Monday, September 29

How Did We Get Here?

There's so much to catch up on but I think we should start with the issue that's smacking us in the face right now, and that's the proposed $700 billion plan to bail out the nation's lending institutions.

I've told you before that economics isn't my strong point, so I've been trying to understand over the last week how we got to this point. For those of you who also need "Economics for Dummies," here's my simpleton explanation.

In an effort to provide more affordable housing for minorities and low-income families, a regulation was passed in the 90s that required lending institutions to overlook normal lending factors like credit ratings and income and to provide loans to low-income buyers, especially minorities. The wisdom was that as the homes appreciated in the booming market the owners would build equity and be able to sell the homes for a profit.

But what happened is that the housing market tanked over the last year, the economy went stagnant and these people weren't able to make their payments. Therefore, the banks are stuck holding all these bad mortgages and they have tied up all the capital for lending. The result is that lending has almost grinded to a halt and these lending institutions are heading for bankruptcy.

Is my assessment of the situation correct? What am I missing? Where am I wrong? I need all you armchair economists to help me flesh out the details.


Laura said...

Thanks for the "simpleton explanation." I'm no good with economics. Over the past few days, I've found myself sitting at the computer reading about the proposed bailout shaking my head and thinking, "What in the world is going on? How did this happen?"

Next Stop Lauderdale said...

Thanks for actually explaining how it really happened. I feel like everyone is blaming this on bush.

Shauna said...

I am glad you explained this as well. It seems as though we are seeing a prime example of when we have the government socializing/universalizing a program, we wind up in more trouble than we were to begin with. If this is what happened with the housing market, can you imagine what would happen with healthcare?


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