Bailout anger and frustration

There is profound anger on what the main stream media (MSM) is calling Main Street as well there should be about this bailout package.

If we don’t face the current realities, Main Street may end up hurting itself more Main Street can presently imagine.

As I’ve written before, Bush, Paulson and Bernake have done a dreadful job explaining how this bailout plan works. I’ve looked and looked for a cogent explanation of how this works and can find little. Here’s how we got in this mess.

  • Homebuyers who ordinarily would be unable to qualify to buy a home were offered mortgages that were “too good to be true,” e.g., no money down, 100% financing, “stated income” which meant no income verification, pay about half the house payment you ordinarily would for 3 years, etc.  [We can argue until the cows come home about “who’s at fault” but, it’s not going to solve the problem. We’ve hit a wall and we have to deal with it. Let’s just say the mortgage industry found a way to move more homes through creative lending.]
  • This loan situation drove the demand for homes higher and higher, both in terms of demand for homes and market valuations.
  • The homebuyers who bought these loans were told that in 3 years they would be able to refinance the house under the same extraordinary deal they enjoyed as “home values do nothing but go up.”  [This is key.  If home values go down–as they have–the home can’t be refinanced.  People can’t afford the new payment that effectively doubles their monthly payment so they have to walk away leading to foreclosures.]
  • Wall Street began buying and selling these mortgages to each other at a profit.  Selling the paper worked well when there was confidence that the paper valuation equaled or exceeded the actual valuation of the homes behind the paper.
  • What happens when the home value drops below the value of the mortgage?  Not good.
  • What happens when you can’t be sure that the appraised value of the house is even close to the value of the mortgage behind it?  Very bad.
  • What happens when people can’t qualify for loans to buy homes?   Yikes!
  • Now, the mortgage paper that’s been traded is of questionable value and has been moving that way for nearly 3 years.  Yet, Wall Street didn’t pause to reflect on this reality–it was “full stream ahead.”  Today, it’s not hard to find homes worth 10, 20, 30, 40, 50 percent less or even more than the value of the mortgage paper.  That piece of paper is no longer an asset–it can’t be converted to cash.  So, the mortgage is actually a liability–it can’t be used to borrow against or sold (unless you want to sell it at a loss).
  • So, Wall Street now has more of these “crappy” loans than you can shake a stick at and no buyers–well, no buyer that is until the Federal Government comes along and offers to buy the loans that no one wants to create cash where there’s a complete vacuum.   That’s what the bailout is about–buying crappy mortgages no one wants to provide a cash infusion to our economy.

Thus, the mechanism to generate cash that once existed to fuel the economy is severely restricted and is now affecting all areas of the economy.  If people stop buying or severely cut back buying homes, furniture, autos, groceries, etc., all the jobs attached to those industries suffer.   Those industries are supported by workers from Main Street.  The success of these companies impacts our investments, 401K’s, retirements, pensions, etc.

Money is the oxygen of our economy. Right now, our economy is strangling.   Without oxygen, the economy is put into a precarious state.

So, we know why this happened and what the implications are.  There is plenty of blame to pass around.  That’s not helpful.  We have a crisis and we need to come together to address this crisis.

Main Street should be angry. 

But, Main Street has to understand that failure to act by supporting some form of bailout package is going to hurt everyone and everything.  Main Street can’t get even with Wall Street without hurting Main Street.  We are all interconnected.

So, get angry and insist that reforms are put in place to make sure this doesn’t happen again.  Just be sure you don’t cut your nose off despite your face. 

What about all the alternatives?  I’ve given that a lot of thought and determined that, sadly, we need fast action.  Just about everything that we might do takes longer than we can probably tolerate at this point.

What should you do?  Call your Congressional representative and tell them that you’re angry we are in this situation, you want reforms put in place after this crisis passes, but you understand that something needs to be done and be done quickly.  Tell them to negotiate a bailout package and make it happen soon.  That, sadly, is our only choice.  I don’t know how big a package they need, but, something has to be done.

What do you think?  Democrat Dave

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8 Responses to Bailout anger and frustration

  1. Of course, it should be noted that a huge portion of “Main Street” took out loans that they could not afford to repay. That is where the blame starts.

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  2. Dave says:

    Politix: I deleted your lengthy post. Too much there that’s not related to my post. The issue is not looking for blame and not looking at history of mankind the Congress. Our economy is in the dumpster and without assistance from Washington could further negatively impact the economy. The politicians committed that this would happen. We are where we are. What is the responsible next step? The average American needs to understand that, to do nothing, likely makes our situation and their situation worse than it already is. To do nothing has consequences. To do something has consequences. Which consequences are likely worse? Let’s focus the discussion around that, please. Democrat Dave

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  3. George Martin says:

    Yes, money must be infused into the economy, but why must it go through the same folks whose poor judgment and irresponsibility got us into this mess. Here’s a thought, instead of pumping hundreds of billions into their mismanaged institutions, why not just reduce this year’s income taxes by the same amount. That would put the same amount directly into the hands of the American people, to spend as they see fit. That kind of cash infusion should keep the economy humming, while rewarding no individual or institution that created this mess.

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  4. Bob Smithson says:

    I’ve got an idea. Use some of the proposed bailout spending to pay for a special, this year only, deal on mortgage payments. For this year only, 100% of mortgage payments, including PRE-PAYMENTS, will be completely income tax deductible. The good people who responsibly pay their mortgages can take advantage of this offer to further reduce their debt, while providing the infusion of cash to the overextended financial institutions, who will be required to immediately use these payments solely to write new mortgages. Win/Win.

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  5. Kurt says:

    Really, George? Cut Taxes?!? You seem to be forgetting that one reason value is down is because the dollar is so weak. The dollar is weak because Bush took a budget surplus and turned it into the biggest deficit in history. Please re-read Dave’s post, or re-take Econ. 101.
    One minor note, Dave. 65% of these sub-prime loans were given to consumers who would have qualified for normal loans. So, while there’s plenty of blame to go around, a little common sense regulation would have kept this problem in check.

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  6. Kurt…I agree that sub-prime loans weren’t used appropriately. Why? Mortgage brokers could hide dollars they were making under the “yield spread” which didn’t really show up in the HUD disclosures as one would expect. So, it was all about mortgage brokers stuffing their coffers, getting a chance at yet another loan when it came time to the refinance of the existing home, etc. Good catch! Democrat Dave

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  7. culturepress says:

    Agreed. A bailout plan of some kind is absolutely necessary, whether we like it not. If we let Wall Street die, the financial backbone of this nation will crumble as well. It’s unfortunate that the plan was not sold well to begin with. The majority of the public still seems to oppose any kind of bailout proposal. Hopefully, the Senate addendums proposed today, with extra protection for taxpayers, will lead to some progress in getting a bill passed.

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