*sorry if this is a little difficult to understand or non linear, I'm really thinking "outloud" here.*
So like many (I think most) Americans, I'm reading and listening about the bailout, and think....is this good or bad?
so I'm on a quest to understand what's happening, why it happened and what will happen. I have a friend who is a financial analyst who I'm sure understands this all so hopefully I'll get to ask him, in the meantime, the most illuminating explanation I've seen so far was Bill Clinton's on the Daily Show.
This is what I understand at this point, forgive any egregious errors and please feel free to correct them, I in no way stake any claim to any great understanding, and this is actually mostly gleaned from conversations that I've had and then my own logical pinning of things together, not research as such.
At the end of the economic boom of the 90's there was a surplus of cash in the economy and in order to create places to invest it the residential sector was expanded. To sell these homes more "unqualified buyers" were given loans at very high rates. These are high risk loans: the loanee's are less likely to pay them back (as per their history) but if they do pay them back the loaner stands to make a lot of money.
What happens next is that the banks sell their loans in bulk to other banks and investment companies. They sell the debt because it is better for them to have money in their pocket now, than to have potentially more money later, but the risk of having no money. Why would someone else buy high risk debt? This sounds really confusing but really we should look at it like any other investment: they pay x for the debt/investment and stand to make a great deal of interest if the loanee repays. The "if" has been turning out to be a bit of a problem. So what happens next is where things break down.
In mortgages there is a foreclosure clause, the collateral. This way the bank does not end up high and dry if their loan is not paid back, they repossess the house and the sell it themselves thus ideally making back the money that they have loaned. This is not ideal as they stand to make more money from the interest of being paid back, then from selling the house, but it's their security.
but now many people are not paying their loans back, does it pay to foreclose on all of these people? Well it seems like no, who's really in the market to buy a house these days? The cost of foreclosing on all of these people and then trying to sell all of these houses is too great for this I think. So what? all of these folks are defaulting on their loans, do we hit them up with higher interest rates thus making it harder for them to ever get out of debt, but increasing the investors chance of making their money back?
That's the whole thing with high risk investments, they're high risk for a reason, and these big investment companies stand to loose everything. A free market attitude would say, well they should lose everything. But looking at the bigger picture gets confusing.
The folks who bought up these loans are not necessarily the folks who own the debt. People who buy diversified funds (I think) own some of this debt, they trusted their investors/brokers to do this for them. They did not necessarily decide to buy these particular funds...I don't know.
It effects more people than made the decisions to buy up these loans.
We, the people of the United States of America lend the companies, and ultimately ourselves 700 billion dollars. LEND. I think that's the part that's evading some people. Ideally the treasury is not just giving banks et al 700 billion dollars, but making an investment. Hopefully an investment that will be paid back and ultimately cost the tax payers far less than 700 billion dollars. It sounds like if it's done wisely it will cost the tax payers about 100 billion dollars. That's still a lot of money. While I can conceive of a million dollars and what that means, it is difficult for me to conceive of a billion dollars and what that means, let alone 100 billion dollars.
(but it's a vicious circle yes? an investment on an investment, and a bad one at that)
So what happens if we do bail out? Foreclosures don't have to happen, eventually things are paid back, the government is re payed and there is greater oversight as to who is loaned what? It's not just a loan though, the government will take a greater interest in how the banks that they now "own" a part of operate.
If we don't bail out? There are lots of foreclosures, our money in the banks (over $100,000 the insuring policy changes but it can be more or less apparently? I actually have no idea) is not particularly safe. commodity prices continue to rise, salaries do not, (this can still happen with a bail out yes?)
Anyhow, there is clearly a place where I just stop understanding.
there are nagging questions though. Do the folks defaulting on their mortgages "deserve" to have their houses repossessed? Do the folks with their high risk investments "deserve" to loose all their money? All of this money that was invested...where is it now?
finally just a quick thought (Noel and I were talking about this) there is all this talk of the stock holder vs. the tax payer. Presumable all stock holders are tax payers, and some tax payers are stock holders, so these categories are not quite as mutually exclusive as debate makes them to be.
More hopefully when I get this explained to me.
Closing the door, leaving the lights on
5 years ago