| Aiemond said: Explanation coutesy of Huzah on neogaf. This is the best way to explain it in the least amount of terms: "They are only worthless in the sense that there's a HUGE liquidity risk to them right now. You have assets that perform but can't be sold on the market because there is no market. So you have banks sitting on these illiquid assets that can't be valued because there's no market for them, that can't get credit from other banks because nobody knows when these assets will blow up. Even if only 10% of the assets will blow up, 10% chance of 100% loss is to much for any bank to consider, like that german bank that got burned by lehmans collapse. Banks start hording massive reserves of cash, putting it in a mattress, and not lending it out, because they need the liquidity to survive bank runs and moves in the markets against them because they can't get credit through normal chanels. So those cash reserves that would norminally be lent out to businesses, homeowners, car dealers, student loans, are not being anymore. Only the governemnt can take on the liquidity risk premium because they don't have to fear a bank run or capital requirements. THAT IS WHY THE BAILOUT IS NEEDED |
With payout:
Bank: I give you money. You do stuff. Wheee!
People: Yay! I get money!
Bank: Yay!
People: Oops, that didn't work out.
Bank: Oh noes! I need money now! Government save me!
Government: Here you go little bank. Take this money and keep going.
Bank: Whee! I get richer and richer! Government can I have more money?
Government: Sure, why not.
People: w00t! Glow in the dark sunglasses FTW!
Without payout:
Bank: I give you money. You do stuff. Wheee!
People: Yay! I get money!
Bank: Yay!
People: Oops, that didn't work out.
Bank: Oh noes! I need money now! Government save me!
Government: F!$% off.
Bank: OH S%@^ Guess I can't keep making these super risky loans. Nuts.
People: Aw, I can't make my glow in the dark sunglasses now...
