I would really, really like someone to answer that question for me before we go giving Wall Street what it wants. The problem, as I understand it, is that largely unregulated financial institutions used sometimes shady deals to sell people mortgage products that they probably could not afford. Other largely unregulated financial institutions then sliced and iced those mortgages into financial products that were then sold almost like stocks or other securities. Now, those unaffordable mortgage products are collapsing in value so the people who own pieces of them no longer know how much those pieces are worth. Since they no long know how much those pieces are worth, they no longer have a good sense of what their balance sheets look like and no one has any idea what those pieces should be bought and sold for. And that means that a large chunk of financial capital has such an uncertain value that its value might as well be zero, so there is an understandable reluctance to use those pieces as collateral or to deal with the financial institutions that have large stakes in those mortgage pieces. And that has lead to what the Fed is calling a credit crisis.
But if that is the case, then giving banks money is not going to solve this problem, is it? At the end of the day, the mortgage pieces are still essentially worthless -- only now they will be owned by the Feds instead of by the banks, sticking the taxpayers with all the risks. Why not do something to shore up the value of the mortgage pieces? A lot of people could afford to stay in their houses if they were in more affordable mortgage products --fixed as opposed to adjustable, rates closer to prime rather than sub-prime -- so why not start with them? Why not allow credit worthy people in these expensive mortgage products to have those mortgages adjusted to something they can afford. The housing bust winds to a close, most of the mortgage pieces the financial industries own become worth something and the only banks to fail are those that gambled with the most unstable, least deserving mortgages. And it probably doesn't cost 700 billion dollars.
Now, perhaps there are good reasons for not doing this. I doubt that as the Democrats are trying to insert a proposal that would allow bankruptcy judges to do something similar to what I propose, ( the Republicans oppose it, of course, but this is already allowed for commercial properties and for people with more than one home ), but I am perfectly willing to be convinced otherwise. But it is a telling marker of just how far right our economic policy has lurched that no one in government or the Wall Street press even feels compelled to explain why helping the bankers is a better solution than helping the homeowners whose declining home values and foreclosures are at the root of the problem