Thursday, September 25, 2008

Financial Meltdown Explained

I came across a really good blog post explaining essentially what's been happening on Wall Street the past few years (H/T Hullaballo ).  Here's the break down from the blog "Good Math, Bad Math:"
The mortgage mess is the starting point. If you recall my posts on the mortgage mess, what happened was:
  1. People like buying safe investments.
  2. Historically, mortgages are very safe investments: people will go to incredible lengths not to lose their homes.
  3. Banks realized that they could make lots of money by taking groups of mortgages, and turning them into bonds that they could sell, earning a commission, and passing the risk to whoever bought the bonds.
  4. These bonds became incredibly popular. Lots and lots of people and organizations wanted to buy them.
  5. There aren't enough good mortgages to put together the number of bonds that people wanted to buy.
  6. So banks started giving out mortgages to people who couldn't repay them, using elaborate and dishonest schemes to pretend that they were actually not bad mortgages.
  7. The people who got mortgages that they couldn't repay didn't repay them.
  8. The banks act surprised: "My god, no one could have predicted that so many loans would default! Whine, whinge, moan, someone come help us!
What's going on now is directly related to that mortgage mess. A good metaphor for it is that the current situation is like a huge city of skyscrapers built on a foundation of sand; the mortgages are the sand.
I strongly recommend this. It helped me gain a better understanding of what these "stupid, evil people" have been doing the past few years and why our economy  and financial markets are where they are now.

The lesson for today is: Complete de-regulation=bad. Common sense regulation=good. It's time for us to put the laws back in place.

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