Bailout?!? What's Really Going On?

I've always been a supporter of free market capitalism, but lately I've had my values tested. Listening to many people much smarter than I am saying we need some sort of "bailout" or our economy will be in jeopardy. But I finally found someone with my same values to help me out and keep things in perspective. He's Brian Wesbury, chief economist for First Trust. You can read his stuff at http://www.ftportfolios.com/Retail/Research/EconomicResearch.aspx . Since he is an economist, I'll try to put things in simple terms.

First, when you get a mortgage, a bank originates that loan. Nowadays, they usually don't hold the loan, they package those up and sell them to investors. In those packages, there are all sorts of mortgages bundled together, it's very hard to determine what the value is of those loans. There are people with excellent incomes and credit history and there are sub prime or liar loans in there. The thing I would like everyone to remember is 96%-97% of mortgages are being paid ON TIME! To me, value is what a buyer is willing and able to pay for something. Since this is a "crisis of confidence", nobody wants these loans and their prices are falling...really fast.

Second, OVER regulation by the government forces companies to use "mark to market" accounting. This means, if "the market" is currently valuing those assets at $0.22 on the $1 and you are an institution currently holding similar types of loans, you need to mark yours down to $0.22. Even though you may want to hold them forever! Again, because of over regulation, federal banking requirements force you to raise more money to shore up your balance sheet. It becomes a vicious cycle and snowballs...thus a "crisis of confidence". Mr. Wesbury uses the example if houses in your neighborhood were all worth $200,000 and you had a loan for $100,000. If one of your neighbors went bankrupt and sold their house for $75,000, your house would now be "valued" under mark to market at $75,000. The bank would come to you and say you need to raise an additional $25,000 and give it to us to even it out. Let's say you do that and then another neighbor went under and sold for $50,000. Now you need to mark yours down yet again and add another $25,000. But you may say, you never even want to sell your home. You'll stay in it forever. You couldn't do this for too long could you. Well neither can the banks.

Mr. Wesbury's idea is to temporarily stop the "mark to market" rules. Let things cool down and the panic to stop. 96%-97% are still paying their mortgages on time so maybe these investors WANT to hold their loans forever and not sell them. They certainly don't want to sell them at $0.22 on the $1.

This won't cost taxpayers one dime. This, along with strong language could prevent further panic.