What is Bailout and how does it work?

In very simple terms and language can you explain what has happened to the economy and how the proposed bailout is supposed to work?

• Answer:

  Because the Federal Reserve is run by a banking cartel with no oversight from congress and their activities are secret, it is possible that the current crises could have been engineered by that banking cartel for the purposes of increasing their power base. What is REALLY happening with the bailout? Your tax money is being given to big banks to gobble up smaller banks. It is not going to support mortgage securities as congress directed. Congressman Kucinich is really upset, he's accused the treasury of rewriting the law. See the YouTube link below. Why don't you ask President Bush? That's what he was supposed to do in the Friday morning speech, and when he didn't the markets tanked. Another demonstration of his total lack of leadership ability. US Economy and Proposed Bailout I will answer the first part, "What has happened to the economy" and leave it for someone else to respond to the second part, on how the bailout is supposed to work (if there is one). All problems stem from loose lending standards for home buyers, extending back to year 2000- 2001. The origination of sub-prime loans meant more people now had the borrowing capacity to buy homes. These loans did not require checks of the borrower's income or other assets, so the home they purchased became the collateral for the loan. As there were more people able to in purchase homes, the price of these homes soared. Thus as long as prices were going up, the collatoral was good. The banks to insure the flow of money (credit) to make the sub-prime loans, found ways to make them appear more secure and sell them to investors or investment banks. A poor loan with insurance does not become a good loan, but it passes the risk of default on to the insurers. Now, insurance for home mortgages is unlike insurance for fire or theft (random events). The sudden decline in home values, coupled with higher unemployment, results in more foreclosures. So, those insuring loans began to run out of money. This is the systemic risk that everyone is talking about. In a more complex manner, poor loans were bundled with better quality loans, in a way to make a product that they could sell, to gain more money to loan. In the same way, the systemic risk of a downturn in the economy was difficult to factor into these products. See collatoral debt obligations. Other loan features, intended to make the loans more affordable, included low or no down payment, adjustable rate loans, balloon payments, and no escrow fund creation. The banking industry through these terms was allowing lending that at the time seemed to be popular and profitable, but now with an economic downturn, a disaster. Finally, the banking industry pushed the "home equity" loans, further diminishing equity for home owners. -I'd Like to add just a brief explanation to the question. The funds; if approved, would be used to purchase asset -- presumably default mortgage -- from financial institutions to prevent fire sale, which is selling asset at any price because the financial institutions are in short, and in serious need for liquidity. This intervention can also be considered as a guarantee pricing, not to let the property prices go down to an unacceptable level; or in other words, to prevent a systematic melt down of the financial institutions. - I would like to add: Wikipedia answerers should not engage in politics per the above "ask Bush" response. Shame, Shame. Lots of reasons exists for the market tanking. - I would like to add: In theory, a reverse auction system is employed so the government doesn't overpay for troubled assets. This is where the government specifies what it intends to purchase, giving the properties of the "troubled assets" and the sellers who offer the lowest sales price get their "troubled assets" exchanged for Tresury bonds. At least that's my understanding. This mechanism has been criticized as the seller know more about the assets being transferred than the buyer. Just the facts.... The "ask Bush" comment was based on simple fact. He had been asked by congressional leaders to to a "fireside chat" type thing to calm people down. He didn't or couldn't... This crisis is NOT just related to home mortgages. Mortgages are just the "straw that broke the camel's back" sort of thing. If they just wanted to fix the mortgage problem they would have just done some interest adjustment and created a system of direct aid to troubled homeowners. The AIG package was a corporate bailout and so is this one. The Myth of the Mortgage Crisis The Mortgage collapse is a symptom, not the source, of economic problems in this country. Distribution of wealth in the U.S. precipitated the mortgage crisis. See the related question on this subject. Additional Information: As the initial responder to this question (the Why don't you ask Bush was added later by someone else, ahead of my comments), I would like to add that wikipedia has numerous webpages on what is now a worldwide economic crises: See: http://en.wikipedia.org/wiki/Economic_crisis_of_2008 http://en.wikipedia.org/wiki/Bailout_of_U.S._Financial_System_(2008) It is an evolving story, and I just tried to summarize one critical aspect, the loose lending standards in the US. Please be respectful and factual. Also, I commend the responder who clarified the reverse auction process for me.