Q: Where did the money go?
A: To the people who sold houses during the bubble and to those who collected fees on those transactions.
Q: Where did the money come from?
A: Mostly, from those who financed those transactions, but only briefly.
Q: Where did the money ultimately come from?
A: From those who bought those mortgages after they had been “structured” into financial sausages called “Collateralized Debt Obligations” (CDOs).
Q: Who bought those CDOs?
A: Banks, mutual funds, pension plans, and foreign governments.
Q: Those institutions have professional advisors. Didn’t they realize that the housing bubble would eventually burst?
Q: Why not?
A: They claim to have had PhD mathematical economists telling them that those investments were safe…
Q: What assumptions led to the ruin of this planet’s economy?
A: The assumption of the statistical independence of defaults.
Q: What does that mean?
A: They were assuming that you defaulting on your mortage and me defaulting on mine were totally uncorrelated random variables.
Q: So what?
A: If the bubble burst, those would be be correlated. So, by implication, they were assuming that the bubble would never burst. It’s just that they didn’t say it in those terms.