Tuesday, September 23, 2008

Mrs. Evilhippy on the Financial Crisis

My Helpmeet just posted what I think is a erudite and witty commentary on the current near financial meltdown of Wall-Street and the giant Dr. Evil-like proposed bailout plan, but I'll let her take it from here:

A Pop Culture Guide to Financial Armaggedon

One thing's for sure, and that is, I'm sure not an economist. Any attempts I've made this week to understand the financial mess we are in right now has done nothing but prove this to me over and over again. But for all the unreadable, un-understandable, unprocessable amounts of information I've looked at this week, I thought I'd try to share what little of that which I have been somewhat able to fathom. And since I am no economist, I have absolutely no working knowledge of most of the terminology involved, much less the implications.

So what do I do?

I will liken it to Pop Culture! That's good, right?

Alright, here goes nothin'..

The secretary of the Treasury Department presented a 3 page document to Congress requesting authorization to infuse the stock market with up to 700 billion dollars over the next 2 years. To form a mental picture, just pretend that this is the movie 'Fight Club'. Imagine all of our Representatives and Senators garbed in all black, Project Mayhem style, and everybody is talking at once, freaking out. The economy just had a giant hole shot through its head and is oozing brains out everywhere. Imagine then that George W. Bush is Tyler Durden. He walks in the room and says "You are not a beautiful, unique snowflake! Any attempt to add snowflakery to the plan will make all the snowflakes melt all over the place and that would be just terrible!"

"I will give you brand new sheets of construction paper! You will start over! Your poor scissor skills will all go away!"

Everyone is still confused. How does new construction paper clean up all the blood and brains oozing out all over the floor? Everybody starts arguing again, to which Tyler George Durden Bush starts a chant "His name is Henry Paulson. HiS NaMe iS HeNRy PauLSoN. HIS NAME IS HENRY PAULSON."

Here is a draft of this 3 page bill as proposed. Pay special attention to Section 8 of said proposition that gives Henry Paulson more unchecked power than Almighty God.

As an aside, there are interesting associations to the term Section 8. In the military, it is the dismissal sited when you are crazy, and from a government housing standpoint, it is the name of program used to provide housing aid for the poor.

It is doubtless that this will NOT be signed as presented. The current reports are that there will be oversite for how this money is spent, and most likely, there will be additional stipulations that we, the taxpayers, can recoup some of this money.

It still doesn't answer the question of where we get this money in the first place. And as best as I can find out, it will be borrowed from China (just like the recent stimulus money). It will then be put into the stock market, mostly by buying chunks of 'bad debt' (to the tune of 700 billion dollars worth) from financial institutions (such as sub-prime mortgage loans that are uncollectable now). The effect is that these financial institutions will no longer have all these bad debts on their books, as though they never made them in the first place, causing the value of the company to return to a normal level.

If this sounds like a horrible idea, it is. But the only alternative is to let the vast majority of American businesses go bankrupt, all at once, plunging the nation into the Great Depression 2: Bigger, Badder and Uncut! If I understand it correctly, this almost happened Thursday. What stopped it? And injection of 105 billion dollars, pre-market opening. This is what I read, see if you can make any more sense of it than I did .

But, at least this collapse would have made some form of sense. People are scared. In one day, they tried to get 500 billion dollars worth of their own money out of the chaos that is our current stock market.

Another of the aspects of our current situation that is to some degree understandable is looking at failed institutions like Fannie Mae and Freddy Mac, who offered a lot of people the chance to borrow money to buy a home that did not have the means to pay back that kind of debt, hence the term sub-prime mortgage lending. And blame is useless here. The Republicans want to say that the Democrats started programs like these. The Democrats want to say that the Republicans have been consistently against regulations that would prevent these types of loans from being legal in the first place.

But the real crazy, the real ugly is all the made up stuff that no one but an economist (or a trader) can understand. You see, we have these things called Derivatives . Right now, we have somewhere in the ballpark of 1000 trillion dollars worth of them. As a country, we don't even necessarily agree with the rest of the world on what to call that number. Is it a sextillion, or is it a quadrillion. Or is it a bazillion-illion-dillion?

There are many, many complications to any attempt whatsoever to explain or define derivatives, and I in no way profess to understanding them. This is the my "are you smarter than a fourth-grader" explanation of just one single one of them. It is called a swap. What you do is not trade money, you just talk to somebody else about how risky their investment is, and then they ask you how risky your investment is (I'll show you mine if you show me yours) and if your risk is better for them than theirs is and their risk is better for you than them, you just swap risks. Viola! The trouble comes in when one of those swappers gets into financial dire straights. In that case, the risks are returned to their original owners, who may or may not have seen it coming and may or may not have the ability to pay the piper.

How is this possible?

The short version is this: They are unregulated. Meaning: No limits, no safety net, no supervision.

Warren Buffet calls them "financial weapons of mass destruction".

The Republican platform has long been against regulations, claiming that the market is essentially sound and will regulate itself.

At least they're organized and seem to agree on something. Most Dems can't agree on a damn thing. And I have no love for either of our Presidential Candidates as they continue to campaign while Congress barks at each other.

What a missed opportunity to show true leadership!

I still have more to say, but this post is long enough. Here are a few more links to what I've found that is the more-understandable breakdowns of what is happening.

Paulson Financial Rescue Plan
Nifty Chart of Disaster
Overview of the Current Financial Crisis

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