How To Tell Your Kids The Financial Crisis

The U.S. is in trouble. In fact, the whole world is in trouble - a financial crisis at a magnitude we have never seen in our lives. We have seen tumbles in the stock market, foreclosed homes, and increasing job losses in the recent months. The American consumers are seen fear in their faces and their confidence in well doing is at all-time low. There is no sign as whether the economy has reached its bottom, even though the government has announced the biggest rescue plan in history that will cost taxpayers $700 billions.

$700 Billions. Who is going to pay for it?

Everyone of us is. So are our kids... and, our future generations. As a parent, I feel responsible 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?

At first, I was struggling to figure out where to start to explain a financial 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 or house work, she wanted less or a smaller share. That's fair according to her, because she is younger and shorter compared to her older brother.

OK... I stopped that thread and switched back to the original subject. I started the discussion of what seems to be the tipping point of this domino effect - sub-prime mortgages. In the simplified story of sub-prime mortgage, two parties are directly involved: the banks who lend money to make profit and the sub-prime borrowers who need money, but don't have good credit scores. Both of my kids have no difficulty understanding that a bank would prefer to lend money to borrowers with good credits, because it is less risky. So, why would the banks want to lend money to subprime borrowers?

First of all, the banks, in order to make even more money, had to look beyond their ideal customers - i.e. people with good credit scores. Although the subprime market might sound risky, the banks calculated that, even if the houses ended up foreclosed, the houses can still be sold with profit. The calculation assumed that the housing prices would keep going up, as they had been in the past ten years.

On the other hand, sub-prime borrowers were excited to embrace all the money suddenly accessible to them. They fell into the traps of low initial interest rates of sub-prime mortgages and were under illusion that they could afford the houses even with no money down. They also calculated that they could sell their house for a profit, should they fail to pay for the mortgage, when the honeymoon period of low interests was over. Again, they were assuming that the housing prices kept going up as they had been.

Well... The housing market reversed its up-rising trend during the course of 2006. All the maths both banks and sub-prime borrowers made all of a sudden made no sense. Like in a poker game at a casino, they lost their bets on the table. The un-welcome job losses and tightened spendings created a downward spiral and made the situation even worse. And, that is where we are today.

Greed - the worst enemy in our genes

Obviously, both banks and borrowers involved in subprime mortgages took extraordinary risks. When asked what prompted them to take such risky steps, my kids carefully searched for the word but came up: "Greed?!" They are right on the target. 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 spectaculars in the oil and commodity markets. It is also the same greed that makes my younger daughter to ask for more of what she likes and less of what she dislikes.

With a hard lession learned, hope for a brighter future

Our kids and future generations are innocent of this crisis. Saddly, they do not have a choice but to accept the $700 billion rescue package that is supposed to clean up the financial mess we 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.