This is one of the best articles I've read in years. It succinctly describes some very important, complex and troubling economic issues. The use of the Super Bowl metaphor in explaining a substantial part of cause and effect in the “real” and “unreal” economies is perfect. The issue of transparency is one for concern on most all fronts, it is unlikely you can truly establish accountability and responsibility without transparency. This lack of openness; compounded by unnecessary complexities, results in little to none transparency, resulting in no real oversight, resulting in systems breaking down and no one held accountable. When the pendulum swings ....where will we be?

Bob K

You take a bunch of garbage loans and break off the income streams. Then you pool them with a bunch of good loans and blend them all together until your B risk becomes an A risk or better. That reduces the overhead costs in the reinsurance and monoline pools. It's called Gold Plating. Or as we used to call it "Don't look too hard up that Rhino's ass".

A bond issued at a discount of its face value at maturity is not strictly a Zero Coupon Bond -- FYI, many US government bonds have been sold that was for, oh at least decades.

Zero coupon bonds were created as derivatives - there is a tendancy to assume that standard bonds without coupons are the same thing -- but they are not. Sometimes the bond is traded, sometimes a derivative representing the bond as held in a depository without the coupons -- in any event it is derived from the bond plus coupons. Incidentally, it was trading in the other asset, strips, that landed Orange County in trouble when interest rates fell so much that people paid off the mortgages and the coupons fell in value (while the zero coupon soared.)

A derivative is what it says, a tradeable instrument derived or deriving its value from at least one other tradeable instrument (and maybe more.) Mortgage backed securities are not derivatives because the underlying asset is not tradeable as a "trade instrument" though you can sell individual mortgages on - they are often used to create derivatives.

Less knowledge is a dangerous thing -- and you are simply wrong in your statement of what a derivative is. Easay, have you learned the lesson yet, don't "twit" people unless you are sure of the fact you are "twitting with"

I completely missed the run up in tech stocks when everybody was getting rich. Instead I bought a little silver because nobody wanted any and it was cheap. I have stayed out of the stock market and missed all those fabulous gains - really have felt stupid as a result. I just put every penny I could get into T-Bills and cringed as the dollar lost 40% of it's value in the Bush administration.

You see, the thing is, I know I am an idiot. I don't understand why a CEO is worth $100 million a year, I don't trust the referees to keep the game honest, and I don't figure I'm smart (or well informed enough) to catch all the "gotchas" in annual reports and prospectuses. The pundits on financial programs on tv mostly seem like super-slick used car salesmen to me and I instinctively grab my wallet when I see em.

My jaw dropped when I heard Greenspan say in congressional hearings that housing lenders should engage in "creative financing" as he was pouring money into the markets - lowering interest rates to historic levels. I watched all those smart homebuyers rack up gains and stupid old me, I just found a cheap apartment for somewhere between 1/3 and 1/5 the monthly payment I'd have had to make on a modest house or one of the cardboard-constructed condos that have been going up around here. (One of those condos would have been more like 8 - 10 times my rent with taxes, insurance etc.) I live neartown now and an affordable house would be out in the boonies, increasing commuting time and expense.

I marveled at how these folks with the same modest (median) income as my wife and myself could manage the new house, furniture - and the new car they were all driving. That was before I heard about 100%, interest only (or even 100%+, no payments at all for a time and so forth).

I guess my wife and I are total fools. We don't understand the market, so we're not in it. We don't understand how to manage debt, so we don't have any. Our car is 11 years old and we don't have a big screen. I have always thought that return of capital was more than return on capital, so we miss every big score.

Still, we had essentially 0 assets 10 years ago and I just heard that the median home price in my area is around 150k. We could pay cash.

Boy are we stupid!

This article was helpful in explaining a very complicated economic system in the most basic terms. Like any explanation that attempts to simplify, you're going to lose a lot in the translation to basics. An interested reader can use this as a foundation to conduct his or her own research as needed.

I want to agree with the commenters who have noted that structured finance and derivatives are not "separate" from the economy -- they are part and parcel with it. These elements of Wall Street are now global in scope, and are designed to help those with money -- loosely called, the "capitalists" -- earn more money and capital from their investments. One way to do that is to find a way to have banks make riskier loans so that you can charge more interest. You are taking a risk that the person taking the loan will pay, but if you can minimize risk through "risk slicing", you stand to make more money. In theory, at least.

There is a second element to all of this, which is that this money is being invested in the stock market. Today's lowering of interest rates to keep the ball rolling is extremely telling. The Fed has basically admitted that one of the key columns supporting the current economic system is the health of the Dow. The Dow is so important that the Fed is willing to risk inflation in order to keep cheap credit available to lend and invest in the stock market.

More and more, our entire economy is being based on easy cheap credit instead of more fundamental economic underpinnings -- manufacturing, for example. Some day that credit will run out and the whole thing will come crashing down.