.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;}
If war is how average Americans learn about geography, the economic events of the past 12 months are how we learn about finance. We’re getting a high-priced education in:

Collateralized debt obligations. Let’s say you borrow money from a solid bank that only lends to qualified, reliable customers. You also borrow some money from an angry-looking guy who stands in your front yard, tapping a baseball bat in his hand. You might choose to combine these two debt obligations and sell them to your neighbor, Roy, who will fall for almost anything. This has been the engine of the American economy for the past several years.

Oil pricing. The scary skyrocketing increase was obviously a major cause of our economic woes. More expensive energy makes it more expensive to manufacture, transport and distribute practically everything. Then prices started going down, and they told us it was a symptom of our economic woes, and also a bad thing. And God forbid that oil prices should ever stay the same for two days in a row.

Naked short selling. It sounds like something you would find at Minx Showpalace up on Northeast Broadway Avenue, but it’s actually a sneaky way to sell stocks you don’t own. The “naked” part means you really, really don’t own them. This is such a terrible, harmful practice that the government slammed its fist on the table and banned it – for the stocks of 19 companies out of several thousand.

Wall Street brokerages. Most of us aren’t quite sure what the people do all day at a place like Lehman Bros. Holdings Inc. – may it rest in peace – but we suspect it involves yelling. It’s a tough business, creating wealth, and we’re glad somebody’s doing it. But “create” might be too strong a word.

“The game Wall Street played relied on leveraging up the cash provided by shareholders to enormous levels and using all the debt to accumulate a giant portfolio of securities,” Fortune magazine said last week. “This model has an obvious, and fatal, flaw. Earnings on Wall Street no longer come chiefly from recurring businesses but rather from a combination of huge leverage and huge risk.” You know, like roulette.

Capitalism. We were taught in school that capitalism made America great, and that people who depend on government to solve all their problems never amount to much. Then something goes wrong and we immediately sneak into the alley for a hit of socialism.

But socialism must be applied judiciously, or you eventually replace the Lincoln Memorial with a sculpture of an upturned palm. When The Bear Stearns Cos. Inc. was falling off a ladder, the federal government ran over with a big cushion. When Lehman Bros. got into the same position, the government pulled up a chair to watch.

Credit default swaps. You have insurance covering damage to your car, so why not insurance covering your bad financial decisions? Credit default swaps allow you to put somebody else on the hook when you take a disaster-worthy risk. The New York Times described American International Group Inc. (AIG) as a central player in an unregulated credit default swap market valued at $60 trillion or more. “Nobody knows this market’s real size, or who owes what to whom,” the Times said. If AIG had collapsed, “its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. More failures, particularly of hedge funds, could follow.”

This, then, is the financial system you’re depending on.

A week ago, when it became clear that Lehman was headed toward bankruptcy, the world waited to see what would happen when U.S. markets opened. The Wall Street Journal quoted an employee at the European Central Bank: “We are in the hands of the Americans.”

Good luck with that.