when I started this blog five years ago, I was a pet sitter and the name animal-crackers made sense. now I'm a stay-at-home-dad and freelance writer, but rather than confuse everyone by getting a different blog, it's just easier to keep posting things here.

Today's blog is an academic exercise on why the stock markets are crashing around us. It'll be serious, and seriously boring. But I need to find a way to wrap my head around this problem, and why not here.

Let's go back a few years and start with with Chris and Pat, an androngynous young couple who want to buy their first home. They know little about how to buy a house, so they go to Rick the Realtor.

Rick wants to help Chris and Pat, but he also wants a fat commission. So he tries to sell Chris and Pat the most expensive house he can.

"Based on your income and downpayment and today's interest rates," Rick tells the couple, "you can afford this $100,000 shit-box in Cracktown."

"Oh," Chris and Pat gasp. "Isn't there any other way?"

"Well," Rick says, "I know this mortgage broker with Reputable Bank, who might get you an adjustable rate mortgage (ARM). And he can arrange for a lower downpayment."

"What does that mean?" Chris and Pat ask.

"That means instead of a $100,000 shit-box in Cracktown, I can sell you a $200,000 fixer-upper in Friendly Neighborhood."

"Yay!"

Chris and Pat really like the fixer-upper, and they commit. At the closing Maria the Mortgage Broker explains what an ARM is.

"It's a variable interest rate," she says.

"That means it can go up, right?" Chris and Pat ask.

"AND it means it can go down!" Maria says.

"You mean, our mortgage payments can go down?"

"Yes!"

"Hurray!" Chris and Pat say.

Chris and Pat are happy. They own a nice house in a nice neighborhood and they just had their first child, Jughead.

Rick and Maria are happy -- they doubled their commission.

Everyone is happy, except Oliver the Overseer. Oliver is a risk manager for Reputable Bank. It's his job to protect the bank from too many defaults.

Oliver has noticed Maria and other brokers are writing an unusual number of adjustable rate mortgages (ARMs). If interest rates go up, homeowners might not be able to make their payments and they'll be forced to default.

That could leave Reputable Bank with a lot of bad loans.

Oliver complains to management, but management is happy with its fat bonuses. So Oliver looks for a creative solution and learns about Credit Default Swaps.

Credit Default Swaps (CDS) are complicated contracts that act as insurance. A big Wall Street firm named Lehman Brothers is selling the CDSs to banks to protect the banks from homeowners who default.

Reputable Bank agrees to pay Lehman a certain price and in return Lehman promises to cover any mortgages that default.

Now everyone -- including Oliver the Overseer -- is happy again.

Then a funny thing happens. Interest rates go up.

Interest rates are the cost of borrowing money. It's basic supply-and-demand. If the demand for loans increases, but the supply of loans remains the same, then the cost of borrowing money goes up.

Chris and Pat aren't financial wizards. They don't know this. They are focused on their family and jobs.

Then one day, they get a letter from Reputable Bank saying their mortgage payments will increase.

Chris and Pat are upset. They call the bank, but find there is nothing they can do. They signed a contract. That's that.

Chris and Pat cut their spending (which by the way is harder when the price of gasoline soars) and they absorb the first mortgage increase.

Six months later, their payments go up again.

Now they're pissed, but still there's nothing to do.

Six months later, their payments go up a third time.

Now they're screwed, no amount of budget tightening can help them. They try to sell their house, but find the housing market is soft. Their $200,000 house is now worth $150,000.

Worse still, they owe $180,000 on the mortgage.

Financial wizards have a term for that -- upside down.

Chris and Pat are forced to default on their mortgage.

Rick and Maria don't care. They haven't talked to Chris and Pat for years now. They're busy struggling with the soft housing market.

Oliver doesn't care. He files the appropriate paperwork with Lehman Brothers and expects the Wall Street bank to fulfill its promise and cover the Credit Default Swap contract.

Here's the problem: Lehman wrote A LOT of these contracts. And because of people like Chris, Pat, Rick, Maria and Oliver -- a lot of these contracts are being called in.

That brings us to Luwanda the CDS Broker. Luwanda was a high-flying financial wizard selling hundreds-of-millions of dollars of CDSs for Lehman. She had a crafty computer model that priced and tracked these complicated contracts.

When Luwanda sold a CDS, the payment from Reputable Bank didn't sit in an account gathering dust. No it was invested. She gave the money to Kevin.

Kevin the Money Manager was another high-flying Lehman associate. It's his job to invest the CDS cash -- protect its principal while maximizing its value. Tough balancing act.

Kevin put a lot of the cash into risk-free U.S. Treasurys. He uses the rest of the cash to buy commercial paper. Commercial paper are very-short-term loans between corporations. Their durations are less than 30 days, and their interest rates are slightly higher than Treasurys.

Using this formula, Kevin hopes to protect his principal while increasing its value.

But a funny thing happened. Interest rates went up.

Treasurys and other forms of debt (called bonds) have a funny relationship with interest rates. When rates go up, the value of the bond (the principal) goes down.

Kevin is happy to see his commercial paper investments yielding higher interest rates, but he is unhappy to see the principal invested in Treasurys go down.

In theory, Kevin would love to sell some of his Treasurys and buy more commercial paper. After all, that's where the money's at.

However he needs to do the opposite, to protect his principal. So he's buying less commercial paper.

Kevin's not alone. A lot of money managers are doing the same.

But then the Chris-Pat-Rick-Maria-Oliver-Luwanda situation comes to a head.

Lehman needs to cover these CDS insurance policies. Kevin is forced to sell Treasurys and commercial paper to pay Reputable Bank for their mortgage defaults.

Kevin already had less cash than he had planned. But now he's forced to sell assets at cheap prices so that Lehman will have the cash to cover the CDS contracts.

As the number of mortgage defaults increase, the frenzy picks up steam.

In its hayday, the market for CDS contracts was worth trillions of dollars. Companies like Lehman Brothers and Bear Stearns were buying and selling them like candy.

But what happens when the CDSs become worthless? The market dries up. And those left holding the contracts have nowhere to sell them.

They've become toxic assets.

Bear Stearns had borrowed a lot of money to buy up all these contracts, thinking they were like gold. But the gold was worthless, and Bear Stearns still owed money.

Like Chris and Pat, Bear Stearns was upside-down.

It faced bankruptcy. But government officials stepped in and found another company -- J.P. Morgan, a regular retail bank like Reputable Bank -- to buy Bear Stearns.

It barely cost J.P. Morgan anything, it was so cheap.

Kevin at Lehman Brothers saw this and freaked out. So he came up with a plan. He took what little cash he had left, and he invested it into something that would have a huge payoff.

Unfortunately, most investments that have huge payoffs are very risky. Basically, it was all or nothing.

Kevin knew this. Lehman knew this, but it didn't tell its investors.

Funny thing happened -- Lehman's high-risk investment tanked. Now it had nothing.

Lehman begged the government for a bail out -- or maybe a brokered deal like Bear Stearns had.

"No way, Jose," the goverment said.

So Lehman declared bankruptcy. That same day, Merrill Lynch agreed to be acquired by Bank of America.

That's when the stock markets began to tank.

Only a few months before, Wall Street had been dominated by five investment banks -- Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs.

Bear Stearns was gone. Lehman was gone. Merrill was gone.

Investors lost all confidence in the market. After all, who wants to buy something if you don't know how much it's worth? Morgan Stanley and Goldman said they were fine. But so had Bear Stearns and Lehman.

Back to Reputable Bank for a moment. Reputable Bank, like most banks, needs to keep 10 percent of its deposits on hand. That means if Reputable Bank's customers have deposited $100 million, the bank has to keep $10 million in cash.

Like Lehman, Reputable Bank doesn't keep its cash in a vault gathering dust. It has its own money manager, her name is Felicia. And like Kevin, Felicia invests the money in very-short-safe loans, like Treasurys and commercial paper.

See how it keeps coming back to the commercial paper? More on that later.

Now Reputable Bank has a problem. Some of the default mortgages covered by Lehman were covered. But most weren't.

The number of defaults continues to increase because of Maria and brokers like her.

That means less cash is coming into the bank. To make up the difference, Reputable Bank writes far fewer loans. Felicia, who was already conservative with the cash, is forced to be even tighter.

That brings us back to the commercial paper market. Big corporations use commercial paper like credit cards, to cover day-to-day stuff like inventory and payroll.

Why not cash? Think of it on a small scale.

Chris and Pat's child, Jughead, starts a lemonaid stand. He borrows $10 to get the ingredients, sells the lemonaid for $20 and pays off the loan plus 5 cents interest.

He made $9.95 and he didn't have to front any of the cash.

It's the same way with Ford or Walmart or Dell. They sell commercial paper, use the cash to make and sell stuff, and use the cash from sales to pay for the commercial paper.

But fewer and fewer people are buying commercial paper now. Ford, Walmart and Dell still need to sell it to finance their day-to-day stuff.

It gets back to supply and demand. If the demand for short-term loans remains the same, but the supply evaporates, then the cost of the loans increases.

Look up LIBOR. It's the benchmark upon which commercial paper is traded. See how much it's gone up in the past couple of months?

That brings us to Ruby, a financial manager at Walmart. It's his job to negotiate short term financing. He calls around to the banks and finds many don't have money to lend. Those that do are charging much higher rates.

There's nothing Ruby can do. He's stuck.

Ruby's bosses see this and realize they can absorb some of the cost. (After all, the cost of gasoline is coming down.) But they can't pass the cost onto the consumer. Consumers like Chris and Pat are already tightening their wallets.

The money has to come from somewhere. And the only cost Walmart can control now is labor.

So Walmart fires a bunch of people. And so does Ford and GM and every other large corporation.

Soon lots and lots of people are out of jobs, with very little money to spend.

And so here we are.