WASHINGTON — News reports about the upheaval in the world of finance have been full
of esoteric terms like “mortgage-backed securities” and “credit-default swaps,”
but the crisis has resonated for people who know little about Wall Street and who
did not think they would ever have to know. Here are several questions and answers
of concern to Main Street Americans:
Q. The bailout program being negotiated by the Bush administration
and Congressional leaders calls for the government to spend up to $700 billion to
buy distressed mortgages. How did the politicians come up with that number, and
could it go higher?
A. The recovery package cannot go higher than $700 billion
without additional legislation. As for that figure, it lies between the optimistic
estimate of $500 billion and the pessimistic guess of $1 trillion about the cost
of fixing the financial mess. But the $700 billion is in addition to an $85 billion
agreement on a bailout of the insurance giant American International
Group, plus $29 billion in support that the government pledged in the marriage
of Bear Stearns and JPMorgan Chase.
On top of all that, the Congressional Budget
Office says the federal bailout of the mortgage finance companies
Fannie Mae and Freddie Mac could cost
$25 billion.
Q. Who, really, is going to come up with the $700 billion?
A. American taxpayers will come up with the money, although
if you are bullish on America in the long run, there is reason to hope that the
tab will be less than $700 billion. After the Treasury buys up those troubled mortgages,
it will try to resell them to investors. The Treasury’s involvement in the crisis
and the speed with which Congress is responding could generate long-range optimism
and raise the value of those mortgages, although it is impossible to say by how
much.
So it would not be correct to think of the federal government as simply writing
a check for $700 billion. It is just committing itself to spend that much, if necessary.
But the bottom line is, yes, this bailout could cost American taxpayers a lot of
money.
Q. So is it fair to say that Americans who are neither
rich nor reckless are being asked to rescue people who are? What is in this package
for responsible homeowners of modest means who might be forced out of their homes,
perhaps for reasons beyond their control?
A. Yes, you could argue that people who cannot tell soybean
futures from puts, calls and options are being asked to clean up the costly mess
left by Wall Street. To make the bailout palatable to the public, it is being described
as far better than inaction, which administration officials and members of Congress
say could imperil the retirement savings and other investments of Americans who
are anything but rich.
But it is a good bet that the negotiations between the administration and Capitol
Hill will include ideas about ways to help middle-class homeowners avoid foreclosure
and perhaps some limits on pay for executives. And it should be noted that neither
party is solely responsible for whatever neglect led the country to the brink of
disaster.
Q. How is it that the administration and Congress, which
have not tried to find huge amounts of money to, say, improve the nation’s health
insurance system or repair bridges and tunnels, can now be ready to come up with
$700 billion to rescue the financial system? And is it realistic to think that the
parties can reach agreement and get legislation passed in a hurry?
A. The first question will surely come up again, involving
as it does not just issues of spending policy but also more profound questions about
national aspirations. As for rescuing the financial system, elected officials in
both parties became convinced that, while a couple of venerable investment banks
could fade into oblivion or be absorbed by mergers, the entire financial system
could not be allowed to collapse.
And, yes, the parties are likely to reach an accord. Many members of Congress are
eager to leave Washington to go home and campaign for the November elections, and
no one wants to face the voters without having done something to protect modest
savings portfolios as well as giant investors.