You may be left holding the bag

Posted: September 23, 2008

IT'S THE biggest government bailout package ever, some $700 billion to keep Wall Street and the American financial system afloat after a poorly regulated credit binge and a still-bursting housing bubble. Yet some four days after the massive federal intervention was proposed, only three things seem cast in stone.

1) Everybody hates it.

2) It's going to happen anyway.

3) You're going to pay for it, or at least certainly your children and their children will.

Public outrage spread yesterday as details of the Wall Street bailout package - in which the government would buy up billions of dollars of so-called "toxic debt" - leaked out. It was blasted by experts on the right ("It costs taxpayers money - don't do it," conservative tax fighter Grover Norquist told Politico.com) and on the left (said former Labor Secretary Robert Reich: "The public doesn't like a blank check.")

But what does it mean for you? Here are some questions and answers.

Q. How did we get into this mess?

A. The last generation has seen a steady deregulation of America's financial industry, especially after a 1999 law - sponsored by Phil Gramm, an ex-GOP senator and John McCain adviser, and signed by Democratic President Bill Clinton - removed traditional barriers between traditional banks, brokerage houses and insurance companies.

One of the results was a surge in the trading of "mortgage-backed securities" - complicated financial instruments that made buckets of money for Wall Street when the price of your house was going up 10 percent or 20 percent a year. But as home prices fall and mortgage foreclosures surge, these heavily leveraged bets are collapsing like a house of cards, threatening the global economic system.

Q. Where does the $700 billion figure come from?

A. It's kind of a wild guess - no one really knows how much these troubled assets, or so-called "toxic debt" that is held by America's remaining financial houses is really worth. And remember, this comes on top of the $29 billion bailout of Bear Stearns, the $85 billion to prop up world's largest insurer AIG, and as much as $200 billion to salvage quasi-public mortgage companies Fannie Mae and Freddie Mac.

Q. Wow, that's a lot of dough - where does it come from?

A. You!

Q. Me! That's not fair.

A. No, it's not! But the cost of these bailouts ultimately falls on the federal Treasury - in fact one aspect of the proposed deal is that Congress would increase the federal debt ceiling to a whopping $11.3 trillion; it was roughly $5 trillion when President Bush took office in 2001.

Now, there is a chance that the government will recoup some of the up-front cash by selling these loans, especially if and when the housing market improves. The government actually made back its money when it bailed out Chrysler in the 1970s.

Q. What if we're on the hook for the whole $700 billion?

A. Experts estimate the cost would be $6,000 per taxpayer or more.

Q. So why don't we do nothing?

A. One thing most experts agree on is that the global financial system is so tangled by this bad debt that doing nothing - the so-called "free-market" solution - and letting these financial firms go belly-up would cause even greater hardship for average consumers.

A highly possible outcome would be a worldwide Great Depression II that would mean massive unemployment, sharply reducing the value of retirement funds such as 401(k) plans and other stock holdings, and causing a credit crunch that would make it difficult to get a loan.

Q. Well, if that's the case, why didn't Congress approve this plan, like, yesterday?

A. The original plan was both vague and troubling to many lawmakers in both parties - in part because it would have awarded unprecedented powers to the U.S. Treasury secretary, with little or no oversight role for lawmakers. That is part of what is being haggled out now.

Q. Here's what I don't get - the government seems to be bailing out the fat cats on Wall Street who acted so irresponsibly with other people's money, but is doing nothing to help the little guy like me struggling to pay his mortgage.

A. You noticed that, huh? Well, some lawmakers are looking to make changes that address some of those concerns.

One thing that seems likely is a provision to make sure chief executives of companies that benefit from a taxpayer-funded bailout don't continue to get super rich in the process.

More controversial - but potentially more helpful to average citizens - would be some kind of help to the hundreds of thousands of Americans facing mortgage foreclosure and bankruptcy - like making it easier to renegotiate the terms of their mortgages. Less likely, but possible, would be changes in bankruptcy laws.

Q. If this doesn't work, then what?

A. Brother, can you spare a dime?*

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