Helping to understand why we are struggling today.

Back in the early 1990's, Congress started pushing Fannie Mae, Freddie Mac, and other lenders of mortgages to give out more loans to people who normally wouldn't qualify for a loan. This allowed more people to go out and buy a home, increasing the demand for homes. Since the demand was so great it created a market for new homes and drove up prices of existing homes. This also caused a lot of people to go into the housing market to "Flip" a house or take out a loan based on the "increase" of their homes value.

The banker and Wall Street types then took those mortgages, broke them up and started trading them.

The problem started as the economy slowed down, people started to default on the loans they got but normally wouldn't qualify for. The owners of the mortgages suddenly had an asset it had to write down or write off completely and where stuck with a very non-liquid asset that they put up for sale. The banks also stopped lending to protect themselves. Since a lot of people could no longer qualify for a loan, there were a lot fewer buyers and a lot more houses for sale causing the housing prices to drop. All those people who bought into a house to flip it or took out another loan on their house, suddenly were stuck with a debt they couldn't pay, since the asset they had just bought dropped in value by 20% and they couldn't afford to make up the difference. The banks had to write these assets off.

As these mortgages went bad, the investment firms that had been banking on them, suddenly realized that a good portion of their assets where gone and they couldn't cover their liabilities and were going to go under.

So now the federal government is stepping in and saying "OK, we're going to buy up all of those bad assets you bought and allow you to become solvent again." The question now is how much does the government buy them for? Face value? Do the firms have to take at least a 25% loss?

While it might be a popular idea to just let these firms fail, it would have a tremendous impact on Main Street, USA. The average person would not qualify for a loan. Home ownership would plummet. With no buyers, the biggest asset's, most homeowner's have, their house, value would drop. It would also effect how likely a bank would be to give out other loans for things like start up businesses, cars, boats, etc. Then those industries would start to suffer from a slow down and would have to start laying people off, etc. The ripple effect would continue and our economy would really tank.

So while this is expensive now, it is cheaper than the alternative.

That is just how I see it.