My new favorite podcast is Planet Money. As the economic turmoil has progressed from frightening to surreal, the NPR crew at Planet Money have done a wonderful job explaining the intricacies of the complex financial world in terms that are easy to understand.
Here is what I have been able to figure out so far. Forget about the subprime mortgage crisis. A huge part of the problem is these credit default swaps – to the tune of $55 trillion dollars. These “insurance policies” were not only taken out by people who lent money to protect themselves against potential loss. Financial gamblers were also taking out credit default swaps on other people’s loans! This is raw gambling. Some analysts estimate that for every CDF taken out to by a lender to protect a loan, ten other CDFs were sold by and for third parties on the same loan.
I am growing weary of the daily refrain that what we have here is a failure of confidence. The bankers no longer trust one another and, consequently, are refusing to lend to one another or worthy customers. Nine months ago these cowboys were lending to anything that could breath, and then doubling down 10 to 1 on the loan. Now they don’t trust one another. I can’t say that I blame them.
Here is my simple solution to solve the crisis:
- Declare all credit default swaps null and void. Nobody pays. Nobody is on the hook. The overlapping, hedged, web of CDFs is too complicated for anyone to “unwind.” Just wipe the slate.
- Give all of the bankers and most of the traders a good smack and then send them to a ropes course – preferably somewhere in the vicinity of the Grand Canyon. I don’t think these guys ever really trusted one another. Now is a good time to learn.
- Exercise the clause in the bailout plan that allows the federal government to take stock in the banks that need cash infusions. Then throw the bums out who have made this mess and start lending to the businesses that are desperate for
There, now that wasn’t so hard, was it?