Economic News

I am not very knowledgeable about the economic market, or stocks, or the Dow Jones and all that business, and the news this week has me regretting this. Can anyone explain what the hell is going on, and why the government is bailing out these huge private businesses, and why they need bailed out to begin with?

I cannot answer WHY the government is bailing them out, and they probably shouldn't be. However, I can tell you why these companies are in the situation that they are in.

Here is a short version:
Do you recall the huge increase in home prices over the last decade or so? Mortgage brokers were getting loans for people who did not qualify for the loans, by encouraging their applicants to exaggerate or even out right lie when filling out the loan applications.

Other loans had adjustable interest rates and when the rates went up, the homeowners could not afford the new, higher payments. The mortgage brokers never qualified the people for the higher rate, just the lower rate. The home buyers figured they would re-finance their homes and get a lower rate when the time came for the adjustable rates to go higher. The problem was that the value of the home went down, so the people could not refinance.

So in a nutshell, many of these companies that are going under have made loans of gazillions of dollars to people who are not paying them back.

The question is, why wasn't the mortgage industry regulated like other industries?

Here's why:

The republicans were responsible for deregulation.

Quote :

In the past decade, as regulators discarded rules, shady mortgage banking companies, financed by the bluest-chip outfits on Wall Street, calculated that they could make a lot of money offering bait-and-switch mortgages to poor credit risks. Default and foreclosure rates would be greater, but higher profits would more than compensate for the risks. So the subprime mortgage industry, enabled by the big banks, invented amazing gimmicks. These included not just variable-rate mortgages, but mortgages that were initially interest only, mortgages with introductory teaser rates, mortgages with no down payment. No income verification required! No credit check! Subprime operators targeted people with horrific credit histories and families desperate for housing who could not afford the debt they were taking on. Last year, 60 percent of subprime loans required no meaningful documentation.
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/03/17/the_dangers_of_deregulation/