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.

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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.

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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.

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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.

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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.

The N Word

Adam Davidson of Planet Money had an interesting interview with Treasury Secretary Timothy Geithner on Wednesday's podcast. Friday's ep follows up with varying opinions on the interview from a few big names, including Russ Roberts of EconTalk.

Geithner toed the company line to an almost ridiculous degree, but it's what one expects. In many ways he is the most powerful, influential person in the world at the moment, and if he orders his eggs over-easy rather than scrambled it could cause markets worldwide to crash.

It's to the point where he refuses to even utter the word "nationalization," although he talks about "that idea" or "that strategy" in response to Davidson's questions. But despite his dancing around the issue, he seemed to clearly deny that nationalization as such is not an option this administration will pursue, even before the bank stress tests have been performed. Nationalization, that is, in the sense of complete government ownership, management and control; one could certainly argue that banks are nationalized to a significant degree already considering the TARP funds giving taxpayers a big stake in money center banks as well as the recent news about Citi. And that's not to mention the implicit and explicit government guarantees for banks and depositors. Increasing nationalization will be a change in degree moreso than kind, although there is a clear line between propping up balance sheets with huge share percentages and actually assuming management.

Friday's episode also has an interesting interview with William Isaac, who nationalized Continental Illinois Bank while heading the FDIC during the Savings & Loan crisis in the '80s. (CIB was later purchased by Bank of America.) Isaac cautions against complete nationalization both in his interview and in his recent article in the WSJ. As one uniquely qualified to speak on the subject, it seems we would be wise to listen to him.

Geithner's recent comments have been this administration's strongest yet holding the line against complete nationalization. The financial markets won't stabilize until investors have a clear idea of the government's course of action with regard to the troubled banks. We need our confidence back - even if it's confidence in an imperfect solution.

Podcastin'

In recent months I've taken to listening to several quality podcasts:

EconTalk: Russ Roberts of the Library of Economics and Liberty (econlib.org) and George Mason University hosts this weekly hour-long podcast with some big name guests on deep economic issues. Heady, fascinating, and frankly frightening stuff given our current climate. The most intellectually demanding of the bunch.

NPR: All Songs Considered: Bob Boilen hosts. Exposure to tons of artists I otherwise wouldn't have even heard of. Often has cool themes for the show.

NPR: Live Concerts from All Songs Considered: Bob Boilen hosts. Full, free live concerts by a wide variety of artists, from Andrew Bird to Tom Waits to Neko Case.

NPR: Planet Money: Laura Conaway and David Kestenbaum host these 20-minute shows that usually touch upon a couple different issues, including both macro-economic and personal finance topics. Often has regular folks call in with stories about unemployment, banking, and other PF issues. Pleasant hosts, often pretty funny, and packed with good news and info.

Vanguard: Plain Talk on Investing: A somewhat irregular (ranging from weekly to monthly) podcast with short 8-10 minute episodes about specific investing topics. Simple, quality, digestible advice. I look forward to applying some of this once I am able to generate some investable assets once again!

A preponderance of NPR, no?

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Also this now-defunct podcast was simply astounding in its time. Content was meh but listen to the smooth sounds of the Velvet Fog on the narration!

Odes to Obama

Are you high on 'Bama? I know you've gotten a lot of visual stimulation recently - how about some music inspired by our new POTUS?

Yesterday's episode of All Songs Considered has songs by several artists written in answer to the challenge laid down by Boilen to commemorate these times in song.

Some decent tunes, including the (annoyingly?) catchy "Be the Change" by Kat Edmonson.

A leader who inspires...imagine that.

All Songs Considered

I'm sitting here alone in the office listening to Tom Waits' "Glitter and Doom" tour from this past summer, courtesy of the recording over at NPR's All Songs Considered blog.

This past week I've been listening to the All Songs Considered podcast, hosted by Bob Boilen of All Things Considered. The podcast is great, with weekly episodes covering a wide variety of stuff - a lot of eclectic stuff I would have never heard otherwise. Several of the episodes I've heard recently include the Best Music of 2008, "The 1980s: Were They Really That Bad?", "1,000 Recordings to Hear Before You Die," from Tom Moon's book of the same name, "Listener Picks for 2008," and "The Year's Overlooked Gems." On the show Boilen, producer Robin Hilton and assorted guests talk about the specific songs they play but they also talk about music itself - metamusical musings that come off occasionally touchy-feely, rarely snobby, and often times quite interesting.

There's also a separate podcast devoted to entire concerts - the All Songs Considered Concert podcast - all for free! Great, great stuff. And a special thanks to Mark Erelli for telling me about it!

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The second song from "Glitter and Doom" is "Down in the Hole," and it is glorious.

Waits is one of those artists whose name I feel like I hear quite a bit but I have had almost no exposure to his music aside from the aforementioned tune's use as the title track to The Wire. But I'm really liking what I've been hearing so far. His voice is like nothing I've ever heard, and his songs are great stories as well as having a really good sound. "Black Market Baby" just came on, which was the song Erelli covered at last week's show.