The Best Solution for the Financial Crisis The DC Guy September 24, 2008

We absolutely need this "bailout". The conservatives who are complaining about this don't know their history, and they don't understand the problem.

The fundamental problem here started with the housing market. When Fannie Mae and Freddie Mac loosened the risk rules on mortgages and things went nuts, so much money was flooded into the market that no one knew what to do with it. Mortgage backed securities looked safe because they were tied to actual property. But they weren't, because while they were tied to real property, the value of the property was inflated because of the amount of money in the market and the bad loan policies.

When this bubble burst, the system was clogged with bad loans and mortgage backed securities that were backed by bad mortgages. Home values began to drop and the cycle worsened.

When this part of the equation blew up, it sent shock waves through the rest of the system. Risk is everything to the markets - buying and selling and trading and insuring against the risk that someone isn't going to get paid is a multi-TRILLION dollar industry. And when all of the sudden what looked like a safe investment becomes unsafe, people panic and we see the market go nuts like it did.

What made the 1929 crash turn into the Great Depression was the response of the Federal Government. Instead of recognizing that they needed to inject credit and money to keep the system from seizing up and to assure people that their money will be safe, they restricted credit. This caused banks to call in their loans, which caused businesses to fail and go bankrupt, which caused the banks to fail, which screwed regular people. Businesses failed, which threw people out of work, and new businesses couldn't be started because they couldn't get loans to begin operations because the banks that hadn't shut down weren't lending to anything that wasn't a sure bet.

The $700 billion "bailout" plan

This $700 billion is not a blank check; it is a line of credit. The new Resolution Trust Company or whatever they decide to call it will buy the bad debt. And this company will work out the kinks and deal with the issues, selling the properties, collecting the insurance, etc. And at the end of the day, this issue will resolve itself. It may take a few years, but it will be resolved and sorted out, and then the company will shut down. This is exactly what happened during the Savings and Loan Crisis. Things worked out so well during the S&L Crisis that the "bailout" from taxpayers actually ended up turning a profit. They paid back everything to the treasury that was loaned and then some. There's no reason to think that this couldn't happen again. This $700 billion could end up being completely paid back.

The important thing to keep in mind is those securities are risky, but they're tied to actual property. Tangible things. It's not just paper. It HAS value. When the housing market turns around and people start buying houses again, things will loosen up and this bad debt won't be that bad. But it can't get any better if we do nothing.

If we don't do this now, we are making the same mistake that was made in 1929. We will have learned nothing from the lessons of the Great Depression. If we do this now, we fix the short term problem, and we buy Congress and the overseers time to figure out exactly what happened and put regulations in place to keep it from ever happening again.

There is nothing "conservative" about letting markets fail. There is nothing "socialist" about monetary policy that fixed and shores up a fundamentally capitalist problem.

This needs to get done, and Congress needs to quit delaying and do it.