Banking 101

The folks from "This American Life" have produced yet another accessible and entertaining look at how the financial world is falling apart. Well, entertaining might be pushing it, but listen to the show and you’re likely to know a lot more about assets, liabilities and capital - and how those dastardly toxic mortgages are causing such problems. The episode is reported by Alex Blumberg and Adam Davidson, the same guys who did two earlier shows on the economy. This one explains basic banking stuff quite well, especially the term "mark it to market" - the price at which an asset, like a mortgage, is sold on the market and how it can run well below the price at which a bank holding the asset says it is worth. Here's Columbia professor David Beim:

The bankers have all been saying, please don't make me do that because if you do I'll be declaring bankruptcy. If I show all those [assets] as a reduction from 100 all the way down to 20, you've just wiped out my entire capital and more. I'll have to go to the government and say, close me down I'm broke.

Best part of the show is towards the end when the true magnitude of the crisis is laid out. This isn't just about bum mortgages - it's about a nation that's drowning in debt. Beim points out how the ratio of household debt to GDP, bouncing between 30 and 50 percent for much of the 20th century, surged from 2000 to 2008. Right now, consumers owe $13 trillion and the GDP is $13 trillion - a 100 percent ratio. The last time that happened? 1929. More from Beim:

That chart is the most striking piece of evidence I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization or ethics on Wall Street. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us... We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money needed to make that prosperity happen.