Here is a simple explanation of the credit crisis by Steve Waldman over at Interfluidity that is quite interesting. Steve has an amazing site. We recommend it.
We have taken the liberty of adding our own twist at the end though. You decide what is the most effective thing to do.
Credit Crisis for Kindergartners
David Leonhardt notes that it's pretty hard to explain what's going on in the financial world these days. Here's how I'd tell the tale to a child:
Alice, Bob, and Sue have ten marbles between them. Whenever one kid wants another kid to take over a chore, she promises a marble in exchange. Alice doesn't like setting the table, so she promises Bob a marble if he will do it for her. Bob hates mowing the lawn, but Sue will do it for a marble. Sue doesn't like broccoli, but if she says pretty please and promises a marble, Bob will eat it off her plate when Mom isn't looking.
One day, the kids get together to brag about all the marbles they soon will have. It turns out that, between them, they are promised 40 marbles! Now that is pretty exciting. They've each promised to give away some marbles too, but they don't think about that, they can keep their promises later, after they've had time to play with what's coming. For now, each is eager to hold all the marbles they've been promised in their own hands, and to show off their collections to friends.
But then Alice, who is smart and foolish all at the same time, points out a curious fact. There are only 10 marbles! Sue says, "That cannot be. I have earned 20 marbles,
and I have only promised to give away three! There must be 17 just for me."
But there are still only 10 marbles.
Suddenly, when Bob doesn't want to mow the lawn, no one will do it for him, even if he promises two marbles for the job. No one will eat Sue's broccoli for her, even though everyone knows she is promised the most marbles of anyone, because no one believes she will ever see those 17 marbles she is always going on about. In fact, dinnertime is mayhem. Spoons are placed where forks should be, and saucers used for dinner plates, because Alice really is hopeless in the kitchen. Mom is cross. Dad is
cross. Everyone is cross. "But you promised," is heard over and over among the children, amidst lots of stomping and fighting. Until recently, theirs was such
a happy home, but now the lawn is overgrown, broccoli rots on mismatched saucers, and no one trusts anyone at all. It's all a bit mysterious to Dad, who points out that nothing has changed, really, so why on Earth is everything falling apart?
Perhaps Mom and Dad will decide that the best thing to do is just buy some more marbles, so that all the children can make good on their promises. But that would mean giving Alice 19 marbles, because she was laziest and made the most promises she couldn't keep, and that hardly seems like a good lesson. Plus, marbles are expensive, and everyone in the family would have to skip lunch for a week to settle Alice's debt. Perhaps the children could get together and decide that an unmet promise should be worth only a quarter of a marble, so that everyone is able to keep their promises after all. But then Sue, the hardest working, would feel really ripped off, as she ends up with a much more modest collection of marbles than she had expected. Perhaps Bob, the strongest, will simply take all the marbles from Alice and Sue, and make it clear than none will be given in return, and that will be that. Or, perhaps Alice and Bob could do Sue's chores for a while in addition to their own, extinguishing one promise per chore. But that's an awful lot of work, what if they just don't want to, who's gonna force them? What if they'd have to be in
servitude to Sue for years?
Almost whatever happens, the trading of chores, so crucial to the family's tidy lawns and pleasant dinners, will be curtailed for some time. Perhaps some trading will occur via exchange of actual marbles, but this will not be common, as even kids see the folly of giving rare glass to people known to welch on their promises. It makes more sense to horde.
A credit crisis arises when many more promises are made than can possibly be kept, and disputes emerge about how and to whom promises will be broken. It's less a matter of SIVs than ABCs.
As it turns out, this is only part of the story.
Alice, Bob and Sue have done this 'marble scam' several times in the past ten years. They are now in middle school. They graduated quickly from 'marbles' for each other's chores, and have been trading a wider range of items to the neighborhood children and their classmates. They have taken compact disk players, iPods, cell phones, expensive video game platforms, stereos, wide screen televisions, and all the latest gear which they have flaunted at school openly and brazenly. They were admired and touted by many as true examples of clever innovation and success in trading so many items and gaining so much material wealth for themselves, and the promised wealth for the other children.
But of course it was a scam, and they could not even begin to pay. Even after their deception was discovered, they continued to work their deals on other families in nearby towns. They are rumoured to have compromised or bribed several teachers at school where they conducted much of their operations. Alice even helped set up a trap for the assistant principal which ruined him.
They don't think they should have to give ANY of it back, and have threatened to burn down the neighborhood unless mom and dad buy the goods that all the children were promised. Mom and Dad think all the parents including people with NO children should help pay for this for the good of the neighborhoods. Mom and dad are afraid and ashamed, but adamant that no one is at fault, and besides it is fruitless to even discuss it. What could they have done? Kids will be kids. Who could hold them responsible? These things happen. Let's fix it and move on.
You live in a nearby town. You are just appalled by this behaviour but are confused about what to do. You hear so many different versions of this story on the radio, and so much advice from famous child psychologists to give them what they want, they'll get it anyway. Morality is an outmoded concept and doesn't matter. Be positive and problem-solving.
Mom and Dad have gone to the town's biggest bank and the president of the bank loaned them part of the money. Gossip had been that the former president had been completely aware of the scam, but its hard to say because he always spoke in riddles and claimed to know nothing until well after it happened. The whisper is that the Kids were big depositors and shareholders in his bank.
The bank president has asked your city council and mayor to raise YOUR property and local income taxes immediately to pay back the loan and finance the rest of what it will take to clean this mess up. The idea is that all the children can have what they were promised, and no one has to fight about what to do or give back. The mayor and several leading city council members have endorsed this because it increases their ability to control funds for the township. Neat, clean, simple.
Your taxes will only be going up 900 dollars per year. Some out of state people will also be paying for this, but who cares about them.
Financial advisors on television have said that you might have to pay that much or more in extra homeowner's and automobile insurance if the kids start burning down houses and breaking into cars to get what they want. What do you care how the problem gets solved?
If you do nothing your taxes will be raised and you will pay. What do you think Mom and Dad should do?
In our story Mom and Dad are the Bush and Clinton Administrations and their regulatory agencies. The Kids are the Wall Street banks. The local banker is the Federal Reserve. The mayor and city council are the Congress. Do you find this interesting? Why not email it to a couple friends and see what they think about it.
