The Week America's Economy Almost Died by Adam Davidson and Alex Blumberg
This is the story I referenced tonight in class. It originally aired on All Things Considered late last week. This is some of the most thorough, straight-forward, not-just-for-economists reporting about the financial crisis that I have come across. Alex Blumberg is a producer for the This American Life, which is easily the best show on radio, IMHO.
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2 comments:
Stacey,
Thanks for the link. I thought it was a great breakdown of the crisis on a macro level, and of course how that trickles (pours?) down on the rest of us.
I found a similar breakdown on a more micro level- in that it comes from a post on a local list-serv, e-democracy in the Mpls Issues Forum, by Carol Becker, ex-President of Mpls. Board of Estimate & Taxation, (elected). She is one of those resources I have come to trust over the years because of her consistently accurate reporting of complex issues. She truly loves this stuff, by her own admission. Her comments also echo parts of what Mike Meyers said in class.
I'm posting her take on the situation and apologize in advance if anyone finds it too long for this space.
From: Carol Becker
Date: 00:03 UTC Short link
Reggie Birts asked
> Can any one address the possible situation if the $700 Billion dollar bail out is not offered ...Is there any subtance to the theory we would all be worst off if it's not done?.........
CB: Well it is like this. You go to the bank. You put a dollar into savings.
Because of fractional banking, they are able to lend out ten dollars as long as they have your dollar in the bank. If someone doesn't pay back the ten dollars, the bank has to come up with ten dollars. Now that ten dollars was supporting $100 of loans. So because of your one dollar, $100 was lost to
the economy.
For lots of reasons, housing prices went up farther than they should have.
Now there is a bubble and housing prices are falling. All these banks that loaned out those dollars now don't know if they will get them back. The more time goes on, the worse things get because it is a death spiral. Peoplee don't buy because they are waiting for the bottom of the market. Banks get
houses that people don't want so they sell them at a discount to get rid of them. Prices go down further so more people wait and so banks sell at lower prices, driving prices down further.
So all those banks that loaned that money out assuming that they would get back what they loaned out, now may not. In fact, they may get much less than they paid out because for a homeowner, it may make more sense to just give
the keys back to the bank rather than continue to pay on a house that now is worth a lot less than you paid for it. Sure it hurts your credit rating but as long as you don't try to buy right away, who cares?
So now, no one knows how sound anyone else is. On top of it, there are fears that we are going to fall into a bad recession. We have been dancing around one for some time now but now it seems that it is here. So folks are even
more reticent to loan money. So in some sectors, they simply don't loan out money. For example, the City of Minneapolis issues variable rate bonds. The bond rate went from 1.77% to over 7% in one week because they had a hard time
finding anyone to buy our loans. And we are rated the most credit worthy of any type of organization in the economy. If no one buys our loans, we do have an organization that pledged to buy our loans if no one else will but if enough organizations fall into that problem, that insurance agency will run out of money and go out of business and we will be completely at the risk of the market.
So no one wants to lend any money to anyone else because they don't know if they will be solvent or not next week. It becomes more complex because all this stuff is incredibly intertwined. The folks that do insurance for municipal bonds also do insurance for other kinds of financial instruments.
So if they are involved in insuring housing bonds, they may have enough money for their municipal bonds but run out of money because of housing bonds. So the municipal bond market could be hurt because of the housing market.
So what could happen? The fear is that because no one knows how to value all this stuff that banks will stop lending money or tighten credit so tightly that it is about the same effect. Then we could go into a huge recession, as
more and more businesses go out of busines, which means fewer people working and having money to buy things which means more businesses go out of business, circle around and around. That is what they are afraid of.
We are now at the point where banks have stopped lending money. If we don't find some solution, we could be at that point where more businesses go out of business because of a lack of capital. And at that point, it won't be some
tony Wall Street businesses but it will be every business. Which way things go is not known. I know that just last week I was struck by the number of vacant storefronts on Nicollet and I wondered if we were already there in terms of a depression, with the latest borrowing issues just a part of a
bigger picture.
I surely don't know all the details of this but it seems to me that something needs to be done to stablize the housing market and an intervention at the individual level is as warrented as intervention at the bank level. I would like to see a program where people can go into bankruptcy court to try to keep their house and have a judge be able to forgive a portion of the loan.
The bank could then be paid from a government pool or could even cut a deal to participate in any recovery in the housing market. I also think that Congress should void the variable rate loans and require conversion to conventional loans within a year. Something like these changes would provide
an incentive for homeowners to stay in their homes rather than abandon them.
Obviously regulation of many aspects of these markets is needed but I would hope that would focus first on the homeowner, something that wasn't in the first proposals for the $700B.
Carol Becker
Longfellow
Wow! Thanks Stacey and John. I feel like I have a better understanding of all this now.
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