Welcome back to the clue-by-four beta, where the graphics suck and each day’s feature comes out late that day. Hopefully it’s timely for my Hawai’i readership…
On Cluesdays, I want to try and explain complicated things in a readable, non-geeky way that busy people can read and understand in a few minutes. This week I’m trying my hand at the so-called credit crisis, which supposedly affects everybody but few people really seem to understand.
Clue 1: your money’s not in the bank
Most people know that the money they have on deposit isn’t sitting as a stack of cash in a vault somewhere. It’s invested, along with everybody else’s savings. That’s how banks make money. OK, you say, but where does the money come from, like when I get a big loan? Well, the bank borrows it, usually from other banks, based on the value of all their investments.
Clue 2: everybody who’s got cash is holding onto it
The problem now is, banks don’t want to lend to each other. Why? Because nobody knows what all their stuff is worth - especially the ones that are holding mortgages. The collapse of the well-known “housing bubble” (where the value of your house was supposed to go up and up and up forever, world without end, amen) has led to house prices going down the tubes. People can’t make their payments and the banks are left holding bad paper. So why do I want to loan you money if I don’t know you can pay me back?
Clue 3: When the only tool you have is a hammer, every problem looks like a nail
The lack of cash - liquidity as it’s called on Wall Street - in the system is at the root of the problem. The government’s solution: soak the Street with a firehose of money! And thus, the $700 billion bailout. The idea being: if banks feel a little more confident that the investments have value (since the government promises to pay you good money for your crap) they’ll feel better about lending.
Clue 4: Whenever a salesman wants to close the deal today, be very suspicious
These conditions have been developing for some time. No one on Wall Street was surprised when investment banks began to totter. The White House admitted that the bailout plan had actually been drawn up months ago. It was sprung on the public at a time of maximum tension in hopes that it would go through quickly. It hasn’t yet, but it probably will, maybe as soon as tomorrow.
Clue 5: it’s usually a good idea to ask the smart guys their advice
Professor Nouriel Roubini, professor of economics at the Stern School of Business at NYU, asked and answered a pertinent question in the title of a recent blog post: “Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System? No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks.” Over 180 economists recently wrote a letter to Congress telling them that the plan is unfair, ambiguous, and will weaken the capital markets.
Clue 6: Check the three Cs of Congress
The Congress can be characterized as controlled by collusion, cowardice and corruption. (Yes, that’s cutesy and stupid, but fuck it, I’m tired.) So why is this plan going through anyway, even though the people hate it and the economists think it’s stupid? Check the three Cs. Your Congresscritter is probably bought and paid for by the financial/real-estate complex, scared of what they might do to her or him, or else totally in league with them… or some combination of all three.
If you think I’m full of shit, I definitely urge you to challenge me in comments, or learn more about this on your own. Read the news critically, and learn some of the depth of the issue through intelligent people online. Resources I like are the Calculated Risk blog and Professor Roubini’s RGE Monitor.
Ignorance serves no one except those in power. Educate yourself - your right to bear clues is as important in the 21st Century - if not more so - than your right to bear arms.
UPDATE: Here is a really good explanation of the subprime mortgage mess (which, again, is not the SAME as the credit crisis but played a role in it)… in layman’s terms. With stick figures!
