Can it Help Me Prevent Foreclosure or Bankruptcy?

  The bailout plan has passed, and we can all breathe a sigh of relief.  Or can we?  The uncomfortable fact of this matter is that most Americans do not even understand what the bailout plan is, never-mind how it will supposedly work.  The real truth is that this decision was out of the hands of the public anyway.  Driven by precisely marketed fear, our politicians approved the bailout, and we must now deal with it.  So what exactly does that mean, and why do we need the bailout in the first place?  

In order to even begin to understand the bailout plan, a working comprehension of banking in general is necessary.  In order to achieve this, let’s take a look at banking on a sixth-grade level- the reading level most newspapers are written in.  We will start with Bank 1.  Bank 1 has 10 customers, who each have $100 in deposits.  Bank 1 now has a total of $1000 in deposits.  Of those 10 customers that Bank 1 has, 3 of them apply for loans totaling $3000.  Bank 1 uses its $1000 in deposits and borrows $2000 from Bank 2 to fund the loans.  Unfortunately, Bank 1 provided these loans to people with substandard credit conditions, and the loans went into default.  Consequently, Bank 1 fails.  Now Bank 2 has lost $2000.  It seeks to borrow money from Bank 3, but Bank 3 won’t lend any money because it is afraid that what happened to Bank 1 will happen to Bank 2.  So now banks in general stop lending to each other.  This means that when “Joe Plumber” or “Mary Real Estate” requires money to improve their businesses, buy more products, or for any other business need, the banks are not making loans.  This freezes spending, and when that happens, the economy dives into a recession.    

While the preceding is a fairly easy scenario to try to imagine, that idea of it needs to be extrapolated many times over in order to understand what actually happened.  Thousands of consumers defaulted on obligations, and thousands of banks stopped lending.  That defines the credit crunch: when liquid credit markets that enabled the flow of currency to occur literally stopped.  This affected every part of the economy: banks failed, insurance giants disintegrated, the dollar lost value dramatically, and there was the sense of impending panic worldwide.  T

hankfully, the Feds stepped in, bullied the bailout plan through congress, and here we are…   While our leaders are touting the bailout plan as providing relief for the everyday American citizen, this is not entirely accurate.  In fact, the plan is to be paid for by American taxpayers at a time when they can least afford it.  The plan does call for interest rates to be frozen on qualifying mortgages; however, this will only help an estimated 300,000 homeowners for about five years- if the plan moves along as originally intended.  So who is the plan really helping, and where is $700 billion dollars going?   First, the bailout plan does not mandate that $700 billion must be spent.  The plan allows up to that amount, which is a balanced projection of what it might cost to get us out of this financial mess.  What the Federal Government intends to do with the money is to invest in the securitized assets of banks that are in trouble, and have frozen or substantially slowed their lending.  

Yes, that means that the United States Government will then own the same troubled and unhealthy assets that caused the meltdown in the first place.  This will allow banks to clear up their ledgers by removing risk-laden debt, and theoretically will provide the incentive banks need to start lending again.  This way, Joe Plumber spends money by growing his business, the bank profits from his loan, credit remains liquid, and the economy flows once again.  

The most pressing question that remains now is whether or not the banks will swallow their fears and start lending again.  In addition to that query, and perhaps an even more vital question, is exactly what the Federal government plans to do with all those unhealthy assets they intend to buy with our money.  Bookmark this blog to find out.   –

This entry was posted on Wednesday, October 22nd, 2008 at 7:00 am and is filed under Financial Market, Long Island Bankruptcy, Long Island Law Firm. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.