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Date Posted: 06:18:56 03/17/08 Mon
Author: Deep Diction
Subject: Re: Help me out here
In reply to: SleepingHare 's message, "Re: Help me out here" on 20:59:34 03/16/08 Sun

Oh, they definitely aren't free. Bailouts happen when the government decides that the burden on taxpayers from a bailout is less than the impact of inaction. And like you mentioned, the bailouts could send the message that the free money will always be there, and we don't have to be responsible. If they allocate the bailout money too heavily to the banks, it might encourage the banks to keep making stupid loans. If they allocate it too heavily to the homeowners, the borrowers will keep taking loans that are beyond their means.

The reason it got this way is that the lending rules got too lenient. Banks have formulas that determine whether people can afford to borrow the money they're trying to borrow. And the banks started coming up with a bunch of ways to circumvent these rules (abusing "no-documentation" or "stated income" loans, especially) instead of working within the rules to protect themselves. And seedy mortgage brokers were writing adjustable-rate loans without explaining the terms carefully to the borrowers, most of which are just too stupid or too trusting to take the time to understand the risks. Lots of times, especially with foreign-language borrowers, they'll be working with a broker who speaks their language and takes advantage of the fact that they can't read the stuff they're signing. The deal gets done, and poof, the broker disappears.

The more restrictive lending rules are a necessary effect of the crisis, but unfortunately, the rules changed very significantly in a very short time, and it is going to cause a lot more bleeding in the process of getting better. If banks had shown more foresight and made the changes on a muchmore gradual basis, we probably wouldn't have had nearly as big of a slump as we've had.

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