Been way too long since I’ve posted to the ol’ blog. I bet after this one you might wish I’d take longer, though.
I love the smell of a crisis in the morning
I’ve been following the financial crisis a little bit. Not that I’m all into the world of business and finance or anything, but it’s hard not to follow it at least a little bit these days. Pretty screwed up. It’s kind of hard to know what’s really going on, especially as I’m not all that financially literate to begin with, but over the weekend I did find, totally by accident, an article that summed up and explained the situation quite nicely for a money moron like me.
So here it is, if you’re interested: Markets to Congress: Bailout or Blowout.
If you could use some straightforward, unbiased information on what’s going on and what the problem with the finance market is, this article will give it to you.
Having been published hard on the heels of Congress’ rejection of the bailout plan, it’s already a little out of date, considering the stock market rebounded by nearly 500 points today. But still, niggling little details like that aside, the main information in it is solid. (Or seems so to me…but then I could be, and probably am a financial idiot, so consider the source before you go off and just believe me.)
But because I can’t resist recapitulating everything, I’m going to go over it myself anyway.
Stupidity in a nutshell
So here’s what seems to me to have happened. Because credit makes the financial world go round, and everybody wants to make more money, and investment banks wanted more capital to leverage, a thing called a morgage-backed security was created. This was treated just like an actual, tangible capital asset for the purposes of leveraging loans.
And when they say leverage, they mean it; investment banks can get a 30 to 1 loan against their collateral. Here’s a for-instance from the article linked above: if you are a person who has, say, a $500,000 house, you could leverage it by 20% to get a home equity loan of $100,000. Also, if you have a $500k house, and can leverage your way into $100k, you could send a little love my way. If you are an investment bank with $500k of capital or collateral, then that 30 to 1 thing they got going means you could leverage your capital into $15 million.
Now let’s return to the mortgage-backed securities. From what I understand, these were used as units of capital — things with a stable, constant value. So you could use them to leverage (borrow) insane amounts of money. Burn it, swim in it, shit bricks of it. Life is good. As long as property values stay constant or increase, and as long as the vast majority of people pay back their mortgages and don’t default.
Here’s where the real stupidity comes in. These finance-corporations-that-eat-sleep-breathe-and-shit-bricks-of-money want even MORE money to throw around.
So what do they do?
They systematically destabilize the system that underpins their mortgage-backed securities by creating a boom-and-bust cycle in real estate. Their shady lending to starry-eyed consumers makes the housing market go up, and nobody stops to think, as the whole thing hurtles onward, ever expanding, that there might come a point when property prices are hyperinflated, making it too difficult for most people to buy in, and when homeowners inevitably will start failing to pay on the Shylock-style morgage loans they’ve taken on.
Wherein Ing waxes grotesquely profane
Skip the next paragraph. No, really, you should. No good can come of reading it. None. But the ones after that are probably okay.
Don’t get me wrong, I’m not a Marxist or anything, but I find it highly ironic that the capital market system has managed, left to its own devices in a few short years of banking deregulation, to basically destroy itself. I know there’s a human cost behind this whole thing, and I don’t want to revel in the misfortune of other people (especially when that misfortune could extend to me at some point as the economy goes sour), but it seems to me there’s a poetic justice in the failure of these banks. They fucked up, and fucked the whole national economy while they were at it. Not just the ordinary “we’re fucked” cliche, either. We’re talking double dryfucked in the ass by a goddamn horse. This is a monumental mess they’ve made. They shit in their own beds, and now they’re scared of the stink, and want Congress to do their laundry.
They deserve to go under.
The individuals who have little choice but to depend on some of these leviathans to store their nest eggs of savings and retirement plans and home equity don’t deserve to go under, though. And they’ve been slowly slippping beneath the waves for quite a while already. But even so, this didn’t become a looming apocalypse until the finance-corporations-that-eat-sleep-breathe-and-shit-bricks-of-money finally started reaping what they’ve sown.
Capitalism at its finest.
Speaking of which, I think it’s about time to deregulate health care and let the free market fix that, too.
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Filed under: Maunderings
