Even though I am a media junkie and have been following the financial crisis I have until now found it difficult to find trustworthy sources that would explain to me in simple terms:
1) Why is it all going pear-shaped?
2) To what extent will the US government’s plan fix the problem?
3) What will it cost (because the $700bn figure is not all going to just get spent without any return now or in future to the taxpayer)?
4) Is there a better way to try to solve the problem?
5) Who is to blame and what can we/should we do to them?
The This American Life radio programme helped once before with their excellent Giant Pool of Money episode on sub-prime mortgages. They have rushed out a new episode, Another Frightening Show about the Economy from the same reporting team (Alex Blumberg and some folks from NPR news). I have to say I found it less enlightening – probably because it had to fit a lot more in – but it still helped. If you don’t want to listen to the programme (though I think you should) here’s what I took away:
1) Greedy speculators found ways to gamble on the health of companies without facing government regulation that would have limited the amount of leverage they could use.
2) It’s not clear if the bailout will work, but hey we’ve got to try something!
3) We don’t know how much of the money we’re putting on the table we’re likely to lose.
4) We should be pushing Paulson to use the latitude built into the legislation to push for “stock injection” instead of just buying up bad debt. In other words don’t just give the banks money to bail them out for their crappy decisions, insist on some equity so if the bailout works the government has some assets for all that spending.
5) TAL doesn’t really tell us who to lynch – looks like the decision not to regulate was made in a bipartisan way.
PS the NPR team also has a daily weblog Planet Money and podcast to help you track developments. A good summary of their answers to questions 3 and 4 is here.
If anyone has alternative answers to my questions I would be interested to hear them – send me a comment!
Update: I see that the UK bailout looks like the stock injection option that NPR suggests most economists would favour…
Read my bible ( i wish i had read it more carefully ) called “Popular Delusions and Madness of crowds”. you seem to have a grasp of what is happening(as much as many of us do) . The main problem is that Banks (and there are 70,000 or some such ridiculous number) in the US are afraid to lend to one another thereby freezing the credit markets. The recent introduction of the federal Reserve into the inter bank lending market should “unfreeze” that and allow business to continue- but it will never be the same again. Thus the ascendence of the “left” the Democrats , who will bring regulation back into the markets after a 10 year binge, and who will , I believe win in a landslide , which will set the Republican party on its ass for 10 or 15 years. Good ridance to bad rubbish in my view.
Comment by Russ Brake — 8 October 2008 @ 2:02 am
A friend (who works at a bank) writes:
1) Why is it all going pear-shaped?
Major institutions have grown their size and earnings by buying assets through borrowing using cheap credit to the point where they are over-leveraged. The drop in asset values are creating a panic selling death spiral. Only those with more conservative leverage and risk policies will survive.
2) To what extent will the US government’s plan fix the problem?
It will not stop the spiral of selling and corporate failures
3) What will it cost (because the $700bn figure is not all going to just get spent without any return now or in future to the taxpayer)?
You can’t buy your way out of this spiral. You just have to wait until the strong survive and the un-infalted value of the assets is set
4) Is there a better way to try to solve the problem?
No, just don’t do anything stupid and pray you work for a compnay that is strong enough to survive.
In a while the survivors will start to buy back up the pieces and the market will return to a new level below the current. Growth will be slower. In the end any new regulation created will probably create more harm than good.
5) Who is to blame and what can we/should we do to them?
We are all to blame. Our cultures feverish drive for growth and wealth creation without oversight creates these bubbles. You can also blame the corporate lawyers and financial analysts who write contracts and develop transactions and priducts that they know were wrong, but still moved forward under the protection of the corporate shield and driven by the promise of larger pay scales and big bonuses.
In the end, a few patsies will go to jail.
What is hardest to do is figure out how to manage progress without the wretched excess and destruction.
I guess the market is like nature….when it gets out of balance it corrects itself. Lets hope nature does not meltdown, because there is no bailout package for global warming.
Wow, that was quite a rant…bye for now
Comment by David Brake — 9 October 2008 @ 12:12 pm