[Updated 11/18/08]
The whole world is suffering the greatest financial crisis in decades, if not centuries. We have seen tumbles in the stock market, foreclosed homes, and increasing job losses in the recent months. The consumer confidence level is at its all-time low. There is no sign as to whether the economy has reached its bottom, even though the government has announced the biggest rescue plan in history, which will cost taxpayers $700 billion.
Who is going to pay for the $700 billion?
Everyone of us is. So are your kids ... and their next generation. As parents, we have the responsibility to explain to our kids what happens and how it happens, so they do not grow up just to find that their "American Dream" is a bunch of empty promises.
Where to start, though?
It is hard to figure out where to start to explain a mess of this magnitude. Looking at my two kids, I started with sharing some of my observations of their behaviors at home. For example, my 11 year old daughter insisted that she must have the same amount of ice cream as my 14 year old son to be fair. But, when it came to meals, she wanted less. That's fair according to her, because she is younger and shorter compared to her brother.
OK. Let me go back to the original subject and look at what seems to be the tipping point of this domino effect - sub-prime mortgages. In the simplified story of sub-prime mortgage, two groups of people are directly involved: the banks who make loans for profit and the sub-prime borrowers who need money, but do not have good credit scores. Both of my kids have no difficulty understanding that a bank would prefer to lend money to borrowers with good credit, because it is less risky. So, why would the banks want to sell many sub-prime mortgages to people who do not have good credit?
First of all, the banks, in order to make even more money, have to look for customers beyond the normal caliber - people with good credit scores. Secondly, the banks calculated that, even if the house ended up foreclosed, they could still sell the house for profit - assuming that the housing prices kept going up as they had been.
On the other hand, sub-prime borrowers fell into the traps of low initial interest rates of sub-prime mortgages and were under the illusion that they could afford the homes even with no money down. They also calculated that they could sell their house and still make a profit, should they have difficulty to pay the mortgage years later - again assuming that the housing prices kept going up as they had been.
Well ... The housing market started turning sour during the course of 2006. Both the banks and the sub-prime borrowers are suffering now, because they made the wrong bets.
Greed - everyone's worst enemy
When asked what is common and shared between the two scenarios, both of my kids slowly replied: "Greed?" They re right on the target. It is greed that makes my younger daughter to ask for more of what she likes and less of what she dislikes. It is greed that makes banks to lend more than what they are supposed to and sub-prime borrowers to borrow more than what they can pay off. It is greed that makes not only banks and sub-prime borrowers take irresponsible actions, but also many others including the speculators in the oil and commodity markets. All these end up causing the worst financial crisis in history.
The hard lesson
Our kids and future generations are innocent. But, they do not have a choice but to accept the $700 billion rescue package that is supposed to clean up the financial mess we have created. Hopefully, we all learn a painful lesson: All of us have to manage our greed and be more responsible ... to be fair to our kids and our future generations.
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Sunday, November 2, 2008
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I think the easier way to help children understand what is going on with the financial crisis is to explain how money works: if you borrow $20 and don't pay it back, someone else will have to. When you borrow money, someone, say a worker in the bank, will have to do the paper work to document that you are borrowing $20, and the worker has to be paid. Now the money you owe may be more with an added fee.
ReplyDeleteExplain that the bank you borrow from doesn't make the money. Explain that banks also 'borrow" money from depositors, and have to pay back to their debtors, too.
Anyhow, I just think children may actually see the picture if we use a simple scenario to describe how money is a commodity that flows from one hand to another.
This topic is so complex that one cannot even begin to describe it in volumes of books, never mind a small comment space in a blog.
That's a very good point. We need to find "age appropriate" ways to explain to our children this financial mess. They are entitled to know what's going on.
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