Washington Post Crashed-and-Burned Watch
An Answer to a Question from Michael Berube...

The Revised, Extended Geithner Plan Catechism

We are live at The Week:

The crisis -- and Geithner plan -- explained:

Q: What is the problem?

A: The problem is that unemployment is rising like a rocket.

Q: Why is unemployment rising like a rocket?

A: Because those businesses that normally would be expanding and hiring right now are not expanding and hiring. This is compounded by the fact that businesses that would normally be contracting right now are indeed contracting -- rapidly.

Q: Why aren't the businesses that ought to be expanding and hiring doing so?

A: Because they cannot borrow money or sell bonds on terms that make it profitable for them to expand and hire.

Q: Why can't they borrow or sell bonds on normal terms?

A: Because banks and investors are loath to take on any more risk, they’re demanding that businesses seeking financing offer them usurious terms, which the businesses cannot do and still profitably expand.

Q: So why are the securities on Wall Street right now distressed and low-value?

A: Because banks, investors, and other financial intermediaries don't think they are worth very much.

Q: Why don't banks, investors, and other financial intermediaries think they are worth very much?

A: Six factors: (a) the housing boom was accompanied by the creation of a lot more assets--principally mortgage-backed securities and their derivatives. As supply and demand dictates, when there is more of something, it is worth less; (b) some of these securities were initially sold at prices that only a fool, thinking a bigger fool would come along to buy them at an even higher price, would ever pay; (c) there is a recession on and so firms have a greater chance of defaulting on their securities; (d) traders working for Wall Street firms are irrationally panicked after having been hammered for a year and a half; (e) those working for Wall Street firms that are now undercapitalized (because they have been hammered for a year and a half) assign a very high cost to risk because it materially increases the chance that their firm will vanish next month; (f) the risk level of these securities is much higher than normal because professional investors no longer trust their own financial models or know how their models compare to the models of other traders...