Making science more better for you on 07/14/08

Headline of the day

Atheist soldier sues military (CNN)
For the abyss and country? No, that's not it...


A financial interlude...

Poker players and bundles of bad paper
A real poker player knows that if he's invited to a game and he doesn't see a sucker when he enters the room, well, he understands why he was called. The suckers in this case were the folks who signed up for the subprime loans that are being blamed for much of the current financial crisis.

We're not arguing that the borrowers, as a class , were victims. Maybe some were, clearly many weren't. More accurately, what they were was fuel for the machine. Keeping the focus of the story on the "kind of people" that got the loans—you know, risky types— is working the long con on the audience. The borrowers were the marks, not the banks.

Follow the money
Start with the basic question: "cui bono?"—who benefits? These mortgages were being offered by banks, not social workers trying to help the underclass. Would the banks have signed off on these mortgages if it wasn't in their financial interest? We think not. We think the banks got what they wanted, loans they could bundle together and sell off to investors as a financial product. That's where they were going to make the real money—not on the loan, but on what they could turn the loan into. Financial alchemy 101.

Assuming the banks would make most of their profit off of the interest paid on subprime loans is like believing that a newspaper makes it's profit off the money you drop in the coin box. In the case of the newspaper, the money is in the ads. In the case of the banks, the real money was in what the loans could be used for by the banks. The loan was the raw material.

They're called consumers, but actually they're what gets consumed
The borrower was the mark and the mortgage the key ingredient in an investment sausage that has started to spoil. Want a slice?

The Fed's hand wringing about the need for more controls and standards is fine as far as it goes. What about controls on the back end? It's seems like getting rid of the regulations that used to prevent this kind activity, such as the repeal of Glass-Stiegel in 1999 by the Clinton administration, has made for a real bad round of financial Jenga. And they're passing the savings on to the rest of us.

Oh yeah, can anyone say credit cards? Sure you can.