Now that the media (and the DC drama queens) are shying away from calling the $700 billion dollar gift to Wall Street a buyout - actually reporting that there is the potential for taxpayers to actually make money from the deal, I am trying to make sure that I have my head wrapped sufficiently around what they are trying to accomplish.
The treasury (via the FDIC) is going to purchase all "toxic" loans from troubled banks so that they can clear up their balance sheet and begin to meet the Federal regulations in order to begin loaning money again. They will be purchasing these failing (or failed loans at the full value (not really the market value, but the full value of the mortgage, even if the property values have dropped substantially) of the note - essentially taking ownership of the property and they owner will begin paying (or not paying) the treasury. This will allow the credit markets to being to outflow again to speculate against potential future inflows into a company that before had crumbling books, but now has a clean slate.
The federal government then owns the notes that are not currently being paid on, hoping that those people who can't pay their loans will begin to do so as the market recovers.
This is in hopes to stimulate the economy, especially in the area of housing starts, so that we can add more homes to an already flooded market whose values are propped up by the fact that loans were so easy to come by in the first place.
Those worthless properties that the federal government (taxpayers) may or may not be paid on and any hope to foreclose the property are worthless because of the housing glut and the fact that the properties are virtually un-sellable. The hope is that eventually the market will recover and both the new housing starts and the foreclosed properties will regain value and eventually surpass their current values (from nothing) giving the taxpayers much needed relief and seeing a return on the 700 billion initial "investment".
Remember, people ultimately foreclose when they can't afford their mortgage and they can't sell their property at or above the loan value. The houses they own are worth far less than the loan amounts that they have outstanding. The government can't do any better getting this money back and who in the world is going to start new houses, when the ones that we already have (most new, 5-10 years old) aren't moving and are depreciating - rapidly.
Add to that the fact that we all of a sudden have $700 billion more in the potential money supply, that is un-earned, un-product driven, non-GNP expanding currency. Any ECON 101 student would understand that, given that there is really no solid basis for the value of money anymore, each individual dollar in the previous money supply is now worth, aggregated, $700 billion less.
Crap. We're all screwed - unless of course I can find a way, before Friday, to buy an overpriced house, at 19% APR, that I can't afford, in a bad part of town....
And the EU, I don't even want to think about that.
I covet any comments and corrections on how I understand things. I'm going to try to get some sleep, but that's probably not very likely.
H