Best explanation ever from a blog Good Math, Bad Path. I’m reprinting it in its entirety. The title of the post is Economic Disasters and Stupid Evil People:
With the insanity that’s been going on in the financial world lately, a bunch of people have asked me to post a followup to my earlier posts on the whole mortgage disaster, to try to explain what’s going on lately.
As I keep saying when people ask me things like this, I’m not an economist. I don’t know much about economics, and what little I do know, I tend to find terribly boring. And in this case, the discussion inevitably gets political, so I’m expecting lots of nasty email.
Anyway, with that said, I’ve been doing a lot of reading, to try to understand this mess. And I’ll try to explain what I’ve figured out.
The situation is both very complicated and very simple.
The simple version? People made lots and lots of stupid loans that couldn’t be repaid.
Of course, it’s not really that simple.
The mortgage mess is the starting point. If you recall my posts on the mortgage mess, what happened was:
- People like buying safe investments.
- Historically, mortgages are very safe investments: people will go to incredible lengths not to lose their homes.
- Banks realized that they could make lots of money by taking groups of mortgages, and turning them into bonds that they could sell, earning a commission, and passing the risk to whoever bought the bonds.
- These bonds became incredibly popular. Lots and lots of people and organizations wanted to buy them.
- There aren’t enough good mortgages to put together the number of bonds that people wanted to buy.
- So banks started giving out mortgages to people who couldn’t repay them, using elaborate and dishonest schemes to pretend that they were actually not bad mortgages.
- The people who got mortgages that they couldn’t repay didn’t repay them.
- The banks act surprised: "My god, no one could have predicted that so many loans would default! Whine, whinge, moan, someone come help us!
What’s going on now is directly related to that mortgage mess. A good metaphor for it is that the current situation is like a huge city of skyscrapers built on a foundation of sand; the mortgages are the sand.
What we’ve been seeing over the last couple of weeks is the same basic scam as the mortgage mess, but on an even larger scale. Lending money is a profitable business. Bundling loans into investment vehicles is an incredibly profitable business for producing what appear to be high-yield, low-risk investments.
Naturally, when there’s a big opportunity to make lots of money, there’s a ton of people looking to get in on it. Of course, just like with the mortgages, there’s a limit. Realistically, there’s only a certain amount of money that can be loaned at any time to people who can pay it back. But there was so much money to be made that as the high-quality loans ran out, they started looking for other things that they could wrap up as investments. Of course, since people who buy these kinds of investments are typically looking for something really safe, that means that they can’t just give money out any-which-way; they need to have some plausible way of saying "This is really safe".
And here’s where the stupidity really started kicking in.
How do you take a bunch of loans that might not be repaid, and turn them into something that’s safe? Well, what do you do if you had a lot of money tied up in a piece of property that you could lose in an accident? Like, say, a car or a house? You’d buy insurance!
That’s basically what the investment firms did. They gave out shit loans that any sane person should have known couldn’t be repaid, and then they bough insurance on them to guarantee that at least the principal would be safe.
So who did they buy insurance from? Mostly each other.
For those following the news today, you know that McCain announced he was suspending his campaign to deal with the economic crisis. And — oh, yeah — he wants to postpone Friday’s debate with Obama.
The polls today show Obama "breaking the tie" and pulling ahead nationally by 4 points. He’s also doing well in important swing states.
McCain now trying to postpone the debate is kind of like faking an injury when your team is down in the fourth quarter.
Josh Marshall has it right:
"Bringing the presidential candidates and their press entourages back to Capitol Hill won’t speed or improve the process of coming up with a good bailout deal. It will politicize it. That’s so transparently obvious that it barely requires stating. And of course that is the point."
And of McCain’s announcement, Rep. Barney Frank told a group of reporters outside the House chamber:
The public seems to agree. A flash poll asked this question:
The first debate between John McCain and Barack Obama is scheduled to take place in two days. Should the debate be held as scheduled? Should the debate be held, but the format changed to focus on the economy? Or, should the debate be postponed?
Held as Scheduled: 50 percent
Held with Focus on Economy: 36 percent
Postponed: 10 percent
Is the right response to the turmoil on Wall Street to suspend the campaigns for president? To continue the campaigns as though there is no crisis? Or, to re-focus the campaigns with a unique emphasis on the turmoil on Wall Street?
Suspend 14
Continue 31
Refocus the campaign 48If Friday’s presidential debate does not take place, would that be good for America? Bad for America? Or would it make no difference?
Good for America 14
Bad for America 46
No difference 35
Barney Frank says: "It’s the longest Hail Mary pass in the history of either football or Marys."
Looks like McCain’s attempt to look like a leader didn’t work.
But in suspending his campaign, McCain also cancelled his appearance on the David Letterman show, which taped this afternoon. He called the Letterman people and said he was suspending his campaign and going back to Washington.
But during the course of the taping, Letterman learned that McCain was actually giving an interview with Katie Couric just down the street. Dave even cut in to the live interview, according to Drudge, and said, "Hey Senator, can I give you a ride home?"
Or… just watch the YouTube:
A chart (adjusted for inflation)
While I’m at it, I think Markos is right. These are the things we should be looking at:
What we need to determine the extent of this "crisis":
He also points to this:
We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself."
— The 2008 Republican Party Platform, adopted earlier this month
Ahem.
Last week, I went to fill up my gas tank. The station I pulled into had plastic bags over the "regular" pumps and over the "mid-quality" pumps. I was stuck buying the "premium" gas. It was $3.99 per gallon, which was what regular was at in July and August, so I wasn’t that upset.
But around the office, I have heard similar stories — people unable to get gas.
Why is there nothing in the local news about this? I’ve read there were outages in Nashville and other parts of Tennessee. Even as far east as Asheville, NC and Western NC. But not around here.
What’s going on?
UPDATE: Hmmmm…. apparently there are spotty supply problems throughout the South. I wish the media would get on this more….
UPDATE: I found this…
The executive director of North Carolina’s petroleum association says consumers should not worry. By the end of the month things should be back on track.
Well, okay. I’m running low, so I guess I’ll start my hunt on the way home from work….
The best known consequence of disappearing sea ice in the Arctic is the loss of the polar bear habitat.
"The Arctic sea ice melt is a disaster for the polar bears," according to Kassie Siegel, staff attorney for the Center for Biological Diversity. "They are dependent on the Arctic sea ice for all of their essential behaviors, and as the ice melts and global warming transforms the Arctic, polar bears are starving, drowning, even resorting to cannibalism because they don’t have access to their usual food sources."
Horatio thinks he saw a ghost.
Hamlet thinks it’s annoying when your uncle marries your mother right after your dad dies.
The king thinks Hamlet’s annoying.
Laertes thinks Ophelia can do better.
Hamlet’s father is now a zombie.
– – – –
The king poked the queen.
The queen poked the king back.
Hamlet and the queen are no longer friends.
Marcellus is pretty sure something’s rotten around here.
Hamlet became a fan of daggers.
– – – –
Polonius says Hamlet’s crazy … crazy in love!
Rosencrantz, Guildenstern, and Hamlet are now friends.
Hamlet wonders if he should continue to exist. Or not.
Hamlet thinks Ophelia might be happier in a convent.
Ophelia removed "moody princes" from her interests.
Hamlet posted an event: A Play That’s Totally Fictional and In No Way About My Family
The king commented on Hamlet’s play: "What is wrong with you?"
Polonius thinks this curtain looks like a good thing to hide behind.
Polonius is no longer online.
[Read more at McSweeney’s]*****
RELATED: Study shows that Facebook profiles can be indicators of narcissism.
Buried in a Roll Call article today:
[White House Deputy Press Secretary Tony] Fratto insisted that the [$700 billion mortgage bailout] plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.
This is troubling. The $700 bailout plan is being presented to us as an unforeseeable crisis. But apparently, the Bush Administration foresaw it, although (presumably) not knowing when. And then they spring their plan on a Friday, insisting on approval by Monday?!?
Something’s afoul, I say….
Scary thoughts from Billmon:
So think of it this way: What happened last week was a giant run on the bank, with people lining up to get their money back — like that scene in It’s a Wonderful Life, except in cyberspace, not Bedford Falls, and with Ben Bernanke and Hank Paulson, not Jimmy Stewart, standing in the electronic doorway and explaining to people that they their money isn’t in the bank, because it’s been loaned to a hedge fund in London, which loaned it to a Wall Street investment bank, which loaned it to a mortgage banker in Nevada, who stole it and deposited it in a numbered bank account in the Cayman Islands. (OK, so maybe it’s not like that scene in It’s a Wonderful Life — it’s more like the scene where Jimmy Stewart comes back to find he was never born and Mr. Potter owns the whole town. But you get the idea.)
What we saw today, however, was something different: a dawning suspicion among the customers that the bank is paying them off in counterfeit bills.
If this suspicion takes hold and spreads, it could open up broad new avenues for financial disaster.
Seeing as how the U.S. government is going to spend $700 billion (the cost of the Iraq War) in a bailout "rescue plan", buying up distressed toxic worthless assets from poorly mismanaged investment banks, many individuals are wanting to cash in.
So welcome to www.buymyshitpile.com, and maybe you too can get on the gravy train. Newsday says the site "captur[es] the spirit of the moment, provides a form for ordinary Americans to offer their various and sundry garbage — broken toys, transistor radios, musty books, smelly tennis shoes — to the Treasury Department." There’s a lot of useless stuff out there, and since the government is buying… why not?
People are wondering what the hell yesterday’s Roger Ebert column was all about. Entitled "Creationism: Your questions answered", it began this way…
Questions and answers on Creationism, which should be discussed in schools as an alternative to the theory of evolution:
Q. When was the earth created?
A. Archbishop James Usher, working out a chronology from the Bible, calculated in 1654 that the earth was created on the night of October 23, 4004 B.C. Other timetables reach back as far as 10,000 years.
Q. What about oil and coal, which seem to have been generated from ancient forests millions of years ago?
A. They are evidence of a Great Flood about 4,400 years ago, which laid down all the layers of sediment at once. They are nowhere near as old as evolutionists and archeologists say. A fossil claimed to be 200 million years old, found in Nevada in 1917, shows a shoe print.
…and continues in the same vein. There’s no concluding point. There’s not a whiff of satire in there, as the "answers" he gives are standard answers from creationists (absurd, yes, but without the additional exaggeration to make it satirical).
It’s puzzling, because in the past, he’s demonstrated himself clearly against creationism:
Yes, there is “creationist science,” an attempt to provide a scientific
footing for beliefs which should be a matter of faith. Creationists say
evolution is “only a theory,” and want equal time for their theories,
one of which is that God created the earth from scratch in six days,
and rested on the seventh.Evolution is indeed a theory. Creationism is a belief, not a theory. In science, a theory is a hypothesis that has withstood the test of time and the challenge of opposing views. It is not simply somebody’s notion about something. The creationist belief cannot withstand such tests and challenges; it exists outside the world of science altogether.
Maybe he’s having some fun with us….
UPDATE: Or maybe hacked?
Since you now effectively own part of AIG, you might want to know what you’ve bought. If you’re like me, you’ll have to read paragraphs twice, but this is a workable primer on the whole AIG bailout.
BTW, here’s a very good cartoon slide show on the subprime mess — a subprime primer, if you will. It’s from May, so it doesn’t encompass the current crisis, but if nothing else, you can see how the subprime debacle leads to widespread ruin throughout the entire financial sector.
