Based on an email received from a friend today, here is a horse racing analogy for you. Just add the appropriate number of zeros to these figures and it will be a closer, though still not a perfect match to the banking situation. Still, I think it is closer than what Congress is using to explain the problem to the public.
George is at the race track and bets $2 on a horse to win.
Two guys observe this bet and Fred says to Samuel, "I'll bet you $5 that George wins his bet."
Nearby are William and Bob. William says: "I'll bet you $10 that Fred welshes on his bet if he loses."
Next to them is Sally. Sally says: "For $3 I'll guarantee William that if Bob fails to pay off, I'll make good on the bet."
Sally goes to Mary and borrows the $7 she'll need in case she has to ever pay off, promising to pay back $8 to Mary. Sally doesn't expect to pay as she believes Bob will make good. She expects to net $2 no matter what happens to George's original $2 bet.
A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.
Question: how much has been "invested" in the horse race?
Answer: $50,000 by the horse owner who expects to profit on his investment as the horse wins and future deals.
Everyone else is gambling (speculating), not investing.
In the housing market, the only "investor" was the person who bought the property. Buyers of the meaningless derivatives spun off from this are gambling. The face value of all these side bets quickly exceeds the underlying investment. Who holds these side bets? Not the homeowner. Customers of the failing investment banks, hedge funds and similar enterprises hold these bets. Notice that the bailout is being directed at them not the homeowners.
The real world is more complicated. For the past 30 years, people placed bets almost anything, starting with the value of stock averages. While there is nothing wrong with this activity, they might as well bet on the temperature in Newark at 8:00 AM. It only becomes "wrong" when congress gets involved and decides to steal more money from the suffering homeowners to "bail out" these financial market speculators.
So when you hear everybody saying this is a crisis caused by the housing collapse, be skeptical. We are in the midst of a classic pyramid or Ponzi scheme and people will lose a lot of money. If the losses remain where the hoped for gains would have gone, that is a market transaction. But, what is really happening with the bailout is that it is the taxpayers who are being milked for the cash - AGAIN!
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