The Coles Notes on the U.S. Bailout Plan
Posted on September 26, 2008 by Tristan Loker
Following one of the most volatile weeks in United States Financial History, a historical bailout plan has been proposed by the country’s financial honcho’s to save the U.S. economy. Unfortunately, when you need political action to tackle economic issues, things don’t always move as quickly as they should. In a speech earlier this morning President Bush said, “anytime you have a plan this big, that is moving this quickly, that requires legislative approval, it creates challenges.”
So, I bet JUICEBOXdotcom readers (Ed.’s note: JUICEBOXdotcom readers who read nothing but JUICEBOXdotcom are oblivious to the rest of the world) are wondering… how did we get here? What is a Bailout? And why is it so important? We care about business don’t we?
So here is the big fat economic skinny: The U.S. economy is in the tube. Some big banks made some big bets and some small people being able to pay back housing loans. Normally, there is a process for approval of loans, but the high prices in a housing boom in the early 2000’s masked bad bets made on high risk loans lent to people that couldn’t pay them back. Signal the burst of a bubble, and unsustainable growth leading to the collapse of a market.
The people who borrowed the money couldn’t pay it back and banks lost hundreds of millions of dollars. The institutions behind the institutions who owned these mortgages (the money) lost more money (somewhere in the billions. Namely Fannie and Freddie Mac, who were holding 80% of these bad loans)
With interest rates high, and lending at a near stand still, everyone was trying to collect, and no one was giving out. The government tried to help with a fiscal stimulus (sending cheques to everyone’s house) but eventually, people spent the money and were back where they started.
Then, some of America’s biggest name banks started going down (Bear Sterns, Lehman Bros, AIG-Look em up). With no one to lend money, and everyone needing it, the worlds biggest economy threatened to come to a stand still. So everybody in the market panicked, which is where I started things.
Confused yet? Good. Now turn on the television and open the paper and follow the bouncing ball…
This week, the biggest names in American Finance (Bernanke and Paulson – Look em up) asked for a blank cheque worth 700 Billion dollars, no questions asked. Congress (understandably) had a problem with giving that amount of money away to a government (with an unnamed successor) that only has 4 months left. So now it is a debate, who should get the money, how much money, and why.
Many people will gripe about bailing out Wall St. making risky bets, and many people will say that there are others who need the money more. The problem is that the financial systems faults lay so deep it is too late not to bail them out.
You’re right, they don’t deserve it. And you’re right, Sally and Joe in rural Idaho should be able to pay their mortgage first, but it has become painfully evident that the American Economy wasn’t built that way.
Is the television on? Are you reading the paper? Good. Because the thing you should be thinking about in the upcoming election coverage (and tonight’s debate) is not the bailout package and the shape of the economy; it is too late and too much has happened. What that bouncing ball should be following now is just the two candidates, and the change needed in the system, not in the shape of its savior.