| There is a lot of terminology, and the details are absurdly complicated, but the basic idea is simple: * businesses make things and sell them * businesses take loans as a way to have a base of money to operate with, because the costs associated to make things have to be paid before the revenue from selling them comes in, and sales may be cyclical, etc * businesses pay interest on those loans. (Hopefully this interest rate is significantly less than their profit margin.) * the issuers of the loans- usually banks- sell the rights to the interest payments of those loans. Why? When a bank makes a loan, it is exposed to the risk of the business failing- if it fails, the loan principal and interest payments are lost. banks don't want this kind of "all or nothing" risk (more below). * people who buy those rights package those interest payment rights into legal structures that combine interest payment rights from a lot of businesses together * parts of those melded interest payment legal structures are then sold, often sold back to banks, because now the risk, instead of being "all or nothing" is "diversified". The same thing happens with mortgages- banks that issue mortgages sell the mortgages and then buy into structures that package the payment rights from many, many mortgages. For every given institution/bank, the move to sell the specific asset and buy the diversified asset makes sense. At a systemic level, when everyone is doing this, it becomes systemically risky. What's happening now, because of the systemic risk, entities that hold these "diversified" assets are themselves selling them to the central bank, which is then absorbing the systemic risk. This article doesn't mention that bank holdings of cash are at all time highs. In principle, this does not amount to "printing money to stay afloat"- though many will say in practice it does. In principle, it amounts to shifting systemic risk around. |