Bailout... and a failed government.

With all the opinions flying around on the proposed bailout in Congress, I thought I would add my two-cents (really only two, I promise). I am an engineer and only follow finance and economics on a very broad level; however, I do have some public policy and poly-sci background... so you can be the judge of my credibility.

Why we are in this mess (as I understand it):
We want(ed) everyone to be able to live in a house. So, lenders offered loans that were increasingly easy to obtain. The problem is that these loans often times had an adjustable rate and/or were interest only (there were other types of crazy lending programs too). Furthermore, lenders were handing out these loans without properly checking the lendee's financial situation.

So... more people could get mortgages, which drove up the cost of homes, which required even more easily obtained loans, which drove up the cost of homes... and on and on...

Eventually the chickens came home to roost. The rates adjusted, and homeowners couldn't make their payments. Homes went into foreclosure... the banks lost money. Home values fell... the banks lost money. Eventually the banks lost enough money that they began to collapse.


What could we have done to prevent it?
Lenders could have been more responsible. (don't hand out crappy loans)
Buyers could have been more responsible. (don't live beyond their means)
The Gov't could have taken their head out of the sand. (regulated these lenders against bad lending practices)


Where are we now?
The credit markets are beginning to freeze, which will prevent even well qualified buyers from getting loans. So more homes will go into foreclosure, causing more banks to go under, which could lead to a downward spiral that we haven't seen the likes of since the great depression (and many well respected economists say this is a likely outcome).


Why will the 'bailout' help?
It will essentially take 'bad' money off the hands of banks. This will free up lenders to offer mortgages (hopefully 'responsible' mortgages this time around), which will help the housing market slowly recover. This not only helps the banks, but it also helps homeowners and home-seekers. On a broader level, it will prevent the collapse of major financial institutions, which we all rely on (picture the opening seen to "It's a Wonderful Life.").


Why is this 'bailout' failing?
Nobody trusts Washington (all of Washington... President, house/senate Republicans/Democrats... nobody), and for good reason! They have destroyed their credibility over the last decade. It is not all Pres. Bush's fault, but he is definitely part of the problem. For the first time in a long time (because an election is coming soon), many House D's and R's listened to the voters and didn't vote for the bailout. Unfortunately, the voters are scared and ticked-off at Washington and Wall Street and are wrong right now. It was only a month or so ago that we had to watch both parties have their self-love fests (conventions)... at which, neither talked about real solutions to this problem. They spent the whole time pointing fingers and basking in their own glory.

Okay... I'm done. Let me know if I'm wrong.