Jason, concentrate your fire. You can argue for delay, for a different deal, for punishing the worst, etc. But the stuff about today being like the Depression but not quite as widespread... and how bad can the loss of 3 or 4 companies really be.. this is just impossible to back, ok? Unemployment today has increased by what, 2-4 million? To reach Great Depression rates we'd have to throw ANOTHER 30-40 million out of work. GDP is down what, maybe 2-4%? Well, take off another 25%. Then take the wages of everyone LEFT working and cut them by 40%. Set up camps in the edges of cities holding millions, and put tens of millions on the roads. Take the Dow down not just from 14,000 to 11,000, but cut it to 2,000. You're killing your argument, and burying your questions, by talking along these lines.

On finance, all I know is that the financial sector is NOT like any other goods-producing sector. If we lost GM & Ford & Chrysler, that'd be a nightmare - especially in terms of regionalized unemployment. But when banks go, they're like the system that pumps invisible blood through EVERY company. Understand me here. I HATE finance, I'm an economist. "We make sense - they make shit up." And my mind balks every time it has to approach it. But it is just NOT possible to compare finance, one-top-one, with autos or steel or whatever.

Part of the reason it is so frightening today is that these guys are leveraged out at 22:1 or 30:1. Now, if a $100 Billion company goes under and is leveraged out like that, that's trillions of dollars worth of activity that gets tied up. In many cases, halted for months. Maybe years. And in so doing, other actors often then fear to move near whole sectors and products. And when they DO manage to sell this shit off, it drives down prices and values for everyone. It spirals outward, and a whirlpool forms.

Another reason I'm scared shitless is the US is in such massive international debt - a subject rarely heard within the country - and has trillions of $$$ held by foreigners. It may sound like mumbo-jumbo to you and me, but if T-Bills are offering a 0% rate of interest, why other nations would want to invest in them? And if they don't, the US $ crashes in value. And that can trigger some ugly ugly things. Hyperinflation. Or Government's responding by pushing interest rates up to 20% and beyond.

Last thing. An awful lot of us want to bash the rich. Many of them have been without morality, eaten up by greed, and have destroyed lives as they went. But when "the banks" go belly up, it is not -in terms of 99% of its consequences - going to hit THEM. Look. They've made their money, it's wealth now, let's go tax it later. Let's even handcuff them from taking more if we like, I don't care. But you HAVE to see that when they go under, not only do tens of thousands of their employees go under, but firms all across the US may then stop hiring and go under. Same with hedge funds, love 'em or hate 'em. Some of the biggest are investing for the universities, for pension funds - as well as for evil billionaire bastards. So your public policy issue is, "If we hate the bastards who ran these funds, do we screw them down into the dust, even if it means taking away any chances at bursaries for tens of thousands of students, and even if it crushes hundreds of thousands of pensioners?"

Other people will have to spell out the condition and implications of failure for these incredibly complex financial instruments... and I'm happy to discus, and learn, about what we can do next. But the comparisons to Great Depressions, the easy lumping of financial firms in with any other companies, the failure to recognize that the real-world hit will be borne by tens of millions, and the fact that this is not just about a hate-on for the big money boys - that stuff is extraneous, counterproductive and probably needs to go.

Yes, we are fucked because of esoteric bullshit that *you* don't understand.

By no one else, do you mean you and your circle of friends? Because plenty of people are talking about it.

What attributions do you want? How about this:

Equity markets are controlled at this point by fear, because nobody trusts anybody. If that 500 point jump on Friday made you feel better, how do you feel today?

http://finance.yahoo.com/q?s=%5EDJI

Pretty scary, huh? Maybe that's because 1 trillion dollars disappeared from the economy in less than a week last week, and if you haven't heard, there are no independent investment banks left on Wall Street.

http://www.ft.com/cms/s/0/97a410b6-884a-11dd-b114-0000779fd18c.html

So what? I hear you cry. Let all the greedy fatcats burn in their own greedy greed they deserve to go down in flames because they're greedy! Down with greed!

When the CEO of Bank of America was asked how many of the 8,100 commercial banks would make it through this crisis, he responded, "About half."

http://www.mcclatchydc.com/homepage/story/52822.html

Maybe he's full of chicken little bullshit too, just like me? He's the most powerful banker in the world but I bet he doesn't know shit. You're way smarter.

So, let's see, so far we have Leahman Brothers, AIG (I'll be generous and call it a bank, even though it's not), Merrill Lynch, and pretty soon we'll have Wachovia added on to the pile. I think the CEO of Bank of America knows what he's talking about. So, let's see, so far we have had 3, let's make that 4, bank failures out of a few thousand that may still be coming. And look what effect that has had.

Because we're not just talking about home prices going down, and foreclosures, which would be bad enough by themselves,(they're down 20 percent from peak so far and most think there's still a way to go before we see a bottom in this market, for reasons that would take a texbook to explain)

http://money.cnn.com/2008/08/26/real_estate/Case_Shiller_home_price_report/index.htm?postversion=2008082611

We're talking about the asset-backed securities you've all been hearing about that were derived from pools of these mortgages (actually they are looked at as pooled cash flows). Most are at least a little familiar with ABS and know a bit about these toxic derivatives even if they aren't quants who know the math (yes I am currently taking a doctorate level class in derivatives so shove that up your ass).

So yeah, these have blown up. And because they are highly leveraged, they have cost many times more than the original underlying asset. And because they are mixed in with other mortgages that are actually good, it looks like these sucker bets are messing up price signals in the whole market, as nobody knows what any of the investments are worth (for many complicated reasons). Basically, the rotten apples are spoiling the whole bunch.

So maybe we can ride that out. And a few investment banks burn. Boo hoo. So what?

Well, if that was all there was, that would be fine. But now we have some rapidly cascading effects...first of all, many of these investment banks who were selling these subprime investments to the commercial paper market were leveraged at a rate of up to 30:1, so in order to hedge that credit risk (coupled with a maturity risk because CP usually has a 6 month to one year maturity and mortgages have a 15-30 or more year maturity), banks took out among other things CDOs (Collaterized Debt Obligations). What these do is act as insurance on cash flows from mortgages. If some of the morgages underlying the investments go bad, the seller must pay part of the cash flows which are due to investors who hold commercial paper from those banks. Otherwise, the bank pays a premium for these CDO contracts.

AIG was one of the world's leading issuers of these CDO's, and the market was huge...

www.sifma.org/research/pdf/SIFMA_CDOIssuanceData2008.pdf

Trillions of dollars of VERY highly leveraged bets on these mortgages, basically insuring debt with debt. Finance geeks and clueless assholes who criticize me should read this article which gives some insight on how CDO markets work

www.banque-france.fr/gb/publications/telechar/rsf/2005/etud1_0605.pdf -

These loans weren't risky and would actually serve to smooth cash flows and efficiently distribute risk AS LONG AS information about the risk profile of these asset backed securities was correct. We all know how that turned out.

Once these banks started defaulting, a wave of claims was starting to swamp AIG. AIG had capital, but not enough to pay out on a systematic failure. So basically it was a modern version of an old fasioned bank run. And since nobody trusted AIG because it was so highly leveraged in these complex derivatives, nobody wanted to give it the capital. So the Fed stepped in and opened up new channels that made it possible for AIG to accept FED loans, which confirmed market fears, which just accelerated everything. Next thing you know they're taking 85 billion from the US Fed at 11 point something percent interest (it's LIBOR plus some ridiculously high premium). And those outstanding CDO contracts? Well, we don't know how those will get paid.

Because we don't know, Lehman and all these other banks that are trying to collect on these payments can't get money, and are already completely out of capital themselves, and can't borrow anything because everyone knows they're teetering on the brink of failure, which means they can't pay back investors holding even the safest grade of CP, which means nobody is buying on the CP market anymore. It's basically shut down.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a9cmb_Gl5Drs&refer=home

So what do you care about CP investors? Here's what you care...most corporations and medium sized businesses used to get funding from the CP market because it was cheap, low rate financing. Banks aren't lending to each other, the credit spreads are the highest they've been in decades, and nobody's willing to invest much in anything, as shown by the price of gold and especially by the interest rate of the 3 year T bill...

http://investmenttools.com/thefed/3_month_t_bill_rate.htm

What does this mean? This is generally considered the safest investment on the market, as the US government has a low chance of defaulting and 3 months is the shortest time period available. Notice how people are basically willing to give the government their money for free, or even less than free, because they don't trust the markets to preserve the value of their capital. Last week this rate reached the lowest point since the early 1940's and we know how great the economy was then...

Here's where you give a shit. There is no more credit. Have you read in the papers when it says that credit markets are FROZEN? Many many businesses finance themselves with as high of a debt to equity ratio as they can get away with, because debt is cheaper than equity and there's a tax shelter for interest payments. But now, sources of credit aren't only becoming prohibitively expensive, they are becoming really difficult to find at all.

This means that businesses won't invest in projects unless they are incredibly profitable, because there is neither debt nor equity financing readily available on capital markets.

This means that many businesses will die. All over the world...which means less jobs...which means poor retail sales...even less jobs...inflation might come about (but might not, reasonable economists disagree) from pumping trillions of dollars into the economy...poor countries in Africa that you don't think can get any poorer? They will. Not to mention the price paid in future living standards, government programs, defense (I hate it as much as you do but we do need it). Everything will get a lot shittier if we don't do something.

The problem is not me being chicken little, the problem is you having your head up your ass and thinking the markets are stable and things are fine. That's just stupid.

Correction. Money is three things: A unit of account, a store of value and a medium of exchange. This is Econ 101, people.

Dude I'm really getting tired of you. I gave you all sorts of data and you tell me I'm being an egghead who is arrogant full of bullshit and somehow the cause of all this. Now I'm not substantive enough for you and only use insults.

I give up, I agree with you now. Everything is stable and fine. Okay? Jesus.