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A simplified explanation of America's banking crisis and how it might be fixed

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The news about banks has gotten kind of confusing.   If you turn on The Today Show at random, you can find yourself listening to something like this, from the chairman of the FDIC:

"As of this date, all these large banks exceed regulatory standards for being well capitalized.   So for right now they're fine...

But then you accidentally flip over to CNBC and hear this:

"With regard to so many of these banks, the stocks are telling us that their underlying equity value is zero, or maybe just a little bit above zero."

And then someone from the Obama Administration (whose very jobs depend on us understanding what they're trying to do to try and fix the economy, who are actually trying to explain this stuff to us) will say something like this:

"Those institutions that need additional capital will be able to access a new funding mechanism that uses capital from the treasury as a bridge to private capital."

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Finally, here's Treasury Secretary Tim Geithner on Capitol Hill explaining his plan to fix our banking system:

"The capital will come with conditions to help ensure that every dollar of taxpayer assistance is being used to generate a level of lending greater than what would have been possible in the absence of government support.   And this assistance will come with terms."

So what does all this mean?  

Compared to what it once was, the stock market is way down.   Experts say it will soon be dropping again.   Banks aren't lending the way they used to, even though our government has given them billions of dollars of our money to help them start lending again.   And my life, your life, the entire economic fate of our country, and the world for the next decade, depends on whether or not the United States can fix its banking system.  

What follows next is a simple explanation of everything you need to know to understand the U.S. Banking system and how it might, or might not be fixed.   This summary explanation is based on a program  I recently heard on public radio, the printed transcript of which is available online.

If you want to understand this banking crisis, you need to understand one simple thing first.   And for some reason this is something that the mainstream media and schools K-12 across the country ignore -- and that is the nature of a bank balance sheet.   If you are fairly familiar with banks and bank balance sheets, skip ahead.   Otherwise, read this introduction first.

Let's begin by imagining the simplest bank in the world.   Call it Bobby's Bank.

Bobby is 11 years old and in his new bank he has invested 10 dollars of his own money that he's using to start his bank.   He goes to his friend Alex and says, "Hey, Alex, do you want to open a savings deposit with my bank?   I'll give you 3 percent interest each year."

Alex says that sounds great, and actually has 90 dollars right at hand to invest.

Banker Bobby then says to himself, "So now I have 100 dollars in my bank, 10 of which is mine, 90 I got from Alex.   All right, so now I need to make some profit.   And that requires at least one other person.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

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Legal Liability for Toxic Mortgages BofA is alrea... by Richard Clark on Saturday, Jan 15, 2011 at 8:54:51 PM
...Why the hell should Wikileaks have to do anythi... by Taylor on Sunday, Jan 16, 2011 at 11:18:47 AM
Thanks for this Mr. Clark. A wonderful piece. I ... by Chaz Valenza on Saturday, Jan 15, 2011 at 9:49:45 PM
. . "thirty years of inequality between the 'have-... by Richard Clark on Saturday, Jan 15, 2011 at 10:54:34 PM
Thanks. You are such a great writer and make thing... by Elizabeth Hanson on Sunday, Jan 16, 2011 at 10:16:23 AM
All anyone reading this needs to understand is tha... by Progessive 1 on Sunday, Jan 16, 2011 at 7:28:32 AM
And let me rewrite it in a way that allows me to a... by Richard Clark on Sunday, Jan 16, 2011 at 3:31:35 PM
American corporations are sitting on tons of cash ... by Richard Clark on Sunday, Jan 16, 2011 at 3:34:33 PM
The amount of payroll tax employers need to pay fo... by Laura Stein on Monday, Jan 17, 2011 at 12:26:49 PM
What would happen if all the banks had to own up t... by Taylor on Sunday, Jan 16, 2011 at 11:13:28 AM
I really appreciated the introductory analogy of B... by Taylor on Sunday, Jan 16, 2011 at 11:25:10 AM
and I have no criticisms of it. I would just like... by Paul Rye on Sunday, Jan 16, 2011 at 2:31:43 PM
Where do derivatives enter the picture ? Houses h... by Matthew Peters on Sunday, Jan 16, 2011 at 9:13:45 PM
One correction (keeping it simple means you need t... by M. Umbrete on Monday, Jan 17, 2011 at 1:19:32 AM
I went back into the article and corrected that mi... by Richard Clark on Monday, Jan 17, 2011 at 11:23:00 AM
This is a wonderful piece. Thank you for compiling... by Laura Stein on Monday, Jan 17, 2011 at 11:44:52 AM
I agree with Taylor: we should have just let the b... by Jeffrey Slotnikoff on Monday, Jan 17, 2011 at 5:35:06 PM
. . we would need something in their place to imme... by Richard Clark on Monday, Jan 17, 2011 at 7:40:57 PM