Explaining the Bailout

Jim- banks make money by making loans. they get the loan back plus interest (profit). businesses make money by getting loans. they use the money to buy or make stuff which they then "mark up" to pay off the loan and make a profit too. This is what makes our merry capitalist carousel go round.

2. On a bank's books a loan is treated like an asset. It's out there, but the bank is going to get paid back plus. In addition, where home-loans are concerned, the loan (mortgage) is backed up by the value of the house. So the more loans a bank has on its books the "richer" it is.

3. But what happens when the loan goes or is bad? In that case, the "asset" turns into a liability and the bank is poorer. Oh well... they can always foreclose on the house, resell it and get their money back. But what happens when the price of the house was a bubble-price anyway and it turns out that the resale value of the house was way under the amount of the loan. Oh shit....

4. Banks can only lend money in proportion to their assets. (12:1 currently I think). Because the whole system is an intricate game of musical chairs or of robbing peter to pay paul, banks can lend out more than they actually have on the calculation that not everything comes due at once and they can always spin around fast enough. But when we reach the "Oh shit" point, banks can't lend because they're aint going to be enough in-flow to cover the outflow. This is what is called "insufficient reserves".

5. Now it's a little more complicated than that because a lot of these loans were repackaged and resold to 3rd, 4th, 5th buyers down the line. The whole thing is the financial equivalent of melamine in the baby's milk.

6. The "bailout" is very simply a program of "cash for trash" Our cash to buy up all these "toxic" (i.e. no good) loans. The idea is that if we give the banks good dollars for lousy mortagages, they will then turn around and make loans again. Of course, we'll be stuck with the trash, but the merry go round will at least start to spin.

7. But nothing in the bill requires them to make loans. Nothing stops these swine from taking the money and buying US or German treasuries, or investing in a Nigerian gold mine. It's basically just a giveaway

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