NYT on the Wall Street Meltdown, what happened, and why it’ll affect all of us.

If, like me, your knowledge of economics is only slightly better than John McCains then you may be wondering just what the hell happened on Wall Street recently that has everyone freaking out. The New York Times Freakonomics Blog have kindly put together a F.A.Q. to help us out. The whole thing is worth a read, but here’s the gist of why it matters:

I do not work at Lehman or A.I.G. and do not own much stock; why should I care?

The concern for the man on Main Street is not the bankruptcy of Lehman, per se. Rather, it is the collective inability of major financial institutions to find funding.

As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.

This is going to slow growth. We have not seen this much stress in the financial system since the Great Depression, so we do not have any recent history to rely upon in quantifying the magnitude of the slowdown. A recent educated guess by Jan Hatzius of Goldman Sachs suggests that G.D.P. growth will be just about 2 percentage points lower in 2008 and 2009. But as he explains, extrapolations of this sort are highly uncertain.

In short the American financial market is in deep shit at the moment and it’s going to affect all of us in one way or another.

14 thoughts on “NYT on the Wall Street Meltdown, what happened, and why it’ll affect all of us.

  1. Does the president have the power to fix it? In all of my knowledge of politics I never understood what can fix or effect the economy. I figure that FDR pulled the US out of the great depression, lets try a derivation of what he did, right?

  2. AngryArcheologist, what FDR did to pull the US out of the Depression was put a lot of money into government projects that hired people: for instance, the sidewalk in front of my childhood house was built by the WPA, the Works Progress Administration, which hired millions of unemployed Americans.  The trouble is, that this is “socialism”, which might as well be “communism”, and is thus un-American.

  3. The president can “affect” it.  He can’t “fix” it.

    This decision marked an acknowledgment by the government that the mortgage market and the institutions to make it operate in the U.S. are broken.

    I find that funny because it was because of certain regulations that were removed by the government that the whole financial crisis actually happened, regulations that were, in part enacted because of what happened to cause the Great Depression.  The government broke what they had already fixed.  That’s ironic, that is….

    The Republicans would like you to believe that the economy and the stock market share the risks, reap the same benefits and take their lumps together.  But the truth is, it’s the economy that is in the toilet, not the market.  The stock market is doing just fine.  I make my living off the market, and I made $2,000 on Monday when the market made it’s biggest drop in 7 years.

    The economy’s messed up because Debt is King.  The Mortgage crisis that got the ball rolling occurred because people were told “Hey, you can afford that house, and we won’t make you pay anything for three years.  Then you’ll have to give us you right arm, left leg and a few teeth and… oh how many kids you got?  You don’t need ALL of them, do you?”  Three years is all the time you need to become rich, right?  I know.  I was offered a mortgage like that.  I pay off my credit cards every month, I have a good credit rating.  I don’t need that.

    I don’t quite understand the mentality that says having a house is better than being able to pay for it, but a lot of other people went for it.  These people agreed because.. Hey.. it’s only a mortgage.. I can always get a second or third mortgage.  People do that all the time.  I personally know people who use a refinancing to pay for their vacation.  I tell them their idiots.  They don’t listen.  At least one of them lives in an apartment now after losing his house.

    See, there was this huge game of hot-potato, where the mortgage companies sold bad mortgages to each other as fast as they got them because they KNEW what was going to happen and they didn’t want to be holding onto them when the time ran out.  Mortgage companies that were new, or that offered too many of those bad mortgages were stuck when the time came and began to fail.  It spread just like a virus.  The people who were faced with foreclosures ran to their banks to take out their life savings to pay their debt.  Banks began to fail.

    The FDIC stepped in and started paying off the banks.  They soon ran out of money and the government started paying them with your taxes, so now, if you went to a bank that was in trouble to take your money out, they would say “We don’t have all of it, but here’s some of your money to cover the difference.”

    Then when the people who were about to be foreclosed on ran to get a second mortgage, the mortgage companies, learning somewhat from their mistake knew these people were bad credit risks and refused them.  A lot of people filed for bankruptcy and defaulted.

    Now I just heard the other day that banks who are in dire straights and need to cover mortgages can use the money in your savings account, CD or money market fund.  The FDIC has promised to cover their risk….. with your tax money… so now, the banks can take YOUR money and use it to cover a mortgage and then get more of YOUR money in taxes to cover the shortfall in your bank account.

    So we’re talking about half a trillion in debt owed by various companies to various other companies or to the public, and a government with the largest deficit in history, and two wars still on.  Where is the government going to get the money to “FIX” it?

    McCain has a solution.  All we need to do is cut taxes on people who make over $250K a year.  That will fix everything.  You can trust him.  He’s experienced.

  4. Read this book: Secrets of the Temple: How the Federal Reserve Runs the Country by William Greider. It explains the smoke and mirrors that the Fed uses and shows how our country, or any country, can run up more debt than the entire wealth of that country. It’s a house of cards. That’s why the national government had to step in to bolster confidence in the system. The key to making this system work is CONFIDENCE. The emperor has no money. (Note: The Constitution states that Congress shall have the power to “coin money and regulate the value thereof.” The only real money, by definition, is the gold and silver reserves in Fort Knox. Go and count that!)

  5. Works Progress Administration, which hired millions of unemployed Americans.  The trouble is, that this is “socialism”, which might as well be “communism”, and is thus un-American.

    No that’s not the trouble.  Socialism and Communism are just words.  The bottom line is: It worked.

    The problem came afterwards when those government “contracts” were over.  I am NOT a fan of state-sponsored welfare, but it was a crisis, and putting people to work in a crisis is great, and if the government can do it directly, then more power to them.  What you have to do after that is have a plan for returning those people to the public workforce.  You work to attract jobs, improve growth, yada yada yada…. Otherwise you are either needlessly adding to the size of government or you’re just delaying the unemployment problem you’re trying to solve because eventually, you have to put those people out of work when you run out of things for them to do.

    As far as today’s problems go, I don’t have a problem with a government bailout in principle, but what has to happen afterwards is a careful examination of what went wrong and some safeties installed to make sure it doesn’t happen again.  Instead, we got the same people who started the fire showing up in fire hats to help, scratching their heads because they can’t seem to remember how the fire started.  They mumble something about taking a look at the sprinkler system, hand you a fire extinguisher, give you a bill for that AND the water they used and then leave, never to be seen again.  And the sick thing is that we’re thanking them for it.  Whoever was in office at the time will get a lot of political mileage out of “solving a crisis” and will have the votes to prove it, but really they didn’t do anything that required more brain power than pushing a button.

    Morons.

  6. I figure that FDR pulled the US out of the great depression, lets try a derivation of what he did, right?

    Going to war with Japan and Germany may be frowned up nowadays.

  7. Going to war with Japan and Germany may be frowned up nowadays.

    Besides, Bush already tried that, but the idiot got things in the wrong order.  We’re supposed to have an economic crisis THEN a war that pulls us out of it, not a war and then an economic crisis that prevents us from fighting it.

  8. What’s going to make this even worse is the debt Americans have. For years we have been spending money we don’t actually have, much like the government. So now with it making harder for credit institutions to give out credit, it’s going to make it harder for those that have already debt to get it paid off at higher rates and such.

    It’s a big financial clusterfuck.

  9. Webs: You know where that is coming from.

    Yes we’re a debt society, but it’s not hard to get loan and it never will be.  It’s just hard to get good loan, with sensible rates.  CC companies make their living off of interest rates and fees, and the fees aren’t much.  If every customer of any credit card company paid their balance every month, the company would go out of business.  They know what they’re doing most of the time.  They hook you, get you to carry as much debt as you can so you can’t quite get out, but you don’t go bankrupt.  Then they make the most money they can.  I don’t know how many times my CC company has called me to ask if I want my limit raised, and I always tell them ‘no’.  I even asked once if there was a way I could get them to stop asking.  There isn’t.  If people couldn’t get loans, the whole house of cards would come tumbling down, so no… it unless some fundamental changes are made, debt will always be easy to acquire and hard to get out of.

      The first car I ever bought I was able to finance with bad credit.  Well really.. no credit.  When the dealer told me I would probably be declined, I told him to go ahead and if that happened, I’d pay cash.  I didn’t actually have the cash, but hey… Ten minutes later, whaddaya know.. my application was approved.  Coincidence??  Maybe…  Either he knew I would be approved and wanted to sell me a different car which would have been odd because I think I bought the cheapest car there, or he really wanted the kickback from a financing deal.  Or he was an… ahem… honest… used car salesman… I won’t even begin to figure the odds on that.

    And I’ve refinanced three times, always to get a smaller mortgage so the interest would be lower or when the rates changed (I’m a big fan of fixed rate loans).  Every single time, I was being pushed oddball (or at least I thought so) deals where I would have a big bundle of cash to just go wild with.  Never mind that I would have to pay more interest and would push up my principle instead of pay it down.  Never mind that I TOLD the guy going into it what my goals were.  Here he is telling me I really should do exactly opposite what I knew was the sensible thing to do.

    I knew enough to bwork the system and get it to work for me, but what about all those people who don’t?

  10. Swordsbane, you’re right, what I meant was for lower and lower-middle class it will be harder to get a loan if things keep going bad. The problem is we built a financial system around profiting off of people’s debt.

    A while back I heard someone on NPR make the case that our credit score system is basically an efficient way of keeping the poor, well the poor. It wasn’t designed with that purpose but it is taking that route. It becomes increasingly hard for those with no credit to get a loan of any kind, including credit cards.

  11. Webs, What makes you think it was NOT designed with that purpose? Follow the buck! The writers and signers of the Constitution were all white, wealthy land owners. You think they were all very altruistic? Certainly some were, but all?  snake  snake

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