Tuesday, November 11, 2008

The Clearest Description of the Financial Crisis

I found this to be the best description of our current financial situation and how we got here for tech geeks like me who understand a lot about computer software and hardware but not much about economics. The lingo is down-to-earth enough for a layman to understand and they provide great examples that many people will be able to relate to.

My summary goes something like this:
  • Consumers borrowed money to finance their homes or took out second mortgages to fund other purchases (sub-prime loans)
  • Investors placed bets on whether or not those consumers would default on their loans (Credit Default Swaps)
  • They paid for those bets using borrowed money (leverage)
  • Bets that were placed when the odds were better grew in value as the odds worsened and it became more likely to pay out
  • The investors who originally placed those bets then sold them to others hoping to benefit from a more certain pay out
  • All of this happened in a dark alley of private, unregulated transactions
  • Now, no one knows what those bets are worth and who is holding them
  • So no one is willing to lend to anyone else
What's really frightening is that investors place bets like this not only on home loans but on all kinds of loans: even on government bonds. I heard that some were even betting that certain European nations would default on the debt that they took on to bail out their economies! Wow!

Listen to the full show: Another Frightening Show About The Economy.
This American Life
Chicago Public Radio