I’ve been thrashing about for ideas on how to explain this whole mess, and think I’ve got a decent analogy. Let’s see how it looks written down.
You have, in your wallet, $20 in cash and a $2000 check for services rendered. You have $2020 in exchangable notes aka money.
You discover that the check-writer has gone bankrupt before the check cleared. You have $20 in money, and a piece of paper, the value of which depends on the assets available and total creditors owed (of which your $2000 is part.) If you were planning to pay your bills, you are in deep deep trouble.
The checks are credit.
It’s not just you wanting to pay your bills. It’s everyone relying on the money that your check represents – and everyone ELSE who had a check that’s now worth, well, nothing.
That’s the situation if credit goes boom Everybody who was relying on it is now facing hard times if not outright bankruptcy.
Enter the bailout. Somebody says, “I’ll cover 25% of the check now and give you a post-dated check for the rest. I’ll help the bankrupt company get back on its feet at which time it will pay off the post-dated check.”
If everyone accepts the post-dating, then they can work out a deal. A likely working example is that you get $520 in pocket and you sign over the PDC for 80 cents on the dollar for another $1200. End result, $1720 in your pocket. That’s still a $300 haircut, but it beats having only $20 in your pocket.
The problem with the current situation is that the plan that was tendered sucked. I think we’ll get a better plan. Economically, a mediocre plan executed well beats no plan – that leads to total financial melt-down. (High probability, not guarantee). See, over 80% of our “money” is credit. And if the credit is allowed to totally collapse, we hit monstrous deflation. The only fix for that is dumping so much money into the pool that we have high and even hyper inflation. Oh, I forgot – the other option is allowing the crash that results. It’s avoidable – or more accurately, it’s within our power to mitigate the extent. That is, we’re going to crash at least somewhat, we can control how severe it is. There are a lot of other issues involved, but this is probably the trigger.
Anyway, that’s the basics, and I hope the model helps people get a handle on it all.