As for the betting argument, I agree with bladdy kirsh who pointed out that there is investment in the traditional sense and what most trades in any given day have become -- gambling. Yes, all you hedge fund players, you are gamblers just like Vegas junkies.

What this article did not do was acknowledge the role that hedge funds and rapid turnovers have in the panic. I don't have time to go into it here, but another piece by Leonard on how these factors expand and burst bubbles.

You lost me at derivatives...

Have said for a long time that the stock market is a giant casino, and you're a damned fool if you don't think the house has rigged the game to make money for itself. Why do we keep making heroes of these crooks?

Excellent explanations of very difficult-to-understand concepts.

Pieces like these keep me coming back.

Thanks, Salon!

I'm surprised you didn't include anything about the differences between the unfortunately named terms of "mark to market" and "mark to model". While Moody's and S&P certainly deserve a heap of blame for over-rating various tranches, it seems no one ever really had a firm grasp on how much they were were worth, and yet many funds saw no problem in resting the foundations of their portfolios on them. The financial models of firms holding these high risk investments, designed to judge the value of these wisps of intangibility, were ludicrously optimistic. And why not, given that just nudging a formula in a model could boost their declared returns? And the house of cards stood, till people had to quickly sell their bits of CDOs and suddenly nobody knew how much they were actually worth.

If everyones property is devaluedthan yes we are are all in trouble. But realisticly, if you don't plan on moving soon, don't worry about a thing. I am in the same situation as you, I know that as long as I can pay my bill and live within my means, all of this will work out in the long run.

There are plenty of valid criticisms that one might make of Vice President Dick Cheney, but Ron Smith's is not among them. He wrote, "What sitting Vice-President refused to part with his 444,000 Halliburton stock options? Dick Cheney."

In fact, Dick Cheney signed a "Gift Trust Agreement" that sets up a third party "Administrative Agent" in charge of exercising his Halliburton options and distributing the profits to specified charities. Say what you will about Dick Cheney, but don't accuse him of unethically profiting from rises in the price of Halliburton stock. It's not true.

MacK: A little knowledge is a dangerous thing. You say that a zero-coupon bond is a derivative, and a better example of one than a securitized pool of mortgage loans. Well, a zero-coupon bond issued directly by the borrowing company or government is just that: a bond, not a derivative. And a securitized pool is an example of a derivative, even if it's not your favorite example. Look it up.

I challenged author Andrew Leonard in his statement that "the same games that Wall Street played with subprime are likely being played in every sector of the economy." You responded with examples of investment categories such as "private equity, hedg [sic] funds, etc." Never mind that most small investors don't venture beyond stocks and mutual funds. I challenged Leonard on sectors of the economy, not on investment categories. Sectors of the economy include, for example, automobiles, petroleum, chemicals, agriculture, transportation, banking, health care, education, publishing, etc. Private equity and hedge funds are not sectors of the economy.

Thank you for a much needed, clear explanation of what's going on and how we got to this point. With the hours of financial mumbo-jumbo on cable, how sad that we intelligent readers need to have this explained to us.

One thing that I have wondered, however: How much of this could have been averted if some of the protections that were put in place as a result of the crash of 1929 hadn't been removed in the last few years because, well, that just couldn't happen again? I've watched incredulously as banks have entered into the stock business (again!)and other financial walls have come down.

In response to some people complaining about the betting analogy, I think the article is nevertheless useful in explaining some very basic issues to someone who has no clue about anything to do with Wallstreet. Many people who read Salon are students, teachers, and people who work for small buisnesses, none of whom have even 401Ks or stock options. I have never had anything to do with investing, beyond my student loans, and probably never will beyond a mortgage. But when everyone is telling you a disaster is happening, and you are clueless, well an article like this is extreemly helpful. While the betting analogy did seem a little oversimplified...it wasn't really neccisary anyway, the article explained the other points clearly. The article is for people on the outside of this world who do not invest, in order to help us understand something that may effect us. It does that very well. And you don't have to worry about scaring us away from the stock market with language of betting, we were not interested in the first place.

Particularly when it comes to margin. In equity funds generally the margin limit is 50%. In hedge funds there really isn't any limit. They can be leveraged up to the sky. So when markets head in the wrong direction the margin exposure can be nearly 100%.

Some here have said, as did bladdy kirsh, that "investing implies that regardless of the outcome, the investor will own something tangible".

This may be true in theory, but except for very large investors or very small stock issues, this isn't really true. Once you've made your purchase what you really own is a representation of a fraction of what other people think a company is worth. I suppose you own something "tangible" if you consider the paper your stocks are printed on, but you don't actually own anything tangible. Why do I say this? Lets say you wanted to get your "tangible" asset out of that piece of paper. Ignoring the fact that you're not going to be able to go to the company and claim anything physical, you want the worth of this supposedly tangible thing, if you can't someone to pay you for it, you have nothing. If you can find someone to pay you for it, you get what they think it is worth, nothing more and often less after fees for making the trade.

Lets say you buy 1,000 shares of a stock worth $100 a share. The company you're investing in at the time is actually worth $100,000,000. If this is "tangible," you now own 1/1,000th of the stock in this company. Lets say the company over time grows to $200,000,000 but because of some bad news or competition the stock is now worth $80 a share. They haven't issues new shares, so if this were truly something tangible you own, you should be able to go to the company and get $200 a share for it. That's equal to the 1/1,000th of the company and you own that many shares. Sadly for you, they'll laugh you out of the offices. You'll get $80,000 on the market (less fees) instead of your $200,000. Now that supposedly tangible thing is only 1/2500th of the company. It was tangible like ice under the hot sun.

Stocks are betting. They're not even betting on the performance of a company, they're betting on the perceptions of large groups of how the company is doing. Hell, there are countless times Amazon or some other stock will announce an increase in profits, but their stock will fall because it didn't rise by as much as the large crowd thought it would.