Commentary | Hyde Park: The ABCs of the economic crisis

A primer on all the terms you’ve heard but didn’t understand

A is for Asset Backed Commercial Paper (ABCP) – These are investments designed to generate income off of repayment of interest on loans such as mortgages. The market for this was frozen back in 2007 when many Canadian banks realized that a lot of their ABCP were tied to the bursting U.S. housing bubble. Realizing that a lot of these investments are held in pensions, the Canadian government became the guarantor to the tune of $32-billion. Not to be an alarmist but if this hadn’t been done, there was a chance your parents could be fucked into financial oblivion in the future.

B is for Bailout – A bailout is an act of giving a loan to a firm to prevent it from falling into financial ruin. When all streams are exhausted, the government is usually the lender of last resort to step in.

C is for Credit Default Swap (CDS) – Imagine that you own a home. Imagine that you buy insurance for that home. To do so, someone evaluates the value of said home – say $100,000 and then decides they’ll sell insurance on it if you pay them $10/month. If this home burns down, the insurer is obligated to give you $100,000. Now imagine a world where instead of buying insurance on your home, you can sell insurance on your own home to someone else. Now when your home burns down you’re on tap to pay the person you sold that insurance to for $100,000. Now imagine that in the same world, your neighbour can sell insurance on your home to someone else and your home burns down; your neighbour now owes someone $100,000 as well. And that is in a nutshell is how a CDS market worked – except that it’s valued at $56-trillion dollars.

D is for Depression – The feeling I get when I listen to Arcade Fire – it also describes a severe downturn an economy that will make the act of listening to Arcade Fire feel more euphoric than a couple experiencing simultaneous orgasms.

E is for Economy – Something that once resembled a reliable Swiss watch but now resembles a cheap Chinese knock-off labeled “Rollecks” that you can buy on the street for $5.

F is for Federal Reserve Bank – An American governmental institution responsible for handling monetary supplies, the regulating financial system and providing financial services to the U.S. government. In recent years, it has also become an institution responsible for bailing out the asses of everyone who makes more than $1-million a year.

G is for Golden Parachute – A large sum of money given to a CEO when they leave their job for things ranging from being fired, resigning, retirement, going to prison or running a company and the pensions of all the employees to work for said company into the ground. Who says we live in a meritocracy?

H is for Housing Bubble – A rise in demand for property, in this case fueled by low interest rates and loose lending regulations. Of course, this was nay followed by the housing burst, when people realize that they can’t afford the homes they bought and all the paper assets tied into them become worthless leading us to where we are today.

I is for Investment Banking Industry – Once the dream destination of many of the world’s finance majors, like the dodo bird and civilized debates on Israel-Palestine, the investment banking industry no longer exists.

J is for Jobs – Or lack thereof.

K is for Kondratiev Waves – A non-mainstream theory proposed by a Soviet Economist in the 1910s. The basic gist of the theory is that the economy moves in large 40-50 year cycles with major ups and major downs. If you buy into the theory and its projections, it basically states that we are in the midst of entering the worst recession seen since the 1750s. I actually have nothing snarky to say here because I don’t want karma to bite me in the ass if this scenario comes true.

Duong Pham is a U3 Economics student. Stay tuned for L-Z next week, and send optimism to duong.pham@mail.mcgill.ca.


Comments posted on The McGill Daily's website must abide by our comments policy.
A change in our comments policy was enacted on January 23, 2017, closing the comments section of non-editorial posts. Find out more about this change here.