Bye Bye Banks and Wall Street
 

Can someone explain what is going on with the banks and Wall Street?

I'd really prefer a non-political explanation - I'm really trying to understand what is going on.

Thank you

Black Friday comes to mind.
but I am not savvy enough to explain it to me, except I see my 401k is bleeding on the pavement.

I don't know if I can explain in a way that will make sense within a length of text that you'd actually read.

I've tried to write a short version several times and it immediately starts to become a long version with serious caveats about important things being left out.

There was an episode of This American Life a few months ago that explained it as well as just about anything I've seen. I'll try to track that down for you. The basics remain true to the events of the last few days (though it doesn't explain why Lehman Brothers was allowed to die while AIG was bailed out).

However, if I lose my job soon (which isn't outside the realm of possibility since I work for the company widely considered next in line) I'll have plenty of time to write things up.

In a nutshell, the economy is tanking because of the speculative bubbles that have been allowed to run rampant with nary enough banking regulation for the past 30 years. We are mostly familiar with the Silicon Valley bubble that burst, and now the Housing Mortgage bubble has burst.

This non-regulatory environment is a product largely of Republican government processes. As is the redistribution of wealth over the same time period so that more concentration of money is in the hands of the least people since the 1900's.

That much money in the hands of people who don't need it floods the markets with speculative investments, going from one boom-town investment to the next, with no brakes by government regulators, and certainly not by the banking industry itself. This is a world-wide phenonmen, and not limited to the U.S.

But in the U.S., it is precisely the kind of economy the Republicans have pushed for, and now its pushed us over the edge into total economic meltdown.


Most Americans aren't paid enough to live the American Lifestyle, so everyone's gone deep into debt. All American institutions have done likewise, and our government - afraid to raise taxes - has followed suit. There's no money on earth to pay back all this debt, and the entire house of cards is starting to crumble.


The Fed Reserve Chairman says he will do everything in his power to prevent a Great Depression, but he may not have that power. Nonetheless, Wall Street has rallied a bit today on the leaked report that the government will continue to take over faililng businesses. Most of the major brokerage houses have already been bailed out/taken into conservatorship by the goverment. Insurance giant AIG followed earlier in the week, mortgage giants Fannie Mae and Freddie Mac were last week.

We the taxpayers are already on the hook for those bailouts to the tune of some 4 trillion dollars, but that's not yet necessarily money lost. Depends on what happens. But a total financial collapse of the world economy is looking more and more likely, in which case those "investments" or "meddling" by the U.S. government would be worthless and would be a total loss to taxpayers in addition to the millions of jobs that are going to be lost.

Meanwhile, $15 trillion in stock wealth has been lost since the beginning of the year, and that's the tip of the iceburg.

And if you think we have it bad here in the U.S., consider what rampant speculative investing has done to poorer parts of the world. Investments in commodities have driven food prices through the roof, and by year's end fully ONE BILLION PEOPLE will be classified as going hungry.



I say while we still have some discretionary income, we get out the tar and the feathers and the torches and the pitchforks. Half of us head to D.C. with the tar and feathers, the rest to Wall Street with the torches and pitchforks.

My brother is a VP at a major US bank. He explained it to me like this:

Let's say there are 5,000 boxes on display. You can't look into any of the boxes but you know that 4,900 of them contain a million dollars.......the remaining 100 contain nothing. What value would you assign to any one box?

If you assign a million dollars to one box and it turns out to have nothing in it you end up in the hole for a million dollars.......so you are likely to assign a lower value to any given box, even though in all likelyhood that box is still really worth a million.

Yeah, I still don't get it either;)

It's... complicated.

Let's just say that the market operates in cycles, and when the pendulum is allowed to swing too far one way, natural forces (eg: market cycles) force it to swing back the other way.

The less simple explanation is that in recent years, the market invented a way to turn mortgage investments into stock investments by bundling large numbers of supposedly similar mortgages together so they could sell shares in them just like you'd sell shares in a company.

Since real estate is considered a safe, secure investment, managers of large portfolios (such as investment funds sold by investment houses or those owned by insurance companies (that's what they do with the money)) invested heavily in these mortgage-backed securities. So with the record number of foreclosures we're seeing, these securities are losing value like crazy, which means the funds that invested in them are losing money like crazy and coming crashing down. Which means that the companies selling or holding these large portfolios are suffering a serious liquidity problem (no cash) so they can't pay their debts (investors selling their shares in the funds, or payouts to insurance policy holders), so the companies are coming crashing down.

The good news is that fortunes are made by people who have the foresight (and the capital) to pick things up at bargain-basement prices.

If I had the dough right now, I'd be buying real estate like crazy - especially after Thanksgiving, and maybe into next year. But I don't.

That's true. You'd assign the boxes a value of $980,000. But I don't see what it has to do with the current situation.

Now suppose you can only afford one box......do you still assign it a value of $980,000...or do you elect not to play?

..and no, I really don't see what it has to do with anything either....just repeating what I heard and there's a good chance I didn't even hear it all.

That strategy would work if you were investing in all the boxes. Unless it turned out that 80% of the boxes ended up being empty.