that they don't value intrinsically but anticipate will create more wealth for themselves because of rising demand.
    2. Demand for the things drops and people are left with stuff they can't trade and don't value intrinsically.

  71. Melssz says:

    I argee with the comments saying it is just a transfer of wealth, but that does not take away that it is a destruction of one's own wealth :p

  72. Hao Fu says:

    Shouldn't the consumption( c+i+g) also be included in the GDP? If it is, then the value was not lost, the price only "depreciated" due to the false assumption that all houses are equal. In the long run, the housing price will only go up due to inflation if hold depreciation and surrounding environment constant.

  73. Hao Fu says:

    Opportunity cost or sunk cost shouldn't be considered as destroyed wealth. They just simply redistributed. One's consumption becomes someone else's income even in this case.

  74. Texas Ray says:

    Whoa there hoss.

    You said "the bank had given $500,000 of real capital, real money that could have been used to build a factory, plant crops, work on research and development, …that was real $500,000 of capital… and now they got a house and they auctioned off that house and they got $250,000. So they lost $250,000. Right?"

    Wrong. Totally wrong.

    Under fractional reserve lending the bank never really put out $500,000 in the first place. 90% of the 'loan' was created out of thin air, or rather created out of debt. The bank only lost potential profit from the affair, not actual capital, not actual reserves. They may have claimed those planned earnings as part of their assets so that it looks like they lost money. But you can't lose what never really existed beforehand. Don't cry for the poor bank. They didn't lose anything. They just didn't make as much as they thought they would. Maybe someone lost a bonus, but then that's what bailouts are for.

  75. DsD1 DVS Games says:

    Hilarious. I’m and from Stockton California

  76. Phinehas Ikanya says:

    this whole idea of valuing a belief is causing robbery without guns but pens. like this video

  77. blkhat117 says:

    Well it's even scarier than that. The bank never had the money lend to homeowner No 3 in the first place. Only a fraction of the principal amount, that money just came out of thin air though a process called fractional reserve banking. Actually this is how money is generated in the economy today, through credit, loans, mortgages, etc. not the printing press at the federal reserve.

  78. shubham raj says:

    8:55 the phone rings

  79. Aditya Singh says:

    2:35 when puberty hits

  80. Alejandro Vargas says:

    Very good explanation although there is one concept that I don't really agree with. The wealth didn't disappear, it transferred. One mans debit is another mans credit (accounting principle), or if you want to look at it one mans income will end up being another mans income (once it is spent). If the economy starts slowing down the FED decrease interest rates on loans so people can take out more loans and start spending more and generating incomes for other. Once the credit portfolio becomes too big and starts overthrowing the income then interest rates increase causing people to think twice about borrowing money. This basic economic concept leads me to believe that wealth does not and cannot vanish, similar to energy it just transforms, moving from one person to the next.

  81. olla 441 says:

    Wealth isnt destroyed because the savings on the discounted price of the house are passed on to the buyer. The money for the granite worktops are sent out to mining industry and trades people. Its a rebalancing in my opinion.

  82. Patrick Jacobsen says:

    Wow this is eye opening.

  83. Patrick Jacobsen says:

    Consider yourself subbed thanks for opening my eyes

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