Finanical Crisis explained in detail
Categories: Finance
This American Life did an excellent episode this weekend that lays out some of the intricacies of the current crisis, which dominoes are falling and what pushed them over. You can download the whole episode as a podcast from iTunes or listen to it online at the This American Life Archive. It’s an hour long and goes into details about the commercial paper market, breaking the buck and credit default swaps and other financial concepts in the forefront these days.
What’s remarkable (to me at least) is just how much bad debt and ridiculous credit were and still are flying around out there in our financial system. Credit card companies will give us tons of credit on little shiny pieces of plastic, assuming our credit is decent. With a little creativity, a person could get a credit line well over their ability to cover simply by spreading themselves across several credit card companies. The greater financial system has a similar exuberance for extending credit it would seem…
Companies were making money by “insuring” bonds without having the capital to pay out in the event of a failure. An institution can hide so much debt that in our (legitimately) paranoid times, no one wants to lend to anyone else leading to the commercial paper market almost freezing up for lack of lenders and available loans. The commercial paper market directly effects businesses’ ability to cover expenses (such as payroll) while waiting to get paid by their customers, expand, and compensate for losses or slow periods. I’m not sure if the above episode of TAL will reassure you, scare you or just make you angrier… but it’s great information to have given that, despite the bailout being signed into law, the stock market is still tanking and credit is still more than a little tight. It’s going to take a while to get out of this crisis.
NPR has also started the Planet Money podcast to try to keep up listeners up to date on the ever-changing news of what’s going on with the markets. I just started listening to it but it’s a little like listening in on a conversation among friends who have more time to keep up with these things – informative, informal and terribly useful.