These are extraordinary times. So this week the Answer Desk is asking you to comment on the financial crisis and the government’s emergency bailout. Log on to Newsvine and join the conversation. (If you don’t have an account, take a minute to register.)
Here’s a sampling of the conversation so far:
How are we supposed to pay this bailout of $700 billion when we are broke? Where is this money going to come from? I've heard that the fed/gov't will issue a check that can't be cashed to pay for all of this.
— Chris J.
Technically, the money would come from the sale of Treasury bonds to investors. But unlike Treasury funds that are spent to make up for the shortfall in taxes, this money would be invested in other bonds that are backed by mortgages.
If the people holding those mortgages pay them back, that money would go back to the Treasury, which would use the money to pay of the investors who bought the Treasury bonds. If it worked, the plan would leave the Treasury owing nothing when the mortgages were paid off.
That's the plan anyway.
How about the rest of us that have sacrificed in order to pay our mortgages each month by working harder and scraping to get by, what do we get out of this except the fact that we will have to pay for other people's mortgages more or less?
There are a lot of msnbc.com readers who agree with you: Why should I have to pay for the mistakes made by my neighbor who borrowed too much money?
It's an absolutely fair question. Here are few things to keep in mind: Relatively few homeowners who borrowed too much — or who were tricked into loans the brokers knew were unsustainable — are getting off easy in this mess. Millions have already lost their homes; only a few hundred thousand have worked out modified loans with their lenders with more affordable terms.
The rise in foreclosures is at the heart of the current financial crisis. The reason mortgage backed securities aren't trading is that investors who buy them have no idea how many mortgages in that pool are good — and how many more will default. Until we can figure out how to stop foreclosures, all of this mortgage paper will continue to clog the financial system. Whoever is to blame, the risk to the wider economy is very real.
Think of it like a patient who has a clogged coronary artery. Unless he gets bypass surgery, he's at high risk of a heart attack. If we don't come up with a solution — quickly — we risk an economic heart attack that would seriously damage the economy. And we'd all get hurt — no matter how prudently we've handled our personal finances.
We sold our townhouse this summer, and we are now looking to buy a single family house. We have been looking at bank-owned properties and auctions. Is there any sense yet how this plan would effect those markets? Will there be more or less on the market? Will prices continue to drop?
While home prices in some parts of the country have begun to level off, there's really no way to know whether we're near the bottom. A lot depends on how many more homeowners can't keep with their payments. As they default and their homes are foreclosures, those homes go one the market at distressed prices. Banks are will to price aggressively because they don't want to hold onto properties any longer than they have to.
It's very hard to forecast when the pace of foreclosures will begin to fall. Some loans have yet to reset to higher levels. Worse, if the unemployment rate continues to rise, people who lose their jobs are at greater risk of defaulting on their mortgages.
And real estate is very local. Some parts of the country have been harder than others, some started turning down sooner than others — and may begun to rebound earlier. One important indicator to keep an eye on: the level of unsold homes on the markets. Before any regional market can recover, you have to see that number start to come down.
What will happen to the average American if we don't do a bailout at all? I realize those banks involved will probably tank, but what does that mean for the rest of the country?
It's difficult to speculate on exactly what might happen. For one thing, while this is clearly the worst financial crisis since the Great Depression, the current circumstances are unique. So making comparisons to past financial panics only gets you so far.
The central issue is the slowdown in credit — upon which we all depend heavily. It's hard to see this on a personal level: You go to the ATM machine and money still comes out, so what's the problem?
The problem is that river of money runs much deeper through our economy than the ATM machine, and there are already signs of spot shortages of money. If money stops flowing, businesses can't function, they lay off workers, those workers have no money to buy things, and around it goes. Here's how Mr. Bernanke described the risks of doing nothing:
"I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal healthy way no matter what other policies are taken."
Where did the amount of $700 billion come from?
— A. Fisher
It appears to have come out of thin air.
Fed Chairman Bernanke gave a hint in Wednesday’s testimony, though, when he pointed out that the mortgage market represents about $14 trillion. So 5 percent of that is $750 billion.
By way of comparison, the current default rate on mortgages is about 6 percent.
What are the chances that these huge sums of money for bailouts, homeland security, Iraq and Afghanistan wars, etc. are actually going to some other covert cause or even to buy appeasement from extraterrestrials??
— Everything in Moderation
We have a call in to msnbc.com's Extraterrestrial Bureau, and we'll report back what they say.
Why don't they make the banks rewrite the bad mortgages they sold? Maybe giving a fixed rate and extending the time for repay. Then the people getting these loans would be responsible for their own bad decisions.
One reason is that the bad loans in question are now bundled together in big packages which are in turn owned by thousands of different banks, hedge funds, governments and other investors. If you sit down to modify one loan, you have to get the change approved by hundreds of unrelated parties. Multiply that by millions of loans, and you've got a complex mess. No one has figured out how to unscramble this omelet.
Treasury Secretary Paulson has said that's one reason for having the government buy up these loan packages: Homeowners could then negotiate a better loan with Uncle Sam. But even if the Treasury bought every mortgage backed security out there, it would take months — if not years — to unwind all these bundled mortgages.
The worry is that we don't have that much time to prevent the credit crisis from spreading and doing long-term damage to the economy.
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