What's Ailing the Markets?

[blsh]

I think this article from "Average Joe" is quite easy to understand. What do you think?

Thursday, August 23, 2007

What's Ailing the Markets?

As you might be able to tell, the problems facing the financial markets right now are no joke. The dumping of money into the banking system by the Federal Reserve, along with the cutting of the Fed's discount rate (not to be confused with the more well known Fed Funds Rate) suggest that the even though there's still inflationary risk out there that the Fed sees what's happening as a real threat to economic growth.

But the problems are not particularly straight-forward and I get the feeling that a lot of people watching the markets falter don't really understand the itch that's causing it all. For those savvy types that find their way to this blog (are there any?) this might be just a review of material you already understand. For everyone else, hopefully this, though very simplified, will help elucidate the situation a bit.

The old maid

So to start, I really liked the way The Economist described the old US banking system in a recent article. They compared it to a game of Old Maid, where each player's aim is to not end the game with the maid in his hand. You could similarly compare it to a game of musical chairs -- when everyone goes scrambling for a chair one person is inevitably left standing.

In the past banks basically took on the bulk of the risk when it came to making many loans -- mortgage loans in particular. With all of these loans on the banks' balance sheets, when the music stopped playing after a time of excess it was a scramble to see who was left with enough bad loans to leave them standing. For that/those banks it was game over.
...
http://theaveragejoeinvestor.blogspot.com/2007/08/whats-ailing-markets.html