We are experiencing a historic economic meltdown. Last September 2008, Lehman Brothers collapsed which basically forced a massive collapse in the stock market, a credit freeze, and the most obvious indicator that our economy was in a free fall. The government has been in massive bailout mode ever since.
If you really want to understand what happened, and you really, really should, the best way to do so, to get a nice overview of what has happened in an even-handed non-partison way, you need to listen to these "This American Life" podcasts (or read the transcript):
The Watchmen
This is a very interesting overview about why the regulatory system failed to put a check on the massive risk our financial institutions took on over the past five to six years, and why they were unable to properly regulate.
One of the culprits is the why regulators get chosen and the way they get paid. Unbelievably, regulators are chosen and paid by the banks they regulate. The ratings agencies (yeah those guys who gave all of those now toxic assets AAA ratings) are yes, paid by the people they apply ratings on...
Part of the reason was that the ratings agencies just weren't strong enough to take on the big guys.
Part of the reason is that Congress passed a bill (signed by Clinton in 2000) that made it difficult to regulate the very parts of the financial system that ended up taking down the entire economy.
Finally this page provides links to some very smart and easy to follow radio shows given over the past six months or so that you simply have to listen to.
"The Giant Pool of Money"
This one describes how the quantity of money globally (real money, not fake - the world has gotten richer as we have innovated and have become more globally productive) has doubled the past 6 years. And how a big chunk of that came into the US markets. Couple that with the fact that Greenspan kept interest rates too low for too long just put enormous amounts of investment dollars into real estate, putting horrible pressures to find new buyers of that real estate, very directly causing the massive bubble we have now seen. Which ironically has caused a big drop in our productivity and global wealth. Yep, a big chunk of that cash has disappeared into thin air.
"Another Frightening Show About the Economy"
This is a great overview of what happened right after Lehman Brothers collapsed and AIG nearly collapsed. Why it freaked Bernanke and Paulson out so much. Because banks stopped lending to each other. Money market funds (which are just a shade riskier than savings acconts) "broke the buck" and were at risk of collapse. Lending came to a standstill. Even companies like GE and McDonalds could not borrow money. It was a historic time in our economic history. This show also explains credit default swaps and why they they were so bad and toxic and why the role they played in taking out the economy.
"Bad Bank"
This one has a lot of Simon Johnson in it. It describes the dire situation of the banking situation. How the housing collapse has made many of them insolvent. Quite literally, many banks have already failed, many more would have already if not for the massive amounts of money our government has given them.
"Scenes from a Recession"
This is a really poignant show that describes anecdotally some pretty crazy housing situations some people have gotten themselves into. Condos built complete with granite countertops but literally without a foundation...
Finally, this podcast, "No Map" has one segment in it about how banks are literally not behaving in their self interest.
It would make a lot of sense if they worked with individuals to restructure their loans, but they are not because they can't. They simply do not have the facilities to evaluate the massive amounts of people who could really use this sort of restructuring (maybe cut the loan amount some, drop the interest rates, etc.). As a result, massive amounts of people are walking away from their homes. Banks are forced to hold them and eventually sell them, losing far more money than they could have if they could have worked out a deal to keep the original owners in their homes.
Its a massive tragedy.
I am a regular listener of "This American Life", so this information trickled my way over six or so months. It might be too much to take all at once. So I do recommend spacing this out...
But I feel its vital that you listen to it. There's been a lot of partisan finger pointing in the public space. What I believe is that the blame is wide. Basically, we all had some amount of blame. Its time we worked together to get to a solution that will work.
But to come to a solution, you have to understand the problem. And you, my reader, have got to be part of the solution. So please, get informed.
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4 comments:
AAAHHH! I really, really, really want to but... I can't. You lost me at "regulatory system", and I really don't have the patience for podcasts. Isn't there a book, or pamphlet, or crib notes or something titled, "economics for dummies?"
Scott, I got this ridiculous email in my inbox today and had to share it. Sadly, this is the kind of economics that I can follow...
"It is a slow day in the East Texas town of Madisonville. It is raining, and the little town looks totally deserted. Times are tough, everybody is in debt and everybody lives on credit.
On this particular day a rich tourist from the East is driving through town. He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to pay his debt to the pig farmer.
The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel.
The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her "services" on credit.
The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor, paying for the rooms that she had rented when she brought clients to that establishment.
The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything.
At that moment the traveler from the East walks back down the stairs, after inspecting the rooms. He picks up the $100 bill and states that the rooms are not satisfactory...... Pockets the money and walks out the door and leaves town.
No one earned anything. However the whole town is now out of debt, and looks to the future with a lot of optimism. That, ladies and gentlemen, is how the United States Government is conducting business today. "
H, On your first comment, I think most of those podcasts have transcripts available for reading... But they are really, really good, and really, really easy to follow, so if you can take time out for them, I highly recommend them...
Your second e-mail was interesting, and it hurt my brain for a little while trying to make sense of it...
But the bottom line, the example is really a bunch of people in a town that have this circular debt dependency that looks back to the origin.
Person A borrows $100 from B who borrows $100 from C who borrows $100 from D who borrows $100 from A.
So, really, everyone who owes $100 also is owed $100 from someone else... So, their balance sheet comes out exactly even...
They had absolutely no reason to be stressed out before that rich man came to town unless they had reason to believe one or more of those folks would not come through on their debt...
Unfortunately, this is not what's happening in our society... Instead, let's extend your analagy just a tad bit...
We have one guy with a ton of money, who lends to the hotel proprieter, the the butcher, the pig farmer, the supplier, and the prostitute...
This man has a lot of money for lending, but he decides to save and lend his money rather than spend it on himself. He lives a poor miserly existence, but he has access to all the cash...
And the folks in town are dependent on loans from this man and are afraid that he'll stop lending or will raise the interest rates...
Well, this rich man is China and the borrowers are the US...
There's a ton more to the story... But the bottom line is China has flooded are markets with cheap cash that they've gotten from us buying all of the goods they manufacture on our behalf.
But instead of pumping that money back into our markets by buying our goods... They save it and lend it back to us...
Its a global trade imbalance that had a lot to do with our current recession. And a recovery depends largely on our ability to correct that imbalance.
Get that miserly hoarder to service that prostitute darn it.. :-) (j/k).
IT'S A MIRACLE!!! Scott did you just explain the recession to me in a way that I can understand it?! I'm now going to consider it the "China-prostitute" theory on the economy and run with it (JK,too!). This actually makes a lot of sense to me. I'm glad took the time to take that silly small town debt and convert it to our real problem. Thanks! (It's a post within the comment section that maybe you should consider pulling out for the rest of your lame readers like me!)
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