| The general arguments concerning the bailout have | | | | dominated the news cycle. It was almost as if the |
| gone something along the lines of: | | | | government takeover of Freddie Mac and Fannie Mae |
| Anti Bailout : "The taxpayers should not have to foot a | | | | never happened. |
| 700 billion dollar bill to bail out Wall Street" | | | | So the previous moves the federal government has |
| Pro Bailout : "But if taxpayers do not bail out Wall | | | | made to stop the financial crisis have not worked. |
| Street the economy will fall apart and those same | | | | Should the 700 billion dollar bailout be different? It could |
| taxpayers will be hurt" | | | | certainly help the housing markets. But it might not. Lets |
| If we could be sure the bailout would work the second | | | | look at why. |
| argument has some merit. While the bailout will | | | | One of the benefits of the 700 billion dollar bailout has |
| certainly help the banks, the problem is we have | | | | nothing to do with banks. It has more to do with |
| almost no guarantee the bailout will help the real estate | | | | perception on Main Street. The hope is that the bailout |
| market and the general economy. | | | | will restore confidence in the real estate market on |
| First let's look at some recent history of how the Fed | | | | Main Street. |
| has tried to help the troubled real estate market. The | | | | In politics people often talk about news cycles covering |
| Fed usually attempts to lower mortgage interest rates | | | | up the last news cycle. Basically the last piece of |
| to help the real estate market. By lowering mortgage | | | | news stays in people's minds until the next piece of |
| rates houses become more attractive to buyers. In | | | | news comes along. The Fannie Mae and Freddie Mac |
| addition, with lower mortgage rates home buyers can | | | | news cycle (and the billions the government will spend |
| buy more expensive houses with the same monthly | | | | on it) only lasted until the next piece of news, which |
| payment. | | | | was about a week. While the 700 billion dollar bailout |
| Therefore lower rates can help stop falling home | | | | should restore some confidence in the real estate |
| prices. So it was not surprising in early 2008 the Fed | | | | market, that confidence might only last until the next |
| cut the Fed rate. In normal markets lowering the Fed | | | | piece of news. And with things happening so quickly |
| rate helps banks and causes them to lower mortgage | | | | that news cycle might not last very long and given the |
| interest rates. And following the Fed cut mortgage | | | | current market the next piece of news will probably be |
| rates dropped to 5.5 for a period of time. If they had | | | | negative. |
| stayed down we might have averted some of the | | | | The other benefit of the 700 billion dollar bailout is that |
| problems with the current housing crisis. But instead a | | | | the government is hoping to influence banks to start |
| few weeks later rates had jumped backed up to 6.2. | | | | lending again. The idea is that by taking billions in toxic |
| Basically banks said thanks for the lower fed rates but | | | | loans off the books for banks they will start lending |
| we are not going to alter our mortgage rates. In fact, | | | | again. The problem is that their is no guarantee this will |
| over the next few months mortgage rates rose all the | | | | happen. In fact, when the Fed lowered rates banks |
| way to 6.6. The next big move was acquiring Freddie | | | | said thanks but decided that prospects for the housing |
| Mac and Fannie Mae. This was one of the largest | | | | market looked negative and continued to add |
| government takeovers in US history. The move was | | | | restrictions to lending. In a similar fashion banks could |
| risky because the government was providing | | | | say thanks for the 700 billion but we continue to see |
| insurance for trillions in loans. And it initially had a | | | | negative prospects in the housing market and |
| positive effect on the housing market. But a few | | | | therefore we will continue to have strict lending |
| weeks later AIG ran into financial problems. This | | | | practices. But thanks for the 700 billion taxpayers. |