Everyone has a different idea on what the problem is here. I'll tell you what I know from all the stuff I've filled my head with over the past week. Some of this you may know already, but I'm gonna break it down into simple to understand lingo for all of you.
1. Banks gave loans to people who couldn't pay for them.
2. Banks took loans and wrapped them into securities and sold them.
3. Other banks KNEW that the loans were shoddy, but first bank provided a form of insurance called a Credit-Swap on the securities. So they were selling the securities (That were bogus) but backing them up with a Credit-Swap.
4. Credit-Swaps are like insurance, but have no regulations, so the banks didn't have to keep any money in reserve to back them. They are basically bogus instruments to provide insurance when there is none.
5. Other banks KNEW credit-swaps were bogus, but bought the securities anyway because nobody thought that EVERYONE would default at the same time.
6. There are 60 TRILLION (with a T) dollars wrapped up in Credit-Swaps. Maybe more.
7. Because there is no regulation on the Credit-Swaps. Nobody knows which banks hold the most, and have the least amount of money. So NOBODY knows which banks are about to crumble.
8. All banks are now fearful to trade with each other because nobody knows if the other bank is going to go out of business and not repay their loans.
9. Cash is frozen and banks are hoarding cash.
10. Large businesses use paper (A very short loan, maybe 1 day to a week) to borrow from banks to make payroll and pay for things.
11. No commercial paper is available because the banks are hoarding cash.
12. Government passes 700 billion dollar bailout which isn't really a bailout, it's more like a cash infusion. Government becomes paper loan dealer.
For instance, AMD recently split into two companies. A fab that was bought by Abu Dahbi, and a design that remains AMD/ATI. AMD was not able to secure commercial paper for the split, so the Government had to loan them around 100 million to get it done.
13. Government money is not loosening the banks grip on the finacial crisis because banks don't know who has the 60 trillion in debt.
14. The 700 billion is being used for commercial paper loans, and being offered to banks to sell the Government their bad securities. When/If this happens, the bank that takes the Government's bailout will have to reveal their books and show the other banks how many Credit-Swaps they have under-insured. <-- That is what the banks are waiting for.
15. In the meantime, there is no growth because there are no loans to spur growth. The credit market is virtually dried up. So investors are nervous and pouring their money into safe securities which is the 3 month national debt note.
16. With that in-mind, we're looking at 3 months before those notes mature and allow the investors to possibly flow their money back into the market.
So this shit is gonna go on for quite awhile. Even if credit markets loosen, the three month note will hold down investments for quite awhile.
It's also a GREAT time to invest in stocks. Especially technology startups that already have venture cap.
I wouldn't worry about the-end-times with this. But I would say that older folk's 401k money isn't looking so hot right now.
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