PublicOrgTheory

If this is even remotely accurate, Khan should be on the speed dial of every obtuse financial reporter:

(1) The problem is that mortgage securities have dropped in value because of the extension of bad loans and the decreasing likelihood of these loans getting paid back. In English, banks gave out bad loans. Those loans aren’t getting paid back. So the money given out is less than the money coming in.

(2) Banks and other financial institutions now have a higher than desirable debt load (in some instances more debt than capital).

(3) The pervasiveness of this problem of debit to capital means that there are few left in the financial industry to provide capital.

(4) It is this capital that the economy requires (hence the Paulson plan, and many “taxpayer check” models). So where is the capital to come from?

(5) The market solution has been for banks and financial institutions to sell off their debts.

(6) Insodoing they have made matters worse, as the flooding of the market with (bad) debt has lowered the price of such debts, and even other debts. So institutions find that while selling their debt, they’re actually loosing more money. They may be getting some capital, but perversely, the debt:capital ration can get worse.

The conclusions that follow this are also very good.