When the going gets weird, the weird turn pro. - Hunter S. Thompson

03 October 2008

The bailout explained comprehensively, in 136 words

If you owe the bank $10, it’s your problem. If you owe the bank $10m, it’s the bank’s problem.

If you and a million others owe the bank $10 each, it’s still your problem – but it’s also the bank’s problem.

If the bank then sells to an investor the $10 you owe, it ought to be the investor’s problem.

But if you have a problem repaying the $10 – and so do a million others – it’s both the investor’s problem and the bank’s problem.

Your problems and the investor’s problems mean the bank now owes another bank $10bn. That is both banks’ problem. But if neither bank will pay the $10bn it owes the other, it can quickly turn into a $700bn systemic problem.

And if the government then owes the banking system $700bn, it’s your problem.
Lombard: The US bailout explained (FT Alphaville blog - Financial Times) - 29 September 2008

No comments: