Simple Financial Recovery Plan

ByHeather

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:

  1. 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.
  2. 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.
  3. 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 commercial paper to keep their businesses running.

There, now that wasn’t so hard, was it?

Similar Posts

  • Dear United: It Didn’t Have To Be This Way

    ByHeather

    Last summer I had a Delta flight out of La Guardia bound for Detroit. It was a Saturday morning and the airport was swarming with passengers, the gate area for my flight was like a mosh pit. As we approached the time to board, a gate agent announced that the flight was oversold by seven passengers. An audible groan rippled through the waiting area as we all clutched our boarding passes and jockeyed further for position in the boarding process. This was not going to be easy.

    The Delta / traveler negotiation process began when the agent offered the usual $400 travel voucher for anyone willing to take a later flight. In a delightful New York accent, a lady standing beside me smirked, “They’ll pay more.” Sure enough, moments later they announced that a $500 voucher was now available to any travelers with flexible travel plans. I smiled as I acknowledged the prophetic power of my fellow traveler. As my plans did not feel flexible, I gratefully made my way onto the plane.

    After the plane was fully loaded, with the last few passengers jamming bags into the overhead bins, a voice rang out over the airplane announcement system that Delta still needed one more passenger to give up their seat. This time, however, they had upped the ante.

  • The Demise of Lofts

    ByHeather

    I fell in love with the idea of living in a loft in the early 80’s. I was just about to graduate from college and Jennifer Beals was dancing across the screen in Flashdance in a beautiful, industrial-strength loft. It was a beautiful living space — about 2,000 square feet with no walls and no rooms. Ever since then I have dreamed of living in a completely open floor plan. Bed at one end, kitchen at the other, living and dining and working in between.

    We are in the process of relocating to North Carolina and have entertained the idea of living in a loft. Unfortunately, today’s brain-dead developers have co-opted the term “loft” in their attempt to be hip. The marketing people have not been talking to the architects and builders. …

  • Steinbeck on Writing

    ByHeather

    I think there is only one book to a man. It is true that a man may change or be so warped that he becomes another man and has another book but I do not think that it is so with me.

    — John Steinbeck, Journals of a Novel: The East of Eden Letters

    East of Eden was the first book that I read by Steinbeck. It was moving and well written and rich with characters. Then I discovered Journals of a Novel: The East of Eden Letters and suddenly I felt I had been given a back stage pass to the mind of a writer.

    Steinbeck had already written Of Mice and Men (1937) and The Grapes of Wrath (1939) when he set out to write East of Eden (1951). In the intervening years he lived through two divorces and served as a war correspondent. Despite the critical success of his earlier works, his standing as a major novelist had faded. As today’s quote reveals, Steinbeck also felt that he had not yet told the one story that was within him. His editor, Pascal Covici, did all that he could to encourage Steinbeck. Covici sent Steinbeck a number of notebooks and instructed Steinbeck to use them to write.

  • The Illusion of Knowledge

    ByHeather

    The greatest obstacle to discovering the shape of the earth, the continents and the ocean was not ignorance but the illusion of knowledge.

    — Daniel Boorstin

    To really appreciate the profundity of this quote you have to think back to Galileo (1564 – 1642) and his epic battle with the Roman Catholic church over the nature of our solar system. Although Copernicus (1473 – 1543) had developed the heliocentric theory a hundred years earlier, the “prevailing wisdom” maintained that the earth was at rest at the center of the universe while the sun and the planets revolved around it.

    But Galileo had a telescope — and became convinced that Copernicus was right. He championed the sun-centric “theory” at great personal risk. He was declared a heretic, forced to recant, and spent the last years of his life under house arrest. The church did not lift its ban on the general prohibition against works advocating heliocentrism until 1758.

  • M*A*S*H

    ByHeather

    Know this. You can cut me off from the civilized world. You can incarcerate me with two moronic cellmates. You can torture me with your thrice-daily swill. But you cannot break the spirit of a Winchester. My voice shall be heard from this wilderness, and I shall be delivered from this fetid and festering sewer.

    — Charles Emerson Winchester, III

    I became a giant fan of M*A*S*H during my undergraduate years in college. By the time I tuned in the show had been on the air for many seasons and had found its stride. Each night the dorm lounge would fill up with fans as we all partook of the syndicated re-runs punctuated once a week with a fresh fix. The writing was superb, the acting a joy to watch. The storylines were moving and yet funny. It seems like every character was my favorite. I have seen each episode so many times I can recite the entire plot line within seconds of seeing the opening sequence.

    The quote above from Charles Emerson Winchester is one of my favorites. …

  • Consumers Go On Strike

    ByHeather

    As the economy continues to sour, consumers have gone on strike. For the past few months, I have been contemplating the following economic and social trends that seem to explain why.

    • American productivity has risen almost 20% in the last decade (Source)
    • Real median income over the same period has declined (Source)
    • Executive compensation has risen astronomically (Source)
    • Consumer debt has risen substantially (Source)
    • Consumer spending comprises 70% of GDP

    Rising productivity is what enables companies to increase employee’s pay. Increases in pay result in the overall rise in our standard of living. However, in the last decade, this relationship between productivity and rising employee pay seems to have been fractured.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.