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Ages 10+ · Money · The story of money
The crash of 2008
Families borrowto buy housesLoans arebundled andsold onHouse pricesfallLending freezes
How a chain of loans broke.
The big ideaA chain of loans is only as strong as its weakest link.

How it works

In the made-up town of Brickton, prices kept rising, so families borrowed to buy houses, paying the loan back a little at a time.

Ana the lender bundled many loans into one parcel and sold it to Cy, so she had coins to lend again. The parcels passed along a long chain.

Then house prices fell, some families could not repay, and nobody knew which parcels held the shaky loans. Everyone doubted every parcel, and lending froze.

This happened for real in 2008. Many things played a part, and many people lost jobs. Afterwards, new rules asked lenders to check borrowers and keep more coins in reserve.

Before: a house in Brickton024681010House2Saved8Borrowedcoins
Maya's family borrowed the part they had not saved.
After: the house and its loan024688Loan6House nowcoins
After prices fell, the house was worth less than the loan.

Example 1: How much was borrowed?

  1. The house costs 10 coins and the family saved 2.
  2. They borrow the rest: 10 − 2 = 8 coins.
  3. They pay it back a little at a time.

Example 2: A house worth less than its loan

  1. The family owes 8 coins.
  2. Prices fall, so the house is worth 6 coins.
  3. The house is worth 8 − 6 = 2 coins less than the loan.
  4. That is a heavy worry for a family.

Example 3: Why a parcel can lose worth

  1. Ana bundles many loans into one parcel and sells it to Cy.
  2. If many families stop repaying, the parcel is worth less.
  3. Nobody knows which parcels hold the shaky loans, so everyone doubts every parcel.
  4. Lenders stop lending, even to each other: lending freezes.

Example 4: After the crash

  1. Governments stepped in to steady the lenders and keep loans moving.
  2. Recovery took years, and some places took longer than others.
  3. New rules asked lenders to check a family can repay, and to keep more coins in reserve, for a rainy day.

Words to know

loan
Money borrowed and paid back, usually a little at a time.
parcel
Many loans bundled into one and sold.
lender
Someone who lends coins, like Ana.
reserve
Coins a lender keeps for a rainy day.
lending froze
Lenders stopped lending, even to each other.

Watch out

Try it

  1. A house costs 10 coins and a family saved 2. How much do they borrow?
  2. A house is worth 6 coins and the loan is 8. Is the house worth more or less than the loan?
  3. Why did Ana sell the parcel to Cy?
  4. In what year did this happen for real?
Answers: 1. 8 coins · 2. Less · 3. To get her coins back to lend again · 4. 2008
Try at homeWith a grown-up, ask what they remember about the crash of two thousand eight. How did people feel?
For grown-upsMany people lost jobs in 2008, and it was a hard time for many families. If your child asks about your own family's story, share what feels right and keep it calm: the point is how a chain of promises works.
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