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Old 04-06-2009, 04:05 AM
x9#z6 x9#z6 is offline
Join Date: Dec 2008
Posts: 27
Default Re: Financial Pneumonia

Great analogy by Mark Thoma. Let's consider his example further. Each car, if it functions properly, is worth $20,000. Like Mark says, some unknown number of cars are total trash and are worth $0. There is 1000 cars in total.

Nobody knows for sure how many are trash but the guess from market wizards is 700. Therefore, to buy the lot, investors will pay $6,000 per car. However, the banks claim (hope!) that only 200 cars are trash and therefore, they won't sell for less then $16,000 per car. So what is Geitner's plan. In a nutshell the government bridges this difference by saying to investors, if you put in just $3,000 per car we'll cover the other $13,000 and when you sell we'll split the difference. So how does everyone make out if the market is right and 700 are trash and the investors sell for $6,000:

investors=push; banks=+$10,000; government=-$10,000

Big win for the banks and big loss for us. Ok, what if the banks are right and only 200 cars are trash and the investors sell for $16,000:

investors=+$5,000; banks=push; government=-$5,000

Big win for investors and another big loss for us. See a pattern here. Heads we lose and tails we lose. There's another name for this plan it's called theft.
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