The Play Station and the Financial Crisis

The Boy asked this morning, “Dad? What’s goin’ on in the news? What’s this crash they’re talking about?” The morning news was talking about another couple hundred point fall in the DowJones and the President just made a quick speech to the American public.

I started to explain it simply enough, but I could tell it wasn’t registering. The Boy had a glazed look in his eyes. And The Girlie looked up from her cereal bowl obviously semi-curious about the news, too.

“Ok, let me put it this way,” I started again. “Let’s say you wanted to buy yourself a new PlayStation. It cost $100 dollars. You promise to pay it back by earning it over time doing yardwork. However, I don’t just want my $100. I want $110. The extra $10 is called interest….. Does that make sense so far?”

“Sort of,” he admitted. “But, won’t charge me more than the $100, right? You’re my Dad!” he joked.

“No, I’m a bank. I make money for the bank by charging you a bit more than the money I loaned you. Banks need to make money, too. They don’t just give away money for nothin’,” I clarified with a finger in the air as emphasis.

“Fine. I get it,” he admitted, “What about this crash though?”

“I’m getting to that. Stay with me,” I continued. “Now, not only are you promising to pay me back the $100 plus the $10 interest, I want something called collateral. Collateral is something of similar value you let me hold until you can pay me back. So…. Let me think …. I give you the money to buy the PlayStation, but in the meantime I get to keep all your GameBoy games until you do.”

“So, basically,” he continued, “You get to do whatever you want with my GameBoy games if I don’t pay you back. Right?”

“Yep!” I said, “now for the crash…. One day, you and all your friends decided GameBoys were kind of old school and nobody plays them anymore. GameBoys became like Eight Track tapes.”

“What?” the Girlie scrunched her nose.

“Never mind,” I back tracked. “You all decided Gameboys had cooties. You all are into Rock Band and Guitar Hero now, anyway. Those GameBoy games are now not worth the $100 anymore. They MIGHT be worth $20 on eBay.”

“That stinks,” the Girlie chimed. The Boy chuckled.

“Exactly,” I pointed to her and she smiled. I looked at the Boy “Plus, you’ve been spending so much time playing your new PlayStation that you haven’t done any yardwork. You don’t have any money to pay me back for the PlayStation. So, since you can’t pay me back, you just let me keep the GameBoys. Make sense?”

“Yeah, I got a new PlayStation for some worthless Gameboys,” he beamed.

“That’s right,” I continued, “the bank, or me, just lost a bunch of money because we thought GameBoys and PlayStations would be popular for a long time. And, now they aren’t so much anymore.”

“You shouldn’t have loaned me the money, huh!” the Boy admitted.

“Well, yes,” I admitted. “I, as a good parent, should have asked you to raise the money on your own first. You should have been able to afford it on your own. As a good bank, I should have had you be a bit more responsible. Instead, I let you just get whatever you wanted.”

“So, now,” I continued, “Think of the PlayStation as a house. Instead of a hundred dollars, think of hundreds of thousands of dollars. What the banks did was loan a ton of money to people to buy houses, like I just did with you and the PlayStation money. Only, nobody predicted that the value of their houses, or in this case your games, would go down in price. PlayStations, as we speak are being replaced by Wii’s. Even your PlayStation isn’t worth as much anymore and you just bought it. For years, when you bought a house, it was thought that it would keep its value, that it would be worth more tomorrow. What is happening now, is that our house isn’t worth as much as when we bought it three years ago. A lot of people borrowed money based that their house would be worth more in a year or two. That isn’t happening. Houses lost a lot of value and now the banks are losing a ton of money. It started a really bad money cycle. And it has caused a lot of worry.”

“So, basically,” the Boy wanted to be done with this lesson, “I shouldn’t borrow money. I should raise it first.”

“Yes,” I answered, “With one last point … be careful what you buy. Nothing holds value very long. Not a PlayStation. Not a house. You have to be careful with your money. Americans and the banks and the government haven’t been very careful over the last ten years or so.”

“Obama will fix it,” shouted the Girlie striking a cheerleader pose.

“I hope so, Girlie. I sure hope so,” I finished.