In short, let us not bail out anyone and see what happens when the republicans actually live ‘less government’.

It’s true that the housing bubble (arguably itself a product of market deregulation) contributed to the current financial crisis; but there have been housing bubbles before, that did not result in the Feds asking for a trillion dollars to bail out the banks (and we are already talking about a trillion dollars, if you include Bear Stearns and the Fannie Mae / Freddie Mac bailouts). As Murf pointed out in a different forum, the present Wall Street crisis is based in large part on imaginary money sold in the form of collateralized debt obligations. I’m sure you’re familiar with them but for other readers, there’s a great summary of the concept posted here: http://www.investopedia.com/articles/07/cdo-mortgages.asp?viewall=1

Murf’s explanation was essentially this: Say I buy a house at $200,000 on a 30-year fixed interest mortgage at 6%. The math of calculating compound interest gives me a headache so let’s say for the sake of argument that this mortgage should be worth $450,000 over the life of the loan. (If you’re handy with a calculator and compound interest, feel free to provide a more accurate figure.) The bank who loaned me the $200,000 promptly sells the loan to someone else; the loan is only on their books for perhaps a few weeks. They keep a tidy fee, and they’re done with it. The institution that bought the loan then chops it up and packages it together with a bunch of other loans and sells it to other institutions; but the assets they are selling are now for the full value of the $450,000, which the loan should be worth if I make all my payments. So somebody out there leverages themselves (i.e. borrows money) and buys up some papers that should be worth $450,000 when they reach maturity.

But then let’s change the scenario and imagine that my loan was an adjustable rate mortgage with an introductory teaser rate or interest-only payments for the first few years, and that the housing bubble bursts after I make my purchase. When my rate resets, suddenly I’m faced with monthly payments that are several times higher than what my real budget can afford, and I can’t refinance because the house is now worth less than what I borrowed to pay for it. Stuck without any options, I default on my mortgage and lose my house and have to sleep on the streets. The house goes back to the bank, but now it’s only worth $150,000, and it takes them six months or more to sell it. They aren’t hurt so bad, because they sold the original loan; but the companies that bought the CDO’s based on my loan are collectively out some $300,000 — they would have borrowed less than that to buy the CDOs, but suddenly the book value of their assets declines by this amount. If the CDO based on my mortgage was on their books as collateral to back further borrowing, they could face serious problems. Now imagine this happens maybe ten million times.

In short, while I see where you’re coming from, I must respectfully disagree with the premise that disillusionment, not funny finance, is responsible for the present meltdown. This problem was caused by a lack of regulation. The government should have prevented lenders from issuing mortgages to so many people who could not afford them; and the government should have had much stricter rules in place regarding how CDO’s could be structured and valued.

Another part of the problem is that many banks knowingly bought the very riskiest CDO’s because those securities pay the highest rate of return; but now those instruments have turned out to be completely worthless, and rather than take the loss and admit they made a mistake, the banks want the government to buy the securities from them at a premium. Personally, I’m outraged. If I made a bad investment personally, it would be my problem personally. But if a bank makes a bad investment, suddenly it’s the problem of the American people? Sounds disturbingly like class warfare.

I maintain that if the government goes ahead with its planned $700 billion bailout of the financial sector, this will be proof positive of the utter failure of the theory of free market economics.

So the core issue behind the current mortgage crisis is primarily “disillusionment” (= removal of false illusions); and Wall Street itself has not caused financial pain to an impartial “average” of all housing buyers and sellers.

For every recent purchaser of a US house, there is another person who sold that same house at a ridiculously high price. Those house-sellers, by definition, have already reaped a financial windfall equivalent to whatever financial losses are currently taking place in the US mortgage market.

@Murf — You’re right. The larger economic turmoil is far from over, and I have amended the text of my post. Initially, my comment was intended to describe specifically what happened to the DJIA in the short term, namely, it was severely in the tank until Paulson’s announcement, after which it shot up by more than 700 points in two days, including the biggest one-day gain it has seen in decades. Since then, of course, it has proven every bit as volatile as it was before then.

The “oversight” in question does not refer solely to derivative securities, although I don’t think those financial instruments are really as hard to understand as the media would like you to think they are. (Sure, the CDO’s are not all equivalent in value, but the basic concept is simply, “I will pay you for the IOU that someone else has signed, and in return I get to keep their interest payments as profit.”) The oversight required is a broad-based oversight of our financial system. I fully favor regulation, because this is what happens when we don’t regulate: the economy collapses and the taxpayers are asked to pay most of a trillion dollars to bail out the greedy banks. It’s not just regulation of how mortgage-backed securities should be valued; it’s regulation of whether or not mortgage lenders should be allowed to FLEECE home-buyers and trick them into adjustable-rate mortgages they don’t understand and can’t afford. It’s regulation of whether or not your credit card company can quadruple your interest rate for being late on one stinking bill. In short it’s regulation of whether or not the financial elites should be allowed to screw over the common people in the name of profit regardless of the deleterious effects this has on the people and the economy.

I agree the issues are complicated but regulation is possible and evaluating the results of the regulation is simple because the statistics (that verify whether things are getting better or worse) are not hard to come by: unemployment rates from the bureau of labor and statistics; household income from the IRS and the Survey of Consumer Finances; mortgage default rates from Realty Trac, here’s their latest press release: http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5163&accnt=64847

“oversight” also assumes that anybody knows what is going on? this stuff, “derivative securities” was created by math geeks in the context of a pseudo-science like economics - nobody understands “it”. not the leaders in charge nor do the math geeks understadn what happens when you implement an idea and let real life get its complexities of whim into it … it isnt science - it is number theory. nobody actually empirically verifies that any”thing” actually gets better or worse. they just look at oversimplified stochastic summaries and play the game.

And not a word in there about changing their lending practices or having better oversight. I feel like i’m watching some out-of-control child throwing a very public tantrum…. i keep looking around, waiting for the parents to step in and do something.

Keep up the good work!