A bare-bones explanation of the economy

I had a reader e-mail and ask for a bare-bones explanation of what’s going on. Are we really that bad off?

Here’s my reply. By all means, if you have simple additions, feel free to add them in the comments.

That’s the interesting thing – it’s really not bad.

New unemployment numbers came out and indeed more people are unemployed right now, but hiring for Christmas will start soon, so it probably won’t be “bad” – 6% I think – for long. Also new housing starts are down, but that’s not new.

A simplified version of what happened regarding lending and what this “bailout” is about: People took out loans that are then bundled and resold to investors. Some of those loans started going bad as housing prices started to drop and they couldn’t refinance for what their houses are worth. (Many of the riskier loans were to people who couldn’t afford them anyway, and often they were done with an adjustable mortgage which meant interest rates adjusted higher the longer the loan was out.) When these risky loans started to default, the investors buying the bundles were freaking because they didn’t know which group of loans were good and which ones might have bad loans – and therefore less return for their investment – in them.

These investors quit buying the bundled loans, which meant banks had to hold the loans they made, which means they didn’t have any free money to make more loans. That’s what they mean by a “credit lock up.”

(I heard one guy say it’s a little like finding toxic waste in your salad every third time you order salad. Eventually you aren’t going to want to order salad at all!)

So…now the government is saying “we’ll by the loans! Then you’ll have money to lend again.” Sadly, you know we’re quite addicted to buying things, and a lot of America’s buying is on credit, so it’s pretty important that the money keeps flowing, or a lack of buying will eventually trickle down to a lack of manufacturing, and that means less GDP, and that means recession. (A real one, not the kind the media keeps faking.)

Recessions aren’t necessarily bad, but they’ve been given a bad name in our more, bigger, better world. I think recessions shake out the crap in an economy. There are casualties, but for whatever reason that business wasn’t planning for the real world, and so, oh, well.

I’m a little less cavalier with individual stories, but for the most part, the prospect of a recession is a really good reason to save a little for a rainy day.

All that said – I don’t have a clue why President Bush jumped on the “hell in a handbasket” bandwagon. I do think, and I’ve written it, that part of the dive in financial companies in the stock market could be a form of terrorism. It’s easy to bet – called shorting – that a company’s stock will go down. If enough people do it, then the stock will go down.

Also, there’s a really complicating component called Freddie Mac and Fannie Mae, but there pretty much tied to the lending explanation above.

They’ll do something. I just hope it’s not something that throws the baby out with the bathwater. What they have planned feels like a three alarm fire when a fire extinguisher would have done just fine.

Hope that helped.


If you want a more official economic snapshot, visit this version produced by the Center for American Progress. Yes, this is a liberal source, but I think it’s pretty accurate. I’d like to highlight phrases like “unsustainable path” and “family debt remains high.” I continue to argue we did it to ourselves.

I also argue we might as well have a recession and get through it. Heck, the MSM has sworn we’ve been in one for months, we might as well remove all of the artificial backing and get on with it. Yes, the stock market as measured by the Dow will go down – I’d bet to 8,000 – but it will eventually go back up.

Earlier I said we should wait and watch. Now I think I’ve seen enough – including pork landing in this bailout – that makes me think it shouldn’t be done.

Enough is enough.


  1. Repubabubba says:

    On this, we agree, but we must avoid being like the business people who were not”planning for the real world, ” We cannot ignore the fundamental reason why this bailout will press forward: National Security. The US government is loathe to hand the keys to US banking interests to foreign powers who purchased it in a fire sale. Too bad the industry affected isn’t biotech, which they’ve already killed in the US our our free market vision would be easier to swallow.
    We need the banking industry to fund the military so we can stay in Iraq liberating Iran for 100 years as per John McCain’s plan, alluded to again yesterday by Sarah in an interview with Katie Couric.

  2. You almost had me there until you started the war talk.

    There’s a lot of international banking already, and the regional banks are very strong. I’m not sure I buy your whole argument.

  3. Repubabubba says:

    The reason my posts sound accurate is because they are independent of whether anyone wants them to be or not.
    As I’ve said, I’m married to one of the people who winds and unwinds the swaps at the heart of this for a living, as in every.single.day. Trust me when I say the termination clauses have never seemed more important, and trust me when I say the Federal Reserve System at minimum tripled its exposure the day of the Gramm et al act. Sure, you can blame X group of people for the sin of excess or Y party for whatever, but in the end these swaps were written with the assumption that the US bank liquidity would not dry up leaving only foreign liquidity in play. So here’s the bailout, like it or not. War is hell, but so is the AAA traunch. Whoda thunk?
    I’m just a preacher bringing you the word.

  4. You may be the preacher, but darn it, I keep nodding off in the sermon because you aren’t making sense!

    The posts sounding accurate doesn’t make them accurate. You are going to have to argue more clearly without all of the sarcasm if you want to be taken seriously.

  5. Repubabubba says:

    Congress is about to print money to bailout the entire US Federal Reserve System.
    The immediate alternative of offering up even more Federal Reserve insurance to foreign investors and simultaneously not regulating the industry is political suicide, and we are witnessing a posturing game of chicken. If there is no bailout, there is more than a reasonable chance that the people who blocked it will go down in history as the dismantlers of Rome.
    Politicians in general tend to abhor having that stigma attached to them.
    Of course, doing the bailout may only postpone the fall of Rome ’till a different session of congress, but the politician’s human nature sees that as a better alternative, IMHO.

  6. Better. Much better.

    Rome is falling. I agree that no one wants their name attached. History will find the proper parties to blame in 50 years or so. (We’re just now getting details on the Cuban Missile Crisis!)

    I do believe (IMHO) that we’ll only be postponing the inevitable. This bailout will have unintended consequences that create the next cause for a bailout. Eventually it all has to end. (One unintended that immediately comes to mind is the printing of money creates inflation.)

  7. Repubabubba says:

    Got your point. As an aside, I’m not sure that the unintended you sight (inflation) is , well, unintended. Inflation tends to diminish the negative weight of fixed rate debt relative to cashflow and accelerate the correction while being a hedge against mid term losses. Of course, that only looks like a positive when imminently going out of business is the other choice. But I’m sure more than a few citizens would be upset if that were a talking point.
    Inflation is like chemotherapy in that way. If you survive the treatment, hopefully you extend your life.

  8. Repubabubba says:

    err, “sight” = “cite”

  9. Remember, you should be able to edit for 5 minutes.

  10. Agreed about inflation.

    You know, these are good points, but your arguments on other threads are beginning to sound like I’m dealing with more than one of your personalities.

    Oh well.

  11. There is a concise explanation of the commercial paper ($) market on NPR this evening. The audio takes about 10 minutes, if you want to check it out.

  12. It’s inconceivable to me that Barney “Blowhard” Frank, who was a leading cause for the failure to regulate, is now the head of the House banking committee and is pretending he is the savior instead of the devil. He has absolutely no shame and is the poster boy for everything that is wrong with the Democratic Party. By the way they say Kennedy’s condition is not serious. Darn it all!

  13. Economy = Money exchanging hands…the more the merrier.

  14. Dell Johnson says:

    For those of you against the bailout. You all realize that there is no “credit” for businesses or anyone. That is very vital to the American Economy. Small businesses will not be able to make payroll soon.

    As for the bailout, I think the bailout needs to have debt warrants attached so that these companies don’t get off scott free. There also needs to be stipulations regarding executive pay to ensure that tax payers don’t foot the bill for golden parachutes?

    I’m not sure what the Republicans are against? The time for action is now. It is not time to take sides.

  15. Oh Dell dell dell,

    The Republicans are against some of the very things you mention. They want the tax payer to be protected…and possibly enriched in the end.

    IMHO, the bet way to address things like Executive compensation is make loans vs, equity. In equity, you are a shareholder… 1 share = 1 vote. 20% stake = 20% vote. You may even get a seat on the BOD, but you weild no power outside of your percentage of ownership.

    With loans on the otherhand, you can dictate whatever terms you want on the front end. “You want a loan?” “Here’s what it will take.” You can still take equity as collateral.

    At the same time, you can’t go around quashing salaries too much or you eliminate that talent you can draw from. How good of pro baseball team could you create if you can’t attract some marquis players? By the same token, reward for poor performance is just plain weak.

  16. Dell Johnson says:

    I am against the severance packages. The Republicans need to come up with a solid bi-partisan plan quickfast, because this situation will only get worse.

    I don’t care for bailing out a wall street company, but it is necessary. I don’t care for helping people who signed up for the bad mortgages. I went for a fixed and resisted the ARM loan when I purchased my home 6 years ago. I didn’t over buy in terms of house either.

    If the bailout , also, helps homeowners, sobeit. I wouldn’t like it or care for it, but if that’s what necessary to stabilize the economy, I am willing to give it a shot.

  17. Dell,

    The Dems controll Congress. They really don’t NEED too many Rep’s to go along for anything other than political cover. The Rep’s just dont want to take ownership of some hastily put together plan that is folly.

    To be fair, I think the Dems have put together a MUCH better plan than the Administration handed them. The “blank check” with no oversight or review was unconscionable IMHO. The same people that would be deciding where to spend the money are the same people that should’ve had a handle on this.

    I really don’t see the world tumbling down in a week if the right progress is being made. The DOW would tend to agree with that.