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Bailout is actually buyup

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There’s been a lot said and written about the Wall St. meltdown on financials. And much of what has been written is accurate…but much has been written by people who know absolutely nothing. Witness, Chris Matthews on Hardball today interviewed CNBC’s Jim Cramer of Mad Money and Steven Pearlstein who writes a Washington Post business column.

Like most people who don’t understand economics, Chris Matthews was under the impression that the taxpayers were going to be on the hook for $700 Billion tax loss, but the truth was never further away. The Federal government will not be, in the purest sense, bailing out investment banks; they will buy up mortgage packages that have lost enormous value because the home prices have declined. Think of it this way, the investment banks bought thousands of home mortgage packages that may have had hundreds or thousands of mortgages in each of the packages. Some good mortgages still, some bad. Some from severely declining home value areas and some from areas where housing prices have lost little value. No one at this point knows what the packages consist of or their market value.

But the result of not knowing the market value has caused a credit crunch. Actually, a credit halt. Banks are not loaning money. They’re afraid to loan money even to good customers or businesses. Lines of credit have ceased. Every business in the country relies on credit availability to stay in business. Without credit lines, businesses will be forced to cut back, mainly on the number of employees, as well as on any growth potential. Some businesses, particularly small businesses, will go out of business. A major recession or even depression will occur.

The Treasury and Fed are trying to stem that tide in proposing to buy up those mortgage packages, possibly break them up, and resell them. Possibly at a profit. In addition, once Treasury begins to buy these mortgage packages, other buyers may decide to get into the market and buy some. Then when housing prices stabilize and begin to climb again, the mortgages can be sold at a profit.

However, the proposed bill sent to Congress is not perfect. It definitely leaves a lot to be desired.

The two guests on Charlie Rose show of yesterday, Monday, discussed the Treasury proposal, what will mean to the American taxpayer, and sheds light on what Congress is currently arguing about.

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Written by Valerie Curl

September 24, 2008 at 1:28 AM

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