JustinSpeak

My dearest reader, these are crazy times indeed. I’ve been hearing a lot of ballyhoo about the credit default swaps and what they mean for the future of the financial system.  Well, after watching the following video from Marketplace, I have a much better idea of what is going on.  It is a long video, about ten minutes, but it will explain the thing for you in pretty simple English.

Enjoy.

Untangling credit default swaps from Marketplace on Vimeo.

So there we go. The current financial system allows for bets to be placed with nothing really backing up the person making the bet, and the people that have to pay up on the bet are set up in such a way that they have to bring other institutions down with them when the fit hits the shan. This is very similar to what went down in the housing market.  People could buy houses, with no money down, on risky adjustable rate mortgages with the assumption that they will hold on to the house only for a few years and then sell it for a profit.  If it works, the home buyer keeps the profits. If it does not work, then the lender basically has to take the fall. The bank could call the buyer and say, “You owe us money.” but if the buyer can’t pay it, then there really isn’t anything that can be done.

Essentially, you’ve got a situation where people could do whatever they want because the risk was, more or less, assumed by someone else. When you’re playing with the house’s money you don’t truly appreciate the repercussions when things go south. 

My advice? Spend less than you earn, and don’t get paralyzed by fear. Live your life with optimism and keep a cool head. Even if this financial crisis causes the world to descend into chaos, which is highly unlikely, cooler heads will eventually prevail.