Dear Science,
What in the hell is going on in the financial markets? The guy on
CNBC looks like his head is going to explode. Well, more so. I get it
has something to do with McMansions, people not paying their mortgages,
and borrowing from China. Explain, Science! Economics is a science,
right? Are we all going to lose our jobs?
Broke
Participating in the current financial markets is like eating
junk food—an act of profound faith, or at least of willful
ignorance. Think back to the melamine scandal—when coal dust
replaced protein in commonly used ingredients, like wheat gluten,
killing pets. Science suspects you started looking at the labels on all
of the processed food you eat, perhaps for the first time ever. The
variety of ingredients is shocking; imagine the complex supply chain
required to assemble Cheerios or Cheetos, involving hundreds of
companies spread all over the globe. Most of us eat these absurd foods
with no thought of the gulf in complexity between, say, a potato and a
Pringle. That is, until a crisis in confidence—like the poisoned
wheat gluten.
During such a crisis, the regulations on the human food chain prove
invaluable—in this recent case, they were able to track the
tainted wheat gluten to a corrupt factory halfway around the world.
Being able to track both the origin and destinations of an ingredient
is essential for containing a panic. When we have no idea where a
tainted part goes, or even a way of telling which parts are tainted,
anything that could have the poisoned ingredient loses its
value—even if the vast majority of processed food had no
contamination at all.
Many modern financial investments—whose number and amount of
money invested within increased dramatically after the depression-era
financial controls were dismantled in the 1990s—are more like
processed foods than produce. Investors just figured this out. And
they’ve started to get nervous about where their cash has gone.
Take the mortgage-backed securities at the center of this
crisis—in which thousands of mortgages were blended together,
sliced into pieces, and then sold to millions of investors. Compared to
the traditional mortgage lent out by a single bank to a single
investor, these are the pizza-flavored low-fat Pringles to a baked
potato. Even as the overwhelming majority of subprime borrowers
continued to make their monthly payments, investors started getting
itchy. Since so few lenders asked borrowers basic questions—like
how much money do you make? or do you have any savings for a down
payment?—the quality of ingredients in these financial
hodgepodges can not be determined. So even the “good” investments
lose value and become bad. Therefore confidence cannot be restored.
The congressional Republicans and President Clinton experimented
with financial deregulation; it failed.
Commercially Yours,
Science
Send your science questions to
dearscience@thestranger.com.
