Bailout anger and frustration

September 30, 2008

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