Okay so this financial crisis is complicated, confusing, depressing, and frustrating. Fun times in America! None of what's happening in the economy is made any easier by the fact that we are in the home stretch of a very important presidential election. Double yay!
In order to try to make some sense of what's happened, I'm going to give you a basic outline of what's been going on, as I understand it. Let me stress as I understand it. If this is totally wrong, please, someone speak up and edumacate us all.
1. Okay so because our government has been run by firm believers of absolute free markets, banks have been generally deregulated over the last decade. The government says, go ahead guys, do your thing, we trust you and we don't want to interfere. So banks and investment firms and the like were like, cool, thanks, we're going to do kind of what we want now.
2. When someone buys a home and uses a mortgage to finance the home, a commercial bank gives the mortgage to the homebuyer at a certain interest rate through which the bank makes money. The bank then turns around and sells those mortgages (the principle amount plus the interest they earn) to a bigger bank, who sells it to someone else, and so on and so forth up the line. In order to sell more of these mortgages, banks were offering mortgages with low interest rates, attracting more people to get mortgages who normally wouldn't really afford them, except that these low interest rates had the possibility of increasing. People took them anyway, even with the risk, because they wanted to buy a home. These are the subprime mortgages. Okay, so we have banks selling mortgages to people who can't afford them and people who can't afford mortgages taking them from the banks. And the government isn't watching what's going on.
4. So then the interest rates on these subprime mortgages go up and suddenly these people who could afford their mortgages at the primary rate can no longer afford them. So they start missing mortgage payments and defaulting on their loans. This is where people start losing their homes. Furthermore, if the people can't pay their mortgage, the originating bank can't make good on the debt they sold to the banks up the line. So there's a shortage of cash flow reaching all the way through the system. Banks suddenly have way more debt than they have capital (which is bad) and everything starts collapsing very quickly as they realize what the deal is.
It's like a series of bouncing checks. I write a check to my landlord for my rent. He deposits it into his account and then pays the contractor working on his kitchen with the same money I just paid him. The contractor pays the lumber yard with the money my landlord paid him, and so on and so forth. But it turns out my check is no good and bounces. So the money my landlord thought he had and used to pay his contractor is no longer there and his check bounces. So then the contractor's does too.
5. Okay so then Hank Paulson steps in as Secretary of the Treasury and is like whoa whoa whoa whoa. This is crazy. So he starts bailing out individual companies, covering their bad debt. He has to get the banks back on their feet by lending them some cash to cover the bad debts so that they have some money to work with. Because the money that banks earn from mortgages and selling mortgages is the money they use to lend us other loans like credit cards and auto loans. If the banks owe more than they make, there's no way they can give us any of the loans we rely on on a daily basis.
6. As Paulson saw the possibility of this happening to many many banks, he decided to step in and just try to fix it all at once instead of as each individual bank was on the brink of disaster. So he proposes this plan to spend $700 billion buying the bad debt from any bank that needs to get their books in the black. He says that if the bill doesn't get passed soon that the whole thing will fall apart. What does that look like? So if the banks can't give you a credit card loan or a car loan, then small business who rely on these loans on a daily basis for their inventory and such cannot operate. They lose and we lose because we can't get the goods and services we need to to survive. And those of us employed by small business may find ourselves out of jobs. If it gets really bad, then even existing credit--your credit cards and loans--will be cut off, leaving people without ways to pay for basics like food and gas. This is what Paulson is trying to avoid.
Oh and the stock market is screwed too. No investor confidence and a shortage of money means your 401k and your stocks and your retirement are quickly diminishing.
7. So Paulson presents this deal to Congress, who needs to pass the bill in order to make it happen. Congress sees a few things wrong with it, besides the fact that it's $700 billion courtesy of the taxpayers. Namely, a) they want there to be provisions providing for more oversight and accountability for the Treasury as to how they are spending the $700 billion b) they want to give the government (and taxpayers) some ownership over these companies who they are bailing out--no freebies here and c) they want to cap executive compensation packages at $400,000 so the filty rich fat cats who head up all of these belly up companies don't get rewarded for their reckless behavior.
8. Okay so Democrats in Congress are like, okay, look. We don't know why we should trust you, Hank. This administration has kind of screwed the pooch in the past and $700 billion is a lot to be responsible for. But we're willing to give you the benefit of the doubt, save for some negotiation on certain details, that we need to do something quickly and this seems to be the only plausible option on the table. So they start working it out with Republicans on the deal because, even though the Dems could pass the measure on their own, they want GOP support so that a) if it doesn't work out, it's not just the Dems fault and b) so that a very national problem can get solved in a bipartisan manner. On Wednesday night reports were coming from negotiations that they were close to agreement. Huzzah!
9. And then John "I Don't Know Shit About the Economy" McCain is like, wait! I will come to Washington and selflessly cancel all of the events I was really looking forward to (Dave Letterman, the debate, the election) so that I can insert myself in a nonpolitical way into a deal I have nothing to do with except that I might have to take over this thing in a few months. So George Bush is like, okay fine, Barack, you come over here too and we'll talk this out with John and other congressional leaders. (Meanwhile, McCain's "suspended" campaign continues to take donations, run attack ads, and send its surrogates to all the talk shows.) John McCain says nothing at this meeting and by powers of the force, single-handedly stalls the whole deal. All of the sudden, even though nothing of this plan had been noted at the meetings that had occured over the last several days, congressional Republicans decided they had a better idea than the plan being worked out. They're not going to tell much of the details except that it has to do with providing guaranteed insurance to banks in trouble instead of just handing them the money. Makes sense, but would have been useful 3 days ago. Meanwhile, Washington Mutual collapses, becoming the largest bank failure in US history. McCain hasn't really said anything, except that he will support whichever plan is going to pass. He came to speed the process, reach a concensus, but will not aid in the negotiations or give an opinion, just support whichever team wins.
And now we wait to see what comes out today, if we're all going to hell in a fireball before or after the NFL games on Sunday, and if the presidential candidates in our Bestest Democracy In the World for the People will actually come and talk to we the people tonight or not.
The end.
In order to try to make some sense of what's happened, I'm going to give you a basic outline of what's been going on, as I understand it. Let me stress as I understand it. If this is totally wrong, please, someone speak up and edumacate us all.
1. Okay so because our government has been run by firm believers of absolute free markets, banks have been generally deregulated over the last decade. The government says, go ahead guys, do your thing, we trust you and we don't want to interfere. So banks and investment firms and the like were like, cool, thanks, we're going to do kind of what we want now.
2. When someone buys a home and uses a mortgage to finance the home, a commercial bank gives the mortgage to the homebuyer at a certain interest rate through which the bank makes money. The bank then turns around and sells those mortgages (the principle amount plus the interest they earn) to a bigger bank, who sells it to someone else, and so on and so forth up the line. In order to sell more of these mortgages, banks were offering mortgages with low interest rates, attracting more people to get mortgages who normally wouldn't really afford them, except that these low interest rates had the possibility of increasing. People took them anyway, even with the risk, because they wanted to buy a home. These are the subprime mortgages. Okay, so we have banks selling mortgages to people who can't afford them and people who can't afford mortgages taking them from the banks. And the government isn't watching what's going on.
4. So then the interest rates on these subprime mortgages go up and suddenly these people who could afford their mortgages at the primary rate can no longer afford them. So they start missing mortgage payments and defaulting on their loans. This is where people start losing their homes. Furthermore, if the people can't pay their mortgage, the originating bank can't make good on the debt they sold to the banks up the line. So there's a shortage of cash flow reaching all the way through the system. Banks suddenly have way more debt than they have capital (which is bad) and everything starts collapsing very quickly as they realize what the deal is.
It's like a series of bouncing checks. I write a check to my landlord for my rent. He deposits it into his account and then pays the contractor working on his kitchen with the same money I just paid him. The contractor pays the lumber yard with the money my landlord paid him, and so on and so forth. But it turns out my check is no good and bounces. So the money my landlord thought he had and used to pay his contractor is no longer there and his check bounces. So then the contractor's does too.
5. Okay so then Hank Paulson steps in as Secretary of the Treasury and is like whoa whoa whoa whoa. This is crazy. So he starts bailing out individual companies, covering their bad debt. He has to get the banks back on their feet by lending them some cash to cover the bad debts so that they have some money to work with. Because the money that banks earn from mortgages and selling mortgages is the money they use to lend us other loans like credit cards and auto loans. If the banks owe more than they make, there's no way they can give us any of the loans we rely on on a daily basis.
6. As Paulson saw the possibility of this happening to many many banks, he decided to step in and just try to fix it all at once instead of as each individual bank was on the brink of disaster. So he proposes this plan to spend $700 billion buying the bad debt from any bank that needs to get their books in the black. He says that if the bill doesn't get passed soon that the whole thing will fall apart. What does that look like? So if the banks can't give you a credit card loan or a car loan, then small business who rely on these loans on a daily basis for their inventory and such cannot operate. They lose and we lose because we can't get the goods and services we need to to survive. And those of us employed by small business may find ourselves out of jobs. If it gets really bad, then even existing credit--your credit cards and loans--will be cut off, leaving people without ways to pay for basics like food and gas. This is what Paulson is trying to avoid.
Oh and the stock market is screwed too. No investor confidence and a shortage of money means your 401k and your stocks and your retirement are quickly diminishing.
7. So Paulson presents this deal to Congress, who needs to pass the bill in order to make it happen. Congress sees a few things wrong with it, besides the fact that it's $700 billion courtesy of the taxpayers. Namely, a) they want there to be provisions providing for more oversight and accountability for the Treasury as to how they are spending the $700 billion b) they want to give the government (and taxpayers) some ownership over these companies who they are bailing out--no freebies here and c) they want to cap executive compensation packages at $400,000 so the filty rich fat cats who head up all of these belly up companies don't get rewarded for their reckless behavior.
8. Okay so Democrats in Congress are like, okay, look. We don't know why we should trust you, Hank. This administration has kind of screwed the pooch in the past and $700 billion is a lot to be responsible for. But we're willing to give you the benefit of the doubt, save for some negotiation on certain details, that we need to do something quickly and this seems to be the only plausible option on the table. So they start working it out with Republicans on the deal because, even though the Dems could pass the measure on their own, they want GOP support so that a) if it doesn't work out, it's not just the Dems fault and b) so that a very national problem can get solved in a bipartisan manner. On Wednesday night reports were coming from negotiations that they were close to agreement. Huzzah!
9. And then John "I Don't Know Shit About the Economy" McCain is like, wait! I will come to Washington and selflessly cancel all of the events I was really looking forward to (Dave Letterman, the debate, the election) so that I can insert myself in a nonpolitical way into a deal I have nothing to do with except that I might have to take over this thing in a few months. So George Bush is like, okay fine, Barack, you come over here too and we'll talk this out with John and other congressional leaders. (Meanwhile, McCain's "suspended" campaign continues to take donations, run attack ads, and send its surrogates to all the talk shows.) John McCain says nothing at this meeting and by powers of the force, single-handedly stalls the whole deal. All of the sudden, even though nothing of this plan had been noted at the meetings that had occured over the last several days, congressional Republicans decided they had a better idea than the plan being worked out. They're not going to tell much of the details except that it has to do with providing guaranteed insurance to banks in trouble instead of just handing them the money. Makes sense, but would have been useful 3 days ago. Meanwhile, Washington Mutual collapses, becoming the largest bank failure in US history. McCain hasn't really said anything, except that he will support whichever plan is going to pass. He came to speed the process, reach a concensus, but will not aid in the negotiations or give an opinion, just support whichever team wins.
And now we wait to see what comes out today, if we're all going to hell in a fireball before or after the NFL games on Sunday, and if the presidential candidates in our Bestest Democracy In the World for the People will actually come and talk to we the people tonight or not.
The end.
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