The Economist's Nightmare: No Bailout

Reports say that it could cost the taxpayers "billions". What EXACTLY is being paid for? When the Savings & Loans went sour, it was simple. The FDIC stepped in to replace savings accounts that had been plundered. But I have read no reports about to whom the money in this bailout will go and why. Thanks.

Sent by Leslie Gaynor | 5:28 PM | 9-9-2008

Nice report. I would like to know, what is difference between bailing out Fannie/Freddie compared to Investment Banks like Bear Sterns? Are they both the same, i.e. good for the country in long term.

Sent by Shailesh | 5:28 PM | 9-9-2008

Leslie, I think this answer is a start, but please don't use it as truth (hopefully someone will validate or correct it). For one, the money will go to recapitalize Freddie and Fannie. An easy way to think about this is to compare it to purchasing a home. The bank requires that you hold x% of the loan(s) in escrow. The reserve for a company is this escrow account (more complicated of course, but this analogy suffices I think). This reserve is "used" (spent) anytime a loan, MBS or any other asset is written down or written off.

But what else? Hopefully someone will answer!

Sent by Ben Gordon | 9:53 PM | 9-9-2008

I would like to know what the bail out and saving of Fannie, Freddie and Bear Stearns means to the capitalist system of governance. Is the free market system unregulated the best possible system economically? Please compare different economic systems under the present circumstances.

Sent by Joel Davidson | 9:56 PM | 9-9-2008

Also, check out Ammon Shea's segment on Morning Edition today on the various definitions of "bailout":

http://www.npr.org/templates/story/story.php?storyId=94449448

Sent by Ben Gordon | 9:37 AM | 9-10-2008

The economists' nightmare boils down to this: The Great Credit Choke Hold. We would not be in this position if we were not of nation of debtors with a debt driven economy. Let's face it: all the United States produces anymore is DEBT.

That being the case, we have always been at risk for scenarios like the current upheaval among financial giants. If we bail them out and things somehow, miraculously return to normal we will still be at risk.

Let's just let it sort itself out. I really don't have a few thousand dollars in my budget to pay other people's bad mortgages. Let's evolve an economy based on something other than debt. This may be a painful process, but so is any birth.

Sent by Patricia | 1:10 PM | 9-26-2008