The financial crisis in layman’s terms

October 6 filed in economy

The sub-prime mortgage crisis which has frozen credit markets has evolved into a full blown, once in a hundred years, worldwide financial disaster.

Dow plungesComplicated unregulated “instruments” (mathematical algorithms developed by scientists to try and make any bad loan still make money, which obviously didn’t work) and  “credit default swaps,” which are at the heart of this crisis, could involve nearly $60 trillion.  That’s not a typo.

The credit swaps are insurance-based in everything but name, because if they were called insurance, they would have to be regulated.  So, the mortgage securities were terrible investments sold to people who couldn’t afford them, and the swaps were “insurance” sold and traded to cover them.  What happens when people can’t pay their inflated mortgages that have lost their value?  The banks holding the notes and the places that sell the insurance can’t keep up, thus everything implodes.

Again, the credit swap market is potentially $50-60 trillion deep.  That’s 4 times the size of the U.S. debt.

Will the $700 billion approved by Congress and President Bush last week solve the problem?  From a psychological standpoint, maybe.  For a little while, at least.  But to me (and many others) it sounds like a David and Goliath problem.   A slingshot versus a giant.  And, we are hardly at the beginning of this mess.

Does anyone want to bail out this system?  Of course not, but right now no one (yet) seems to fully comprehend how dangerous a situation we are all in.  Even the people in charge don’t seem to know the specific magnitude.  Let’s just say that it’s bad enough to make a deeply conservative administration want to try and nationalize components of our banking system.  Think about that for a minute.

And if you’re curious how the political candidates’ polls will look later this week, know that 3rd-quarter 401k statements are in the mail and on their way to mailboxes around the U.S.  I don’t know if I even want to open mine to be honest.

These are serious problems that require serious people to try and pick up the pieces.  The effects of this crisis will likely be felt for 5-10 years at a minimum.  This historic time that we’re in today requires  far more important discourse than irrelevant and polarizing character attacks.  We need the smartest and most inspirational adults on the planet to be in charge, and we need people to come together and recognize when certain systems (and/or ideologies) of the past have failed us all.

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