Help me understand the current economy.

September 15, 2008 7:46 AM

In light of yesterdays events with Lehman Brothers, Merril Lynch and AIG and all the hubbub with the the "Mac" banks, I'm pretty confused about the economy. I'd like to spend the day reading up to understand the entire situation, starting with the housing market leading up to Bear Stearns and culminating this weekend's events. Could someone please recommend some key articles that will help me wrap my brain around this entire situation?

My understanding of whats going on is very hazy at this point. I've got small pockets of understanding but really need a crash course on our current economy. I'd like sources that could walk me through the last year or so.

I don't need speculation on where we are going, just a sensible, even headed explanation of what happened. Multiple sources are appreciated.

posted by Telf to Work & Money (17 answers total)

This is certainly more simplistic than wht you are looking for, but the electoralvote blog wrote this today:

For people who don't understand what is going on, here is the story in a nutshell. Decades ago, when you wanted to buy a house you went to local bank and applied for a mortgage. If the mortgage was less than three times your annual income and you had a good credit history, the bank would loan you the money and you would pay them interest and some principal every month for 30 years. Then Wall St. got a bright idea: buy up all the mortgages from the banks, collect a few thousand into a pool called a CDO (Collateralized Debt Obligation) and sell shares in it. The owner of each share would get a pro-rata share of the incoming monthly mortgage payments, analogous to what a bond owner gets.

What happened? It sounded like a great idea and soon all mortgages were sold and repackaged into shares. It didn't take long before the banks realized that they could issue mortgages of five, six, even eight times the buyer's annual income or sell them to people with terrible credit histories. After all, the shaky mortgages would soon be somebody else's headache. That's what happened. Lehman, Merrill, and others bought billions of dollars of mortgages that the homeowners had no hope of ever repaying on schedule and nobody wanted to buy shares in these worthless CDOs, so the brokers got stuck holding the bag with billions in worthless loans.

posted by goethean at 7:51 AM on September 15, 2008 [12 favorites]

link for above
posted by goethean at 7:51 AM on September 15, 2008

it may be a good idea for you to start watching more pbs. they have an excellent daily show called nightly business report that deals with the daily market issues. they do a pretty good job at explaining what's going on. the link directs you to the webcast, which is the full program in quicktime. they update it the following morning, so as of this writing you're gonna see friday's program.

andrew ross sorkin's dealbook on nyt is pretty good as well and -finally- there is always charlie rose who I am pretty sure will devote a few hours to the story this week.
posted by krautland at 7:55 AM on September 15, 2008

Not an article but a radio show: This American Life on how the mortgage crisis happened.
posted by PatoPata at 7:58 AM on September 15, 2008 [7 favorites]

You could look at the links provided here.
posted by triggerfinger at 7:58 AM on September 15, 2008

Listen to This American Life's episode The Giant Pool of Money. They do a great job of explaining what caused the current mortgage crisis and goes on to explain a bit how that is affecting other parts of the market.
posted by backseatpilot at 7:59 AM on September 15, 2008 [5 favorites]

Third-ing Giant Pool of Money as the first step.
posted by griphus at 8:39 AM on September 15, 2008

Fourthing Giant Pool of Money, it's a really good summary, and especially good because the programme talks to both the people directly involved and the people responsible for it.
posted by Happy Dave at 8:59 AM on September 15, 2008

If you're feeling ambitious, you can go over to The Economist magazine's website, and dig into the Finance and Economics section. Depending on how much access you have to archives, you'll find at least an article an issue going back a year or so on this topic.

There's also a slightly older American economy backgrounder, which will have links to various issues facing the US economy. While that background was created about half a year ago, the topics are still relevant, and, as the name implies, provides background information to current events.

For most people, the following holds: I Survived a Global Re-pricing of Risk and all I got was this stupid t-shirt.
posted by chengjih at 9:58 AM on September 15, 2008

I came here to suggest PatoPata's link. It's a really simplified but thorough explanation.
posted by desjardins at 10:28 AM on September 15, 2008

Not the OP here, but thanking y'all for the mention of THIS AMERICAN LIFE -- I'm downloading the transcript at your recommendation because it sounds like I'd be able to understand this.

Plus, it's Ira Glass talking, which would be a bonus.
posted by EmpressCallipygos at 11:02 AM on September 15, 2008

When you're done with "The Giant Pool of Money," move on to "Enforcers," last weekend's TAL (I grabbed it last night on iTMS). The second segment discusses the role of naked short selling and CDOs in the current crisis.
posted by fairytale of los angeles at 11:42 AM on September 15, 2008

Related to q, but not entirely: What Should I do: Q & A on market turmoil as it affects personal investment decisions.
posted by lalochezia at 5:22 PM on September 15, 2008

I suggest this slide show. It has some harsh language in it so avoid it if that's not your thing, but I felt like it explained things pretty well.
posted by Horatius at 6:09 PM on September 15, 2008 [1 favorite]

New York Magazine has a profile of David Einhorn, The Confidence Man, who was calling Lehman's bluff a long time before this week.

A few days before this year’s conference in May, Einhorn and his analysts at Greenlight had a private call with Erin Callan, the then–chief financial officer of Lehman Brothers. In two previous speeches at other investing conferences, Einhorn had raised doubts about Lehman; in April, he had explicitly stated that his firm was shorting Lehman, meaning that it had borrowed stock and sold it, with the idea that the firm would replace it at a later date when the stock declined in value (in essence, a bet that the stock would go down, not up). Very few people publicize their shorts, and when Einhorn did, it got Lehman’s attention. The conversation with Callan was to give her a chance to explain discrepancies he had uncovered between the firm’s latest financial filing and what had been discussed during its conference call about that filing.

That very week, a glowing profile of Callan had appeared in The Wall Street Journal, describing her in the headline as “Lehman’s Straight Shooter.” But she’d only been on the job six months and her background was as a tax lawyer, not in finance. She was evidently not prepared for the complexity of Einhorn’s questions and tried to bluff her way through. “The conversation was reminiscent of the ones I had with Allied,” says Einhorn. “We had our questions, we were organized, but she was evasive, dishonest. Their explanations didn’t make any sense.”

And so Einhorn, his sense of righteousness piqued, made a fateful decision: to use the conference to skewer Lehman Brothers. Given the abuse he’d received after he eviscerated Allied, he had to know that this might also have unpleasant consequences. But he was determined to out Lehman as emblematic of the greed and arrogance that had caused the credit crisis in the first place.

posted by gen at 11:57 PM on September 17, 2008

The New York Times Magazine had an amazing profile of Nouriel Roubini, Dr. Doom - Profile - Nouriel Roubini - Predicting Crisis in the United States Economy, which I think is required reading for anyone who wants to know about the current state of affairs.

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”

Roubini's been predicting this collapse for years. His recent interviews on Charlie Rose are riveting.

A discussion about the takeover of Fanny Mae and Freddie Mac

A discussion about the crisis on Wall Street
(Skip the Larry Summers monologue and jump to 13:30, that's where Roubini joins the round table discussion.)
posted by gen at 12:07 AM on September 18, 2008

Response by poster: For posterity:

http://www.metafilter.com/75426/The-Money-Meltdown
posted by Telf at 11:15 AM on October 6, 2008