Now that the first debate is over, and FiveThirtyEight is showing Obama with a 317.8 to 220.2 margin in electoral votes (FL and Ohio now slightly leaning to Obama, VA definitely leaning, MI and PA definitely in his column, and even Indiana tied) the financial crisis/bailout got my attention again.
I can only go so far in trying to understand the complex system. Mickie Nardo researches it and explains it in (relatively) easy terms at 1 Boring Old Man (on list of links to the right), especially his post from last night "follow the (unregulated) money."
I did get some enlightenment on the other side of the coin from an NPR program, "This American Life," explanating why the credit market is so precarious. In simple terms I could understand, it explained that many big businesses operate on such a thin margin of liquid assets that they routinely borrow short term loans called "commercial paper" just to operate day by day.
They had a guy explaining that its his job each day to look at how much money his company has and how much they need that day, and then he calls up one of his lending sources and makes a deal like: give me $990,000 today and I'll pay you back $1,000,000 tomorrow. And they do this every day.
It's not that they're in dire straits; that's just the way they operate. On other days, he may find that they have surplus that day over what they need to pay that day's operating costs, so they will turn around and lend some out. Apparently they prefer to do this than to have a nice little pot of operating money. He explained that, most of the time, it's almost a clerical job to do this, it's just automatic. You see how much you need that day, and then make calls and arrange the loan.
But that's how precarious it is. When the lending banks get scared and decide not to lend (or don't have it) then within days a business like this could fail, even though it was considered solid a few days before.
It's all a house of cards in many dimensions and in all directions. And that's why people like Barney Frank and Chris Dodd say we have to do something quick to reassure the lending banks, so they'll keep making these loans. If they don't make these instant, short-term loans -- even relatively small, fairly solid businesses won't get operating money and will start failing quickly.
I hate the idea of bailing out Wall Street, but it's short-sighted not to. It's also short-sighted if we don't fix the systemic problem (deregulation) that led to this disaster.
Ralph
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3 comments:
Just got through watching This Week on the economic crisis with George Stephanopolis, George Will, Robert Reich, Newt Gingrich, and the business editor of Washington Post.
G. Will got off the best line: The bailout "is not a matter of arithmetic; it's psychotherapy."
What he meant is that it's not so much a certain amount of money to invest in these bad credit securities, it's what will reassure all parties so they keep the credit markets open.
They all seemed to agree that the "culture of greed" has to change. Everybody lives beyond their means, on credit: families, the government, and Wall Street itself.
According to my 16-year-old son, our current situation is like the Panic of 1837. People bought land with loans from banks. Then they'd sell the land to other people who would buy it for more money borrowed from other banks, etc. etc. Banks made bad loans, creating a credit boom, then the government called in their debts, the banks couldn't cover them, so the government spent $37 million to keep banks alive, which the banks immediately loaned out. Sending the banks out of business again. This led to a 5 year Depression that was the worst in our history.
That analogy, if accurate, is pretty frightening to me.
One money site - I forget which - said the key is what 'value' the government pays for the assets they purchase. It said if we pay "fair market value" we'll get screwed and won't make any money back. But financial institutions will make money.
Taxpayers should be paying 'distressed' value, which is what those assets are actually worth.
The reports I read claim we're paying 'fair market value' to the banks.
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