When one is an idle student messing around with studentish things, it is hard to imagine the other idle students as future leaders of vast importance.

No, it’s not hard. It’s impossible.

My student years had some people who would go on to do remarkable big-scale things.

At Oxford University during my time there was Benazir Bhutto who became Prime Minister of Pakistan and was assassinated late last year as she ran again for office.

And Tony Blair, who became Prime Minister of the UK and has not been assassinated (yet).

With me at the Fletcher School of Law and Diplomacy was Jay Pollard, who became a spy for Israel and is still in prison in the USA.

And Jim Manzi, who went on to get wealthy. Very wealthy. Interesting that he read Classics at undergrad.

So when we are looking for guidance on the world’s financial sector woes, the insights of someone who has made a lot of money – and understands the stuff – are well worth reading:

Here’s the problem with having lots and lots of debt and no savings, whether in the form of passbook savings or equity in your house: Sooner or later Tuesday comes around when you happen to have had a bad week, and the guy who sold you your hamburger wants his money, but you don’t have it…

Normally this would have been bad for both the homeowner and the guy who wanted to get paid for his hamburger, which might very well be the mortgage lender, but not really a big deal for you or me. (If enough of this occurred, of course, it could lead to a general slowdown and hurt pretty much everybody.)

But this impact was magnified by the fact that most of the mortgage lenders sold the right to the payments under the mortgage to third parties. These third parties broke up the rights to the payments from the mortgages into lots of little pieces, combined these pieces with the rights to payments for little pieces of lots of other mortgages, repacked these in “creative” ways, and re-sold them to fourth, fifth and sixth parties.

Four, five and six then used these promises as their own equity in order to raise further debt of their own. This would be like you using an IOU from your neighbor as your down payment for a mortgage.

So when lots of these over-leveraged homeowners started to miss mortgage payments, parties four, five and six had less money than they expected, and they had problems making their own debt payments if they themselves had taken out enough debt. Oh yeah, many of these debt contracts are in fact between parties four, five and six.

Unfortunately for you and me, parties four, five and six are the financial institutions where we have our life savings deposited…

Read on.

He explains it all elegantly. And has some terse things to say about the solutions now being proposed.