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Even if we name the meltdown, though, we're still going to have a lot of folks confused about what's going on. As of now, the definitive big picture piece explaining the crisis hasn't been written, because much of the crisis is a result of the fact that nobody knows what's going on. For instance, that Bear-Stearns deal you kept hearing about? Nobody knows how bad their financial situation is. We're dealing with such crazily complex financial instruments that there's no simple balance sheet we can refer to, no accepted method of totaling up the risk these banks have assumed. We're screwed, and we don't know how badly.But insofar as some of the crisis can be explained, Mark Thoma does a pretty good job in this dialogue. And if you want an idea of how weird things are getting, think through this Brad DeLong post on the fate of Bear-Stearns:
There are two ways to read last night's sale of Bear Stearns to JPMorganChase for $2 a share:1) There were no other bidders. Bear Stearns only other option was to file for bankruptcy this morning. And Bear Stearns's executive were convinced that that was not an option--that not playing along meant that everybody everywhere would look with glee on the filing of every criminal fraud charge against them anyone could think of.2) Even with the Federal Reserve offering a put on the worst $30 billion of Bear Stearns assets, there is so much garbage in the closet that $2 a share is a fair price.Brad thinks the answer is #1, and I agree with him. That's why Bear Stearns, which was sold for $2 a share, is currently trading at $7. If you read this Wall Street Journal article on how everything went down, it's pretty clear that Paulson and Bernanke swore that everyone in the room would be going to Gitmo if they didn't cut a deal right the fuck then. They forced the executives at Bear Stearns to take whatever deal JP Morgan was willing to give them. But because JP Morgan can't rapidly evaluate the risks that Bear Stearns has accumulated, they had to lowball, offering a deal which implies massive levels of risk. Ordinarily, this deal wouldn't have been taken. But the government didn't give Bear Stearns a choice And in order to keep the board from going back on the deal, they let JP Morgan retain the ability to purchase Bear Stearns real estate and gave them 20 percent of the shares. The only way you get the BS folks to agree to that deal is if they're convinced they're avoiding something much, much worse. Like prosecution.
