The Truth about the $ 700 billion bailout

In my opinion people are greatly over-reacting to the proposed $ 700 billion "bailout" that Congress is reviewing to save both Wall Street and Main Street. The over-reaction is largely the fault of the media which loves to hype negative headlines while not fully explaining the situation.

It is understandable for American taxpayers to be angry over what has happened on Wall Street. Make no mistake - both parties are to blame. Since the time of the Clinton administration, the Democratically controlled Congress greatly pressured institutions to enable home ownership for everyone and put significant pressure on Fannie Mae, Freddie Mac, and the financial system to accept low credit quality applicants, on the premise that rising housing prices and an improving economy would make it affordable to the homeowner. Meanwhile, the Republican controlled Congress prevented regulation from being put in place (on things such as credit default swaps) to make sure that things didn't get out of control. You definitely cannot blame this mess on just the Bush administration.

Getting on to the $ 700 billion. Folks, this is not a situation where taxpayers spend $ 700 billion and never get it back. The media makes it sounds like the money is flushed down the toilet. This is completely untrue. In fact, the government is likely to book an enormous profit on this transaction which will go a long way toward reducing our deficit.

The $ 700 billion is being used to purchase mortgage loans at a deep discount to their original value. The government may buy loans at 30 - 50 cents on the dollar and the banks that sell them to the government will take huge losses in exchange for the cash from the government. Most of these loans are actually being repaid. The government will restructure the mortgage payments of those who are unable to make the payments. They can easily do this and not lose money because they did not pay full price for the loan. Another factor in its favor is time, the government does not have the quarterly earnings pressure that banks have. As the economy improves and housing stabilizes and increases in value, and as more borrowers consistently make payments, the value of these mortgages will soar. As other institutions see that the government bought these assets at a deep discount, and that many of the loans have been restructured to be payable, there will be a great demand to buy them from the government. The Feds will sell the loans to these buyers at a tremendous profit, with estimates that the taxpayer will profit in the range of $ 700 billion to $ 2 trillion. Yes- thats right - $ 2 Trillion. We could use that right about now.

And the worst case scenario is that the government doesn't make a profit. How much of a loss do you think it would take? Since they bought these assets at a steep discount, probably no more than $ 50 - 70 billion. Thats much less than we spend in Iraq in one year.

The one thing that is extremely uncomfortable is that according to capitalist theory, governments should not interfere with markets - they shouldn't invest in them or take over businesses. Normally this is true, but in the case of a crisis that has the potential to impoverish virtually all Americans, radical action is necessary.

There is huge upside and negligible downside here. Yet taxpayers are deceived into thinking that they are spending $ 700 B. Stupid, irresponsible media. They are not spending it, they are investing it! And if they don't do it they will see all of their investments, including money market funds, head towards zero really fast. Implications - no spending money, no retirement, and also no more work...