Economic Downturn? Depression vs. Reccession? Bailouts? Confused about how our economy came to it's current condition? Want to be able to discuss the current economic crisis intelligently?

Watch these three short videos produced by The Wall Street Journal.

Very enlightening.

2 comments

1. Steven Walchek on January 8, 2009 at 2:46 PM

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2. Steven Walchek on January 8, 2009 at 2:47 PM

   I posted a reply to a comment on Digg regarding this video. People are wanting to point the finger. Here is one comment on Digg (posted by user Gaqua) that is analogous to the 'who is to blame game'. My explanation in non-complex finance vernacular is below.
   
   Gaqua: "I've got a warehouse full of 32" LCD TVs in 50" LCD TV boxes. Let's say that a Judge states that I can legally sell them as 50" LCD TVs without telling the consumer. Yeah, the consumer could open the box and look - but the vast majority don't.
   
   Since the Judge says I can do that, let's say I just start doing it. I sell tons and tons and tons of 32" LCD TVs for about double what they're actually worth. People are getting ripped off all over the place.
   
   So whose fault is that? Is it the Judge's for making the law? Is it mine for taking advantage of it? Or is it the consumer's fault for not being more cautious?
   
   The correct answer is: it's everyone's fault. Every person along the way should have acted differently. Nobody is blameless here."
   
   Me: "Freddie Mac and Fannie May were only one piece of the equation. Gaqua's explanation is solid.
   
   The consumers looking for a lower mortgage payment were duped by the slick salesmen not thoroughly reviewing the loan terms, instead getting them to focus on the immediate rather than the long term. The fact that a consumer was signing into an ARM loan and the fact that their payments would double in 2 years was either ignored by the consumer themselves and/or a very small focal point not reviewed by the mortgage broker.
   
   The banks continued to lend money to the consumer through the mortgage broker because they were able to ship them off the books quickly through complex financial instruments like CDO's. The ratings agency are to blame for slapping a AAA rating on these financial instruments that carried toxic debt (for the record, the US government treasury bills carry a AAA rating...compare that to a high risk sub-prime mortgage). The Wall Street investments banks are then to blame for A) Selling the complex debt instruments with AAA ratings to pension funds and endowments knowing full well that they were toxic the entire time and B) Investing shareholder money into purchasing these instruments themselves.
   
   I was a private equity associate for a period of time (the good ole days) and I know due diligence tactics well, especially when it comes to loan portfolios. The fact that the Wall Street analysts were complicit (they had to know that these debt instruments were not AAA insurable) instead of raising the red flags like they were paid to do lends another contribution.
   
   In short...blame follows the dollar."