BURNING DOWN THE HOUSE ...

MATCH STICK #1: Remember when Treasury Secretary Hank Paulson said we needed to pump taxpayer money into the financial system so the banks could start lending to consumers and businesses? Well, guess what? It looks like some of the banks are hoarding cash. Worse, instead of lending to consumers, they plan on using what they get from the American taxpayer to scarf up troubled financial institutions ... further consolidating their position in the market.

MATCH STICK #2: At the same time, market players are looking for money to buy up incredibly complex (and often toxic) investment products that they were supposed to pay insurance on. Owners of the toxic instruments, for many reasons, feel obliged to sell. In simple terms this is akin to your insurance agent arriving with the fire department, and offering to buy your burning house at a discount price. If you refuse, he leaves and takes the fire department with him.


The real problem here is that the market players don't have any money to make these purchases. They have to borrow money. This drains funds from a system that has few funds to begin with (which helps to raise LIBOR rates). If we continue with our "fire sale" metaphor, this is akin to your insurance agent gaining control of the fire hydrants when they arrive on the scene. They might not actually own the water supply, but access is cut off.

Moral of the Story: If we don't get this right (as appears to be the case now), debt, tight credit, and simple stupidity could turn a small brush fire into something the Santa Anas whip up every summer in California ...

- Mark