Sometimes, you get the Bear...

Let's assume for a moment that I own a business. Assume it, because you all know I don't, or else I wouldn't be blogging. Anyway, assume I own a business. Assume that for several years -- decades, even -- I've been employing business practices which yield ungodly short-term gains for me, but are, in the long-run, fundamentally certain to ruin me, my business, and everyone who touches me.

Let's say, for instance, that I own a dog-breeding farm, but that I have been buying barren dogs for about ten years now. I know that few if any of them will ever produce puppies, but I buy them because they come cheaper and I can rent them out as guard dogs till they kick the bucket.

Now let's say that practice starts to catch up to me, and to everyone who's been doing what I've been doing: it's been ten years, and all the dogs are old or dying. And because I have no puppies to collect from them, I have no long-term investments, either.

I come to you, and I beg you for help. But instead of, say, helping me re-invest in young bitches that can have puppies, I want you to go to the bank and put a mortgage on your house to get me a loan to buy new guard dogs. You assume all the risks, and I will not change my behavior in a way that will help my business.

What do you do?

You tell me to go to hell in a handbasket, that's what you tell me to do.

Unless you're Ben Bernanke and the Federal Reserve. Then, not only do you go get the loan and assume all the risk for me, but you also promise to pump more money into the market to help all my friends.

Bear Stearns, an investment group which survived both World Wars and the Depression, has recently fallen victim to the so-called subprime mortgage crisis. A lot of people hear that term thrown around, but here's what it really means:

Traditionally, when a bank gives out a loan, it requires security: some thing that it can come take from you to sell to repay the loan if you don't pay the loan and the interest back quickly enough. There are thus two sources of income from loans: interest payments, and the possibility of foreclosing someone's home or property to repay the principal.

At some point, banks figured out that they can make a ton of money by making loans to people who have stuff, but have a bad history of repaying loans (i.e. bad credit). So banks would make loans to these people at extremely high interest rates in order to collect huge sums if they did repay, and would just take the houses, cars, etc. if the person didn't. It was win-win for the banks. But at some point, all the banks and lending companies caught on to this, so there weren't many new customers who had stuff to take. So banks came up with the subprime lending business.

Subprime loans and mortgages are made to very high-risk individuals -- people that the banks candidly know will not repay their debts, are likely the file for bankruptcy, and thus give the banks a reliable source of short-term income when they have to sell all their possessions. The thing is that when someone files for bankruptcy, their creditors can only get what they actually have. So if you loan too much to the person, you will take a lot; and if you make these loans to a lot of people, you will take a huge-arse loss.

As you might imagine, the subprime mortgage crisis has occurred because banks and credit companies started loaning money to as many people as they could possibly get their grubby little fingers on. The "crisis," then, is that exactly what everyone with a penny-sized brain knew would eventually happen to these banks is now happening: they're going freaking broke, and taking the economy with them.

And why is that? Because the money they were loaning out helter-skelter was yours, mine, and Samuel L. Jackson's. If you have money in one of these banks, it's your money they've been throwing down the toilet.

Now, what should happen is that these banks all fail, we have a big economic dip, but we come out of it a little wiser. Actually, that's what should have happened years ago. But the Federal Reserve, by cutting the interest rates on loans frequently to "save" such a crisis, has kept making it easier for banks to make the mess worse by loaning out more money they'll never see again.

And now, one of the biggest and most important investment firms has asked the Federal Reserve (our country's central bank) not only to make it easier for them to continue this boneheaded practice, but to fund it and take the risk that it won't work. And the Fed is doing it.

The Bear, it seems has gotten us this time. To be specific, it has gotten us into...well, the stuff a bear "does" in the woods. I'm scared to death of how far this rabbit hole apparently goes.

Have a nice day.