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Understanding Financial Meltdowns
Like most (all?) Americans, I've been trying to figure out what the hell happened to the financial system, why we have the bailout plan we have, and whether I should think it's a good thing. Most of the sources I found are either too superficial or filled with jargon I didn't understand.
A month ago, I had the good luck to catch an episode of the radio program, This American Life, which explained the background of the housing crisis. It was phenomenal. This Sunday, I caught part of another episode, which explained the bailout, credit default swaps, why the bankruptcy of Lehman Brothers forced AIG into financial straits...and how the meltdown ballooned out of the commercial paper market freeze. I had to leave before the show finished so I made it a point to search out the online version; it was just that good.
These programs are aimed for an audience with no knowledge of the U.S. financial system and they take the time to explain the terminology in easily digested words. :) Each one is an hour. If you're interested in listening to them yourself, here are the links:
The Giant Pool of Money: A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.
Another Frightening Show about the Economy: They'll explain what happened this week, including what regulators could've done to prevent this financial crisis from happening in the first place.
Both are free to download from the links given. The second is available this week only on iTunes as a "This American Life" podcast for free. :)
A month ago, I had the good luck to catch an episode of the radio program, This American Life, which explained the background of the housing crisis. It was phenomenal. This Sunday, I caught part of another episode, which explained the bailout, credit default swaps, why the bankruptcy of Lehman Brothers forced AIG into financial straits...and how the meltdown ballooned out of the commercial paper market freeze. I had to leave before the show finished so I made it a point to search out the online version; it was just that good.
These programs are aimed for an audience with no knowledge of the U.S. financial system and they take the time to explain the terminology in easily digested words. :) Each one is an hour. If you're interested in listening to them yourself, here are the links:
The Giant Pool of Money: A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.
Another Frightening Show about the Economy: They'll explain what happened this week, including what regulators could've done to prevent this financial crisis from happening in the first place.
Both are free to download from the links given. The second is available this week only on iTunes as a "This American Life" podcast for free. :)
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Do you have any favorite economics blogs to recommend? I'm especially interested in any that are good discussions of policy. I prefer that they be relatively agenda-neutral -- or that they clearly state they have an agenda.
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I've also picked up a lot from the economics category at The American Scene. I think it's a right-leaning blog but they're not overtly partisan (that I can recall). They've had some good overviews and also some good links out to other places.
I honestly get to most of them by clicking through from political blogs... some that have had good links are TPM (and they've got a collection of quotes which links to their sources on their bailout burnout page, and it links to a bunch of people I've read and found interesting) and hilzoy, who has also had some good overviews. Both are liberal, in case you're not familiar with them, but they try to pull economic analyses from all over.
Also of course stuff from The Economist just because, uh, it's what pops to mind when I think of economics. They've got some blog sections and stuff. It's pretty interesting. Also interesting was this article, where like 80% of economists polled say Obama would be better for the economy. McCain: pwned.
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You started out way ahead of me. Both of my parents are CPAs so I have a reasonably good grounding in basic personal finance but the larger finance system? I knew *nothing*. Never took any courses in it, never found it in the least bit interesting. When the Bush Admin proposed the bailout, my knee-jerk reaction was, "no way I want to hand that kind of money over to a single person's discretion -- and I really don't want the government purchasing an unbelievable pile of crappy securities!"
But I had no knowledge of what the root problems were and thus no tools to evaluate whether I thought the idea of buying "troubled assets" was a good way to fix whatever it was that had gone wrong with the economy. I couldn't form an opinion on the bailout's approach so I've been playing catch-up. :)
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I've had a similar gut reaction, particularly watching house values and the amount of consumerism around me. I couldn't figure out where all of this money was coming from but it was obvious that I'd missed out on some secret in life. That is, until I started shopping for a house; the deals people pitched were insane -- and virtually every one of the formerly modest houses in my own neighborhood had been refinanced to renovate it with granite counters, luxurious bathrooms, exotic woods, custom lighting, top of the line appliances...money was everywhere.
I wasn't surprised by the mortgage meltdown -- but I had no idea that a whole new financial system had grown up to provide these mortgages and how that was destined to bring down Lehman Brothers, Bear Stearns, AIG, and on and on.
I feel as if I now understand Katie Couric's question to Palin about why not funnel the $700 billion to the troubled mortgage industry to help "the people" rather than helping Wall Street banks.
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When I was a kid, my dad took the WSJ. His company started offering stock options to the blue collar guys and my dad decided he needed to understand this new benefit. As a result, I had not only the Chronicle and Time, but now the WSJ to absorb (I was a word sponge at 9). I learned how to read the stock pages and how to follow the ups and downs and what all that crap meant. As I also read some of the articles, if I understood them or not, I started connecting what the articles said with what the numbers did. It was like a game. It was fun.
Jump forward a few decades.
I don't read the financial pages any more, but some of what I learned then, seems to have stuck at a very deep level. *Nothing* about the 10,000 level in the market made sense. I couldn't figure out where the *stuff* was coming from to generate that kind of rise, especially since it didn't just peak weirdly and then settle. (This is where I should also say that I never did understand economics when I took it. The whole discipline seems completely counter-intuitive and I'm leery of things that are counter-intuitive.)
What I'm hoping I'll learn when I watch those shows is something to explain that. What I *fear* is that it's *all* been manipulation and fraud.
I have nothing in the market and I'm so very happy for that. The stock market isn't an "investment", it's a gamble and I never gamble what I can't afford to lose.
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A lot of the economic analysis I've seen of Republican vs. Democratic Admin -- and I'll be the first to admit I've been a surface skimmer -- indicates that Democrats in general are better for the economy. Luckily, this year's really easy to judge as McCain likes our current model so much he'd like to put it on steroids. Short of shutting down the Treasury and reverting to a barter system, I'm hard pressed to think what a government could do worse in handling the economy.
Not that I think huge tax cuts for anyone is a good idea at this time. After effectively doubling this year's deficit, I'm really antsy about any plan that promises to cut revenue and raise expenditures.
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I never got into reading business news and I have no foundational knowledge of the larger financial systems.
What I'm hoping I'll learn when I watch those shows is something to explain that. What I *fear* is that it's *all* been manipulation and fraud.
They don't address the DJIA so they might not be what you're looking for. They're about the conditions that gave rise to the sub-prime mortgage market (the first link) and the mechanics of the system that caused the Fed & Treasury to suddenly panic (the second link).
I have nothing in the market and I'm so very happy for that. The stock market isn't an "investment", it's a gamble and I never gamble what I can't afford to lose.
How are you saving for retirement? Are you buying bonds and T-bills? Is there something else out there?
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And I agree, you really can't sustain a viable economy without manufacturing of some kind. One of the Obama's ideas that I really like is heading into the rust belt and setting up plants to manufacture the necessary technology for renewable fuel *there*.
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