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David Leonhardt attempts to explain The Big Shitpile in slow, simple sentences. And he does a good job laying out one of the pieces that isn't getting enough attention, the way in which mortgage risks had been spread out across the whole financial system, rather than remaining with the banks:
[This] largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.Got that? The banks that held the mortgages had begun letting other groups -- hedge funds investors, etc -- invest in the payback of mortgage debt. When consumers stopped being able to pay back mortgage debt, it wasn't only the banks who got hit, but the investors who were essentially insuring the banks. And because no one really knows who holds what debt, no one's really sure how far this thing will spread, or who will collapse. The fall of Bear Stearns was all the more unsettling because it was totally unexpected. And nothing scares the markets like the unexpected.One more thing: I get the argument that bailing these folks out does too much to save the rich. But if we avoid a recession, it also saves the poor. Why can't the government do a bail out but insist on personal consequences? I.e, if these companies want help, their executive class gets fired. It's fine to want to teach Wall Street a lesson, but you probably shouldn't let the economy tank on principle.
