Basic primer on the economy - Democratic Underground

nadinbrzezinski

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Mon Sep-22-08 10:32 PM
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Basic primer on the economy

Edited on Mon Sep-22-08 11:09 PM by nadinbrzezinski

Why this matters to you?

Many across the blogosphere have written... let it crash... let it go... and in this there is a sense that people don't understand how this will affect them. So in an effort to explain some of this first lets start with Liquidity Crisis. We have heard this phrase bandied out quite a bit... so what does it mean?

Liquidity Crisis: This means that there is little to no credit. How does that affect you? Well, I am going to assume that like most Americans you have an ATM card. I am also going to assume that like most Americans you sometimes don't take money out of your bank at least some of the time. The reason why you can take that money out of your corner bank, even if this is not YOUR bank is that your corner bank trusts your bank to pay up what you took out of your account tonight. Now if your corner bank stops trusting your bank to pay up... they will not let you take that money out even if you have a million bucks in your account, to back up the sixty dollars you want to take out.

There is more... your employer... even if they are very small has a line of credit with their bank. This credit helps them to pay for things like payroll every fifteen days, regardless of whether they have the cash or not. In fact, many businesses have a yearly budget that includes a financial plan presented to the local bank where they tell the local bank what they expect to make, and then the bank decides whether to give them that line of credit. If your local bank cannot get money to lend, due to that liquidity crisis, they will stop lending your employer, who will not have cash on hand to meet obligations such as paying you a salary. They have no money, no fault of their own by the way, they will have to start freezing salaries, or plain out giving out pink slips. And once the pink slips go out, those who have lost their job cannot make payments, and cannot do other important thing that rely on credit. In effect the problem becomes worst.

Leverage

Another one of those terms bandied out like there was no tomorrow. These are essentially risky loans... where you are getting lets say 40 bucks for each physical buck in a loan. There are limits, legally, on how much of this a bank can do. And investment banks had almost no limits, so they got quite a bit of phantom money in their balance sheets. These kinds of leveraged loans were not allowed until legislation put in place to stop the practice after 1929 was removed... (Gramm-Beechley)

Derivatives

Ah yes one of those lovely things that actually, imho, has led to this mess. Basically you take ten loans (the packages are larger than that... but still serves) You break them as the lender into smaller parts, and sell them to a third party. You essentially make them into securities. The problem is that you can mix good loans, you know Mr. Jones, who pays his bill every month like clockwork, with Mr. Smith's who hasn't made any payments in a while... and that is what the bad paper is. This bad paper is part of the problem. Oh and derivatives are failrly modern... as in the last iirc 30 years or so.

So what can I do?

Plenty, call Congress early and often and make your displeasure known, and of the bill that Paulson proposed section eight (no accountability) and section two (no bid contracts) is what is so scary. They don't need to fully reinvent the wheel, as much of the legislation is still in the boosk from the Depression era... but they need to something (though this is not necessarily the way to do it) to make sure that the credit system doesn't freeze up. Oh and by the way, it did freeze up twice last week. That meant that banks were not trusting each other... why my hair is on fire... and why I get it why they need to try to stabilize this market, but they should not RUSH into it.

I hope this helps to understand a little of the alphabet soup and why this really affects each of us.

As to what to do... well we do need things like the WPA of the Depression era... as even if we stabilize this market tomorrow, there are still going to be business failures. A WPA program will still increase the deficit, (and the right will call it AGAIN, socialism) but it will keep people employed, paying taxes and buying into the economy We also need to re-regulate the markets, and a good place to start is with Glass Steegal, which after the fire is put out, probably needs to be modernized.

But chiefly you need to contact your congress critters... like now... yes, use the E-MAIL system.. and keep doing this throughout. Remember, if you don't make any noise they are going to assume that they are doing what they need to do no consequences.

Nadin

Ed for clarity