The REAL Cause of EVERY Financial Crisis

i'm done i want out it's just money 1637 1797 18 19 37 1901 29 1937 1974 1987 jesus didn't that [ __ ] [ __ ] me up good 92 97 2000 and whatever you want to call this it's all just the same thing over and over we can't help us the law of gravity hit wall street today and financial markets around the world right is worse you're going to see one of the biggest recession in financial crashes of all time so for decades in new york we've had this thing called the pizza principle which essentially says that the price of a subway ticket is the same price as a slice of pizza but this balance was broken this year for the first time in decades and of course the problem doesn't relate specifically to pizza it's just about everything that's going on in the world global chaos inflation looming financial crisis cryptos rose and fell it promised millions of dollars and then collapsed it took people's futures with it starters are closing down people are losing their jobs and expensive pizza is really the least of our problem it's just money but the question in all of this the question that i think that we have to ask ourselves more often is who is to blame for all of this shouldn't we have seen this crisis coming i want to explore how we got here in today's very special extended episode of company forensics [Music] welcome to our slide green house in brooklyn whenever our overseas team needs to work out in new york this is where they'll stay we rented this apartment a couple years back so that it there'd be a place that feels like home but rent on this place went up by 800 this year over 30 percent increase and that brings me to the beginning of today's story because there was a point in time where you could buy an entire house with this we're going back to holland or the netherlands in the 1700s the dutch were powerful there was this company that essentially ruled the seas they had they had a private army for themselves the east india trading company now there's one crucial cultural context that you need to understand about the dutch most of the population back then were calvinists that was that's one of the strictest forms of protestant religion now calvinism forbids them from parading around from showing any luxury or from even wearing any fancy clothes so get this you're a 1700s entrepreneur you have a startup you have trading spices you live comfortably you're making money you need your profit chairs you visit your occasional coffee shop how can you brag about this newfound social status in a religious approved way well the answer is tulips i mean tulips are pretty but in 18th century holland this was the symbol of luxury that didn't break any rules you could put them on hats and dresses or you could just carry them around honestly tulips got so expensive that one meant that you were rich and owning many implied that you were somehow filthy rich and people even started valuing special or defective tulips the same way they do like coins today like the ones with color stripes that are caused by virus were extra extra special and tilt prices went up and up and up but so far things were still normal until these guys stepped in now the thing with tulips is that they only bloom for a short season in the spring everybody was getting better at growing tulips but you could still only get tulips in the spring so what our stockbroker bros did was come up with this sort of contract a contract that you could buy anytime in the year and that would guarantee that come spring you could get your tulips at a pre-set price now this was of course great because not only are you guaranteed to have your own looks for the summer you have this paper you have a paper that guarantees your tulips at a fixed price and well this means that if people start getting really excited about tulips this year or maybe they sacked some other caribbean town and they have some extra gold lying around you can now sell your tulip more expensive better yet you could sell your contract for a better price you didn't even have to wait for the tooling now this contract that we're talking about this is called a future and yes we still use futures to this very day and at some point tulip futures were truly more expensive than a house some reached 5 000 gilders when a yearly salary back then was 250 and what a lot of people don't get is that this boom was not created by the flowers it was created by the speculators i don't expect anybody to ever have actually physically traded a tulip for a house like the madness that happened was over these contracts over the speculation over the brokers but what people really wanted was the flowers not the papers not the speculation so in no time these contracts these features that they had come up with had no buyers chaos prices plummeting suicides and lawsuits no of course not that's a very common misconception actually as historians researched more and more into this story they actually found no evidence to suggest that this tulip bubble ever rattled the nation in this way there's not even a single record of individuals filing for bankruptcies around this tulip bubble now some people did lose a lot of money but the country didn't even enter into a default i mean the dutch didn't do it very well after that so it wasn't a success story for the dutch but it wasn't because of the tulips anyway the urban legend of sorts happens because we we sort of love saying i told you so we sort of love to be the smartest person in the room we want to brag about that insight that we know that nobody else has but who was really to blame in this situation the bro that invented the future or the people that wanted some quick books or the religion that banned other luxury items hold that thought for a second let's get into the next door [Music] the 1920s were crazy times in the states i want to paint this picture to you so the great war is over the u. s has come out victorious and post-war economic booms are not rare if you're a farmer you're suddenly maximizing productions to feed all these soldiers that just came back home henry ford had just mechanized the model t and people wanted their cars and their houses and their latest technology whatever that was that means the demand for wood and rubber and steel was growing it's estimated that the u. s economy doubled in size from 1920 to 1929 and that's all great but there's a very big catch fast growth usually means having to borrow money now borrowing money is not necessarily bad farmers for example took out mortgages so they could pay for more equipment and for more land factories expanded and they hired people to ramp up production and they might have borrowed some money to do that even regular folks used credit to buy this new technology so the entire u.

s economy had doubled but it had done so using credit and the us was printing money like crazy at this time just to keep up with all of this activity with so much money so much money lying around people suddenly wanted to start investing in the stock market this is regular people but the stock market was growing really fast it had reached historical heights and people were confident that it would never drop i couldn't believe what was going on in those days so how did this crash become so bad well it's because of banks banks here saw an opportunity they saw an opportunity to profit from this new and thriving stock market now what they would do is loan money so people would use that money to invest in the stock market and when money run out when banks run out of money they just borrowed more money from other banks or in other institutions loans on top of loans all of this money going to bet on the stock market now this little creative instrument is called margin trading that's when you borrow money you borrow money to gamble i mean to invest to invest in something uh let me just give you an example let's say that you want to buy some tesla stock because you're sure that this stock is going to go to the moon now you've got ten thousand dollars that you'd like to invest in tesla shares and for example at the end of 2021 that would have been about nine tesla shares at eleven hundred dollars each now that's very cool and all but that's not too many shares i mean it's just nine if your shares gained say a hundred dollars per share you've made 900 10 that's cool but the guy next door he's making a lot more money than you you want more money because you're sure the tesla stock is going to go up so these stock brokers can help you fund this bet with margin trading and all you need is ten percent collateral so if you show that you have ten thousand dollars in your trading account what they'll do is they'll lend you the other ninety thousand dollars and that way you can invest a total of one hundred thousand dollars for tesla stocks mind you it's not that you're gonna invest ten thousand dollars of tesla stocks you will own the full hundred thousand dollars of tesla stock thanks to this little loan now you have 90 tesla shares and then you can go and brag to your friends for also trading now this is called a leveraged trade or a leveraged position now fast forward a few months and then tesla stock drops as it actually did and now each share is worth 639 dollars now your 90 shares are now worth 57 000 you've lost 43 000 but remember you only had 10 000 to begin with you actually now owe your broker bros 33 000 and they don't really care about the stock price anymore they care about this loan that they gave you that you agreed to take and you bet in the wrong company this is called a margin call and it's gonna be really really important in just a second leveraged or margin trading is very dangerous today it's accessible to everybody truly with just a click but even back in 29 it was pretty easy to do margin trading and nobody likes to think about these bad scenarios everybody just wants more and then these guys know it from 22 to 29 the dow jones increased by 220 and at its peak it reached 381 points in september of that year people would invest in companies and more people decided to bet on companies with money that of course they didn't have and then some would say that it's almost obvious that this makes no sense again nobody likes to think about these things people hate to think about these bad things happening so they always underestimate their likelihood but at some point somebody realizes that the price of the stock versus what this represents a piece of a company the price of that stock doesn't really make sense because if you look at the actual company well the company's not that big i mean it need to be twice as big to justify the value of the stock today nobody likes to think about these scenarios but sometimes sometimes they just hit you in the face people panic people sell in mass so company values began tanking the stock market started freaking out and the world was moments away from chaos but that's not all there's another element to this perfect storm now i don't want to dig too deep into this whole interest rate part but you need to understand some basics the fed which is in the us the central bank defines the base interest rate from which all banks and lenders operate so the 1920s fed was not at all happy with all of this margin investment and all of this spending it might lead to inflation so in order to control the spending what they can do is spike interest rates that means immediately means that borrowing money is gonna be more expensive it might also mean that the loan that you already took now pays a little bit more interest now it also means that if you put your money in the bank maybe they'll pay you more interest just for having the money in sitting there on your account so people are now encouraged to just go with the safe bank account or a certificate of deposit rather than just betting money on the stock market so other countries also raised their rates to just keep up with the us and overall people borrowed less and spent less and all of these companies all of these companies ramping production to keep up with all this demand now they have things that they can't sell in him and lo and behold the perfect storm companies started firing people and cutting wages to keep up with all these losses things that they can't sell so people didn't have the money to pay all those debts that they got one person defaulted and then another and then another and then another so started this little chaos this little house of cards as soon as the bell rang on a new trading day this collective panic sparked a selloff crowds started gathering outside the stock market and they were watching as this valley was plummeting and in this very terrible week this man jumped to his death someone fell out of a window we're not really sure if it was because they were like committing suicide because their shares were down but the point is one man died and everybody just decided to panic even more because people now are jumping up buildings because the stock market is crashing the point is brokers started doing margin calls remember those they came back to haunt people and there was one very big problem the problem was that these were regular people these were average individuals retail investors with no more money the brokers demanded such large sums that it was just impossible for people to pay people tried desperately to sell what they had to pay off these margin calls but you can't sell a car or a house it's impossible to do that in a short term especially if everything is crashing at the same time so now it's october 29th this is black tuesday the stock market doors open with just one word which is sell but nobody was there to buy stocks were now worthless people rioted inside the stock exchange and outside on the streets entire fortunes disappeared the stock market dropped 23 in just two days and there was nothing you could do to stop it on black tuesday alone the stock exchange lost 14 billion dollars which equates to 240 billion dollars in today's money that's in just one day in total this crash cost 600 billion dollars in losses in today's month banks ran out of money they ran out of money so they started defaulting the banks and they were unable to pay other banks that they had borrowed money from and so money truly ran dry people just couldn't even afford to eat farms all over the u. s saw their income drop by up to 50 and again there was nobody to buy those cars or those houses or anything entire factories closed down the crash did not stop until 1932 and by then one of every four americans was out of a job and banks didn't far any better half of the us banks went bankrupt half the u.