"As domestic spending drops, still more people in other industries that had relied on this spending to create demand for the products they made lose their jobs. Et cetera."

Woah, there, Keynesian much?

If the problem is the banks don't trust each other, why don't the healthy banks seek out an honest broker of some sort to reveiw their books and give them the stamp of approval or risk rating? Let the sick ones die. Or is it impossible to determine the financial health of a bank right now? Are they all so sick?

Instead of financing "good debt" going forward (i.e. the "jobs are coming back, if only there is credit driven investment" scenario you described)? Can't the government act as creditor in place of the banks that MIGHT fail if this crisis continues? That seems like a better deal for the taxpayers -- we get to invest in jobs rather than rescuing financial institutions from bad decisions.

I just want to point out that Carly didn't JUST get asked to "please go away" for 21 million dollars. She was also the CEO that thought it would be a good idea to spy on one of her company's board members during the proxy battle for the Compaq HP merger. She has no qualms about breaking the law.

Thanks Mr. Delong..although over at KOS it's been calculated that the total gross worth of all mortgages now in default does not exceed 200 billion bucks..therefore, where does the rest of the money go? To buy credit-default swaps? Paper that may NEVER have any real value?

That seems nuts.

I like the suggestion of another poster at Salon who suggested buying the bad assets of the otherwise healthy institutions..foster the growth of the strong and let the weak perish..if we're going to prevent the "free market" from doing what it's supposed to do, the least we can do is imitate some of its creative destruction.

What a fucking mess. And all caused by dickwads like Phil Gramm, and Greenspan (who could have prevented most of this, but didn't..poisoned as he is by Ayn Rand)..and most of all by the testosterone-addled assholes who run Wall Street investment banks and ought to be taken somewhere and gelded.

It's not about bankers but a failed economic model based on an infinitely growing, unregulated, fiat currency decoupled from real productivity but rather tied to consumer spending. Asset bubble to asset bubble.

Imagine you're a college professor and you have a student that's illiterate. Previous professors have passed the student so the college could collect the tuition. Now, a rude awakening occurs in that you have a student in your class that really is illiterate. What do you do? Go on with the charade by managing the student's migration via propping up the fantasy for the benefit of all? Or do you send the student back to get learn to read?

These derivatives don't represent risk nor do they represent productivity. The false dualism of a fire sale vs. a time to mature value is also bs. The reality is these derivatives reveal a gambling society's addiction to laziness. The functions to get to their real worth is not some sorta of silly backwards Z function but is a painful step function that we all must pay just as we have to accept the illiterate student needs to be sent back to start over again.

...For this.

If the Treasury is able to sell the assets for a good price, the monies paid by the Treasury were a purchase. If the Treasury is not able to sell the troubled assets ever and must eat a large loss, the monies paid by the Treasury are deemed to have been an investment in the firm -- and the government and the taxpayers own a pro-rata share of the firm, and get a pro-rata share of the dividends and the capital gains the firm earns in the future.

Something making sense, something sorta fair and something McDummer, here, can get his head around.

Thanks for putting this whole mess into language easy enough for financial ignoramuses like me to understand.

Here's my question: if the looming problem is a lack of money available for lending to busineses and others, then instead of giving $700,000,000,000 to the failing banks, why doesn't Uncle Sam instead become the lender and use that money to lend to businesses, etc.?

Thanks to you or anyone else who knows the answer.

for the last few years, they are derelict in their duty. if they didn't, they are merely incompetent.

or maybe the world is just too complex for oversight, but then we can say to congress, why is it not kept simple?

the american system worked ok when cotton went out and slaves came in. it coped with intrastate deals of salt fish and timber. but times have changed, and the economy has changed, and maybe the character of the people have changed too.

maybe it's time for a new constitution, one whose aim is not to protect the smarties when their deals come unstuck.

The problem isn't about money but rather about liquidity.

Market liquidity is a business, economics or investment term that refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. Liquidity also refers both to that quality of a business which enables it to meet its payment obligations, in terms of possessing sufficient liquid assets; and to such assets themselves.

The problem is that the $60T in credit default swaps have gone from being liquid to becoming illiquid because the market for them has frozen due to the real value of the promises backing them being indeterminable. A consequence of this is that the money supply will contract due a decrease in the velocity of money as well as the printing of it. (All money is printed via debt, e.g. mortgages.)

The velocity of money is the average frequency with which a unit of money is spent in a specific period of time. Velocity affects the amount of economic activity associated with a given money supply.

The government is trying to reestablish a market for these securities in hopes that doing so will cause private sector actors to join in, resuming the trading (and price setting) as was being done before today's so called panic. Nobody knows if today's panic is really an aberration or if it's setting new values.

It's kinda the inverse of Greenspan's comment that you don't know if you're in a bubble until after it pops. Well the bubble popped and now the assumption is that the pendulum has swung too far, too fast so government must slow things down. It does little to solve the fundamental problems of these securities. During the internet bust all the over hyped stocks went bust. There is no reason to believe the same thing won't happen to these mortgage backed securities and derivatives. The government didn't start buying pets.com stock to support it. The proposition was a failed one so as a society we let it fail and adjusted. Unfortunately, part of that adjustment was to give the same financiers unregulated controls who went on to create the housing bubble. Bubble to bubble.