700 billion what????

[efuincarnate]

As an aside, can any of our well read folks out there explain why a 700 Billion dollar bailout is neccessary?  At last count, there were roughly 305 million Americans..if you gave every one of them a million dollars, and froze prices across the board for a year(to prevent rapid inlfation and price gougeing), I am pretty sure the economy would thrive, most if not all those bad loans would get solvent instantly, and it would infuse 80% of that sum, right back into the consumer driven economy...that would be 699 billion, 700 million less then what they are proposeing, but the previous just seems like common sense, rather then "rescue" the current credit system, the one keeping the majority of Americans as modern day endentured servants, it seems far better to let that system fall away, and for a much simpler fix, allow Americans to actually take part in owning America, through home purchase's not loans, paying off credit debt, not collecting it..of course all those "fat cats of Wall street" would not have our vig to use to make themselves obscenely rich, ...but that is kinda the point.
I am sure someone here knows far more then I about all this, feel free to school me on why I need to loan money as a taxpayer to the banks and credit companies so they can then loan it back to me, the taxpayer, with intrest, to keep myself in debt..it just does not make sense, at least not to me.

[Xorisai]

Your math is wrong.  One million to 305 million people would be 305 trillion.  A million millions is a trillion.

[Howlando]

If you divide it up it's just over two thousand dollars per citizen of the US, which is a huge amount of money. There's an expectation that it may ultimately end up not being much of a loss at all due to the investments increasing in value, but TBH I don't know if that's true or not.

[efuincarnate]

Epic fail on my part but...

back to the original question, why do they need 700 billion, or seven hundred thousand million, for?  We are still loaning them money to be able to loan it back to us? Still makes no sense. Make it make sense. Please...

[Howlando]

Short answer from a non-specialist:

Modern finance is really complicated. However, we've begun to reach a point where so many otherwise trusted institutions have fallen and there's been so much bad debt floating around that institutions are no longer prepared to lend to each other, choosing instead to hold onto their cash or buy treasury bonds. The consequences of this are a kind of domino effect in which credit becomes increasingly scarce, and even sound institutions/borrowers can't get their hands on credit anymore.

This means, for example: profitable small businesses that rely on a steady stream of credit can no longer get credit to meet payroll or buy materials for big orders, state/city municipalities are having a harder time getting bonds to pay for big publics works projects, individuals will have to pay MUCH higher interest rates to buy a car/house/student loan/whatever, and so on.

The modern day economy is -incredibly- reliant on credit, and once you get a credit freeze like this it could very, very rapidly get much, much worse as all of this spirals out and decreases profitability and weakens the economy in every way you can imagine. Think about it like a domino effect.

On the day alone in which the plan was proposed, we saw almost twice the total value of the plan proposed being lost, just out of concern and fear that the situation laid out above may come to pass.

Theoretically, the "bail out package" is supposed to buy up some of the worst complicated mortgage securities out there, so this crisis reaches a "bottom" - where lenders will no longer feel a lack of security about lending out their money again, and where the economy can gradually start to recover.

In theory, over time these investments made by the treasury will most probably recoup much if not all of their value.

It's definitely a bad situation to be in though, and I wouldn't presume to know what the best answer is. But I certainly do find myself believing the vast majority of economists out there who say that some form of action from the Feds is necessary if we do wish to hold onto our modern, capitalist, prosperous society.

(Of course, maybe we should all go back to living as agrarian farmers!)

[PanamaLane]

I'd like to add that a huge part of this has to do with the collasp of the housing market. As banks were forced to foreclose on houses because people couldn't keep up with the outrageous mortgages they got for them it created a situation where banks were stuck with homes that nobody could buy. Since nobody could buy them, their value plummeted, which is a simple supply and demand relationship. It equates to a bank making lousey investments and loosing serious amounts of money on them. Since they lost their capital, they've become more reluctant to loan.

Credit is the crux of capitalism. It keeps money moving through the system, if banks can't lend money everyone fails. What the bailout is designed to do is this:

A: Put these mortgages in the hands of the government. They can then lower the cost of the mortgages that people are paying, keeping them in their homes as well as take a temporary lose on homes that have already been foreclosed on, lower the price and get people buying again.

B: Give banks the ability to start loaning again. To put it simply, give them enough capital (cash) to free up the credit market.

C: Play the waiting game. Ideally, as people start keeping up with their payments, and new people start buying homes values should rise again. Real estate is a flux, but overtime value always seems to go up, much like the rest of the markets. The theory is then that as values rise, and people pay back their debts, the government will actually -make- money because they bought the debts at a lower cost now then its value will be later.

D: Use the money that the government makes off this deal (if it makes any of course) to pay off the national debt. Seeing as there are no other plans to even put a dent in the 9+ trillion dollars our country owes, this is a ray of sunshine for all of us that may come out of this.

I hope that at least explained the principals behind what the bailout intends to accomplish. In fact, the whole stigma of "bailout" has kind of been the problem here. What it really is is a "buyout". The government is going to buy these bad investments and hopefully turn them back into the money makers they were always supposed to be.

If you want to think of it on a personal level, imagine that you have a credit card bill you can no longer pay. I've been there, it sucks, trust me. But just when you think all is lost, someone from "debt solutions" comes in and buys your debt and lowers your payments to something you can afford. Overtime, the debt solutions people still win as long as you make your now more affordable payments and you win because you don't have to go bankrupt. The buyout is a bit more complicated, but the same idea is there. Its really an invest in the future of America and Americans. Which may or may not work! A lot will depend on we the people, working hard and staying on top of our own debts.

[Sandstorm]

The overall idea of the bailout is a sound one. However, the Senate is currently messing things up by proposing their own plan, then adjourning for the year. What this means is that if the Senate's plan is good, it will be passed soon. If the Senate's plan is bad, and flawed, then the government will not be able to do anything until the first session in 2009. By that time, we will be New China.

[JackOfSwords]

Sandstorm, I wouldn't worry about it.  We're -already- New China.

[efuincarnate]

Thanks to Howland and Panama, at least I understand the issue now.  And thanks to Xorisai for catching my error. Glad I floated that here before my fiery letter to congress.  The Million dollar plan has beed adjusted. (Coincidently, the plan being voted on, hell may have passed by now, is almost a trillion dollars with all the pork)  Looks like this will pass, despite the incredible  public anger over it.

[Sr.N]

It has passed.

I'm not US american, but isn't it a good thing for you guys, afterall? Better spend 700bi to try to fix the economy, than break it, have more unemployment and lose more than 700bi in the future due to low economy?

[efuincarnate]

"You guys" is a relative term.  It is good for Hedge fund managers, folks with retirement funds, stock holdings in banks, and the high finance world in general. Also, for all of those who are dependant on credit to survive in buisness or life, it is  good thing. For those of us who really hate loaning money to loansharks to loan back to us,-our own money- not so much.. Just makes you angry..Unfortuenetly, it seems Americans have a tendency to have the big screen TV, the  latest Xbox, the new car, newest fashion, cable TV etc..even when it far outstrips what they can afford. So, our consumer driven economy is now (has been for a long time) a debt/credit driven one. I have yet to meet anyone out and about in the world where I live who is not just enraged about the whole thing, but I live in Los Angeles, and views are probably a bit skewed.

[Sr.N]

What is the impact it has for you (as citizens of your economic level)? I know it's the people money, but I think it's going to be put in good use to prevent things getting worse, which would directly impact in the whole country economy, which means less jobs, higher prices, etc..

We had lots of problems with inflation and unemployment in our country for decades, but the economy is more solid now. I know this is pretty bad...

[Letsplayforfun]

The economic issue (simplified version) from an economist:

Banks actually 'create' money by loaning more than they actually have. To prevent them from creating too much money, central banks only allow them 'so much', and only print so much 'paper money' to reflect as certain percentage of the mass of supposed wealth in a country.

Problem is, when for some unforseen (sic...) reason major financial institutes go broke, then people get scared and hold on to their cash, or wish to withdraw it for safekeeping, or just go broke too. Basically this has (at least )two consequences.

First, if people hold on to their wealth (cf Howlands post), others can't get enough to invest in projects that would boost employement, competitivity, etc. That's today's situation.

Second (that's what happened roughtly in 1929), people want to withdraw from banks which a felt unsafe. Back to step one: if banks gave out more money that they actually have: what happens when everyone claims it: they go broke. More, since banks have insurances, insurances risk going broke too. And since USA is connected to world finance... well, you get the idea. On the stoke exchange, people want to saveguard what wealth they have, so they to sell sell sell. And when everyone is selling, the stoke's worth drops dramatically (meaning people lose money of course).

Before they go broke, banks seize the mortrages on the loans they gave out (houses, cars, whatever). Meaning: people are put on the streets. (Read Steinback's 'Grapes of Wrath' to get an idea). People on the streets don't buy as much goods, meaning less firms are necessary, meaning less empoyement, and a vicious circle sets in.

That second step is what governements want to avoid. Panic would be really, really bad (cf. Mr. Trichet's -EU central's banks manager- speech "Trust is our main asset")


Now for the solution (a solution, hoping it will work):

By injecting central bank cash to commercial banks, it allows them to still be able to meet cash demands on the market, and thus not 'hold back'. By having the State pay out for broke firms, it cuts short the risk of contagions or dominos.


Now for the sociological part:

Basically, modern day financial system is based on trust.

Trusting the bank note in your hands: it's just a plain paper sheet, yet you trust it to actually allow you to buy things. Trusting the 1s and 0s in a bank account that there is actually a "worth" behind it. (cf above, there isn't as much). Trusting people you loan money to to actually be able to pay it back. Trusting that share you bought on the stock market to represent some kind of value (present or future) of the firm it stands for, etc...

Today's crisis is one of credit, but also one of trusting the fragile balance of the financial institutions. Most economist already warned that finance had been 'overheating', so the crisis is more like a "things are getting back on a normal line".


It's also a moral crisis concerning remuneration. High finance managers have gotten rich during a period where most social inequalities have gotten worst. That in itself, you make your own opinion of. But then, when they bring firms to being broke, they take no penalty for them as governements (meaning common folk's purses) pay the bill. Basically, they took the risks, took the cash when things were good, and let others pay for them when things got bad (today). Roughtly, the plan will cost each US family about 2200$. For many of which, that's a huge amount.


That being said, most economists agree that it's best to pay now because it could get much worst (cf. 1929).

Just a reminder: this is a simplified version of the events. It helps understanding the mainlines. But in truth, it's way more complicated.