Imagine a car lot
The poetry of economics: imagine a car lot. . .
This explanation of the various possible approaches to toxic assets is very good, very clear, and should be circulated more widely:
Imagine a car lot that has 100 cars on it. However, some of these cars have problems. Half of them will have engine troubles that total the cars - the engines blow up and the cars are then worthless - and this will happen just after purchase. The other half are perfectly fine. Unfortunately, there is no way to tell prior to purchase which type of car you will get no matter how hard you try. Thus, half of the assets on the car dealer’s “balance sheet” - the cars on its lot - are toxic, and lack of transparency makes it impossible to tell which ones are bad prior to purchase.
It’s pitched at the level of a reasonably bright child, which is exactly what I’ve been looking for.
March 24th, 2009 at 9:41 am
After so many years of the internet I no longer really get any economic explanations that don’t begin with “You have two cows”.
March 24th, 2009 at 1:03 pm
you have two cows. one of your cows is toxic, but you don’t know which one. both your cows and all your money are going to be given to a senior executive of AIG. the executive will use the toxic cow as collateral for a series of credit default swaps and will use the healthy cow to barter for food and wives. the government will guarantee the value of the toxic cow. QED, problem solved.
March 25th, 2009 at 7:13 am
Finally it makes sense!