Banking Crisis Explained
And of course, if [the U.S. government] were planning to take over the banking system, they wouldn't announce it beforehand. They'd probably say exactly what they're saying right now, at least until they got everything set up, until they hired enough people, put all their plans in order...and then one Friday evening, they'd make an announcement...and nationalize the banks over the weekend.Last week's episode, "Bad Bank," of This American Life, has a very basic yet excellent primer on what banks are, how they function, and what is at the core of the current banking crisis - toxic assets, balance sheets, mark-to-market, write-downs, and the like. Alex Blumberg and Adam Davidson use a simple scenario to illustrate how banks are capitalized and what can lead to insolvency. The basics are simple but can be difficult to understand while trying to ignore things like mortgage-backed securities, CDOs, CDSs, ARMs, TARP, TALF, FDIC and other esoteric financial instruments and inscrutable acronyms.
There's also a great discussion with Simon Johnson, former chief of the International Monetary Fund (IMF), Professor at MIT's Sloan School of Management, and - most impressively - fellow blogger, about the pros and cons of nationalization.
Columbia prof David Beim discusses this graph, which is frightening. Currently consumers owe 100% of GDP - some $13 trillion. The only other time the Household Debt to GDP ratio has been 1:1? 1929:
"The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us... We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen."It's not as simple as forcing the banks to lend, unfortunately.
In the second segment they talk to a couple entrepreneurs of Mortgage Strategies, who are buying mortgages from banks at a discount and negotiating with homeowners to either refinance their mortgage at a much lower monthly payment (but still very profitable for MS because they bought, say, a $400K mortgage for $200K to be refinanced at $300K), or stay in the home and rent it from MS.
Of course these are just a couple guys, and although they are smart and able to bring in investors, they are only able to handle a tiny percentage of the total mortgage debt out there. Also these are simplest of these assets - just a mortgage between a bank and a homeowner. They aren't exposing themselves to the intricate mortgage-backed securities. Still, it's a free-market solution that shows that even right now there is money to be made and people are taking risks to make it. That's some good old-fasioned American know-how (plus Columbia MBAs and millions in investor capital).
The TALF is actually a gov't sponsored version of this for things like small biz loans, student loans, and car loans, aimed to give private equity generous lending terms with Treasury backing any potential loss due to consumer default. Good idea but possibly implemented too late - such securitized lending still requires consumer demand, which has all but vanished right now.
It's a great show. Take a listen when you get a spare hour. Very helpful for laymen like myself understand WTF is going on right now.
8 comments:
Here's a tip:
http://www.youtube.com/watchv=cMnSp4qEXNM&NR=1
Don't bother trying to find it on the U.S. based internet: it was taken down under pressure, and is under pressure to be taken down where it is now posted.
OUguys!
Who has you under observation?
(In this instance...it's a Doc.)
Well that's just a tease, Doc. The link doesn't go anywhere. What is the vid about?
http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1
Somehow, the ? was dropped out of the sequence in the original although it WAS there when I sent it: try it again, this time first making sure that there is a ? between watch and v, no spaces.
Again, it appears that the U.S. version, which is the first place I found it when the controversy was raging, has been taken down or washed; but the Canadians continue to keep it up...so far: if you read the text they parallel the story with you'll see they feel pressure up there and hold slim hope that it will stay up. AND THAT, I fear, is the state of what has been wrought. Is it? We're all young enough to likely be able to find out...soon enough. Without a stethoscope to register the beat or microscope to plunge the depths of the "slide."
Ah I believe you emailed me this a while back.
Lack of regulation was a major cause of the current crisis, but there are a lot of factors that go beyond Fannie and Freddie. I'm less interested in casting blame at this point (there's enough to go around) than in recognizing what the problems are and trying to fix them.
My post and the podcast it references are more about the banking crisis as such - i.e. severely depreciated assets such that writing down their value from imagined to actual would cause major banks to become insolvent - rather than how those assets became toxic (subprime mortgages from the likes of Fannie & Freddie).
The banking crisis is UNexplained to date and until those who know the facts (but would smother them) make sure that more just folks comprehend them, then ... how they can be 1) corrected now and 2) prevented/avoided in the future?
But in direct answer to your whether I emailed that to earlier: Yes, I did...(and it was swatted aside then, too).
IF we are all in this together, which is to be doubted should one take a political stance, but is undoubted at all in the sene of citizenship, should not those presumably most satisfied by election results also be those who insist upon stark truth in coverage of how the events unfolded so that all might be included in that knowledge and the effective political participation that might flow from it? Or shall I now simply resort to saying "They LIE," and you resort to endlessly repeating "But THEY lied!" and both of us be lost in that form of confoundment unceasing until everything unravels?
Do you, too, not think that unravelling and dissipation and, eventually, evaporation would be the result? That's the temperature reading I get this shift of the night.
I'm all for finding out the truth in these matters. Clearly it's been the failure of past administrations and legislators to adequately regulate F & F as well as our entire financial system. The Dems' push for "housing for all" was a fine ideal but greatly flawed in practice. But even the subprime debacle with F & F is just one part of the current financial crisis, which goes way beyond bloated GSEs without proper oversight.
We have an immediate banking crisis to fix. After that we will need to revamp, restructure, and/or increase regulation of the financial system to a degree unthinkable a decade or so ago.
It just seems overly simplistic and counterproductive to keep insisting - as that video implies - "Frank and the Dems killed the bill that would have prevented this" at this point in time.
Well, all this back-and-forth aside, I would just like to say that this particular episode of TAL was a lovely accompaniment to my train ride down to D.C. An hour well spent crocheting, looking out the window on the Mid-Atlantic's dilapidated and abandoned industrial corridor, and listening. Thank god for the podcasts!
@Am: Glad you enjoyed it! Did you say hi to the Prez while you were there?
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