Questions About the Bailout, and How We Got Here

Now that Congress has voted down the one solid plan we had to address the credit crisis here in the U.S., lot of folks are wondering where we go from here. And many of those same folks are worried about what this means to them and their money.

First, the crisis itself. Hindsight is 20/20, of course, but signs that we were heading for something bad have been there for a while. Two local investment advisors warned about Fannie Mae and Freddie Mac in the pages of Arkansas Business four years ago:

We believe the time has come to bust up Fannie Mae and Freddie Mac, which have become the final guarantors of the bulk of the residential mortgage debt in this country.

These huge entities perhaps have the strongest lobbying groups in Washington, so the job will require much fortitude and tenacity.

Not long ago, our country went through a financial crisis in home mortgage finance with the savings and loan business.

The federal government was called in to pay off the guaranteed liabilities (the insured deposits) and to make an orderly liquidation of the assets.

Fast forward to today. We have Fannie Mae and Freddie Mac, which have taken the place of the savings and loan industry from a financing perspective.

Thus, the potential hazard of guaranteed deposits that existed in the S&L business has been transferred to these two behemoths. Fannie and Freddie have taken the risk and run with it, leveraging their balance sheets to a point where any sober observer would consider both undercapitalized.

A multitude of mortgage originators has taken the place of S&Ls on the asset side. Many are barely capitalized operations that simply collect an origination fee and transfer the risk to Fannie and Freddie.

Sounds familiar, eh?

Fast forward to 2007-2008. MSNBC shows us how this year unfolded, tracking statements by Congressional members and financial leaders alongside unemployment rates and Dow Jones levels, via this neat interactive chart. Early last year was when we began to see bankruptcies from some of the largest mortgage lenders in the country, whose sub-prime mortgages began to go bad as people couldn’t make their payments.

That’s led to the wave upon wave of bad economic news, and brings us where we are this week. Yesterday’s (in)action by Congress was dramatic, but on the whole not surprising, considering the outcry from “Main Street” that taxpayer dollars shouldn’t go to a multi-bllion dollar bailout plan for Wall Street.

On KTHV at 6 p.m. Monday, Craig O’Neill and I talked about what that bailout plan might have done, had it been approved. Click here to see the video.

So now what? Because of a Jewish holiday, Congress doesn’t meet again until Thursday. Will Monday’s bailout plan come up for another vote, or will an alternate plan emerge? That remains to be seen.

Meanwhile, what do you do with your money? More on that after the jump.

The New York Times answers some basic questions about the bailout and talks about how you should handle your finances, especially if you’re about to retire, but even you’re young, still working and maybe not feeling the effects of the crisis:

It’s not yet clear how much more the crisis will affect employment levels. Still, this seems like the best moment in years to have a few months of cash set aside in one of those online savings accounts just in case you lose your job or face some large expense that you haven’t predicted.

How bad will it get? Some say not to worry. Despite all the talk about another Depression, many believe that something like that isn’t in the cards this time around. Some wonder whether the crisis is overhyped. One personal finance blogger thinks now’s the time to shut off the TV and put down the newspaper:

I continue to mandate that we shouldn’t panic and that we should avoid emotional decisions involving our money. After all, when blood is in the streets, that’s when we should pump up our courage and think about buying low. But this media, the talking heads and our political leaders haven’t been too encouraging.

They could both be right. But it’s important to remember that, at the end of the day, we’re in uncharted financial waters. And remember this: financial markets are slowly, and painfully, remaking themselves into a system where cash, not credit, is king. In Arkansas Business this week, a pair of Little Rock money managers put it like this:

“All you had to do to get a mortgage was to fog a mirror,” said Alex Lieblong, president of Lieblong & Associates, a Little Rock money management firm. “There was so much fraud going on out there it was scary. Now the market will overcorrect the other way.”

Lax credit standards are expected to give way to more conservative standards, as the pendulum of public opinion swings back.

“It is going to be a tighter underwriting process, as it should have been all along,” said Elijah Cunningham, president of ValuePoint Partners Inc., a Little Rock money management firm. “You’re going to see a shift back to more of a deposit-based lending system. It wouldn’t surprise me if we lost a third of the banks because the nation is over-banked. You may see a market where the banks eat their own.”

Now’s the time to pay off debt and save.

More

$700 Billion Bailout – Is My Money Safe? [Lazy Man and Money]

The Crisis and Your Money – What Does It Mean to You? [Money Smart Life]

Is Your Bank Fine? – And Other Links to Helpful Tips In Time of Crisis [Money Smart Life]

(A version of this post appears today on the The Ladder.)

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3 Responses

  1. Thanks for the post. I’ve been looking around because the bailout confuses me. Anything economic confuses me a little bit, you hear a different story anytime you read an article. Keep up the good work.

  2. Thanks for your comprehensive thoughts on the bailout. I hope we learn something from this crisis, but history always repeats itself in some way. I just hope it doesn’t do so for a great long while.

  3. Btw, I’m “curlytree” in that previous comment. Don’t know how I got logged in with that old name I use… 🙂

    SVB @ The Digerati Life

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