Quote:
Originally Posted by DGthe3
As I understand it the money is to act as seed money and to increase the attractiveness of taking out a loan. The banks, knowing that it is high risk to loan out to some people now will be more selective in who they give money to. But the idea is that if nothing was given to the banks, nothing would be taken from the banks, which is bad for the economy. By giving $200B, it is expected that the shift it will cause in the demand will cause the banks to loan out more than $200B. So then, the banks will be able to pay back the fed, and make a little money too, and consumers can go out and spread money around. Thats the idea (I think), and it should work.
the whole problem was caused by having a strong housing economy where the banks could still make money even if people couldn't pay their mortgage. Basically they were beating the curve, the mess happened when the curve caught up and everyone started to go into damage control -less loaning from the banks and less spending from consumers. Massive infusions of money from the government are the only way to break the cycle, always has been and always will be.
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The 200B is to offset the losses in the subprime market (high risk loans) So I think the only dissagreement I have with you is that it was the defaults on the sub prime mortgages that caused the lending market to head south and not necessarily the fall of house prices. The value of a home has no impact on a sub prime borrower to pay back his loan. Now the bank did get hammered on both ends when subprime borrowers defaulted and the banks were left with greatly depreciated houses. It seems to me that now that house prices have dropped the banks are scrambling to get back in the game to start the process all over again. More loans because houses are cheaper, house prices go up, banks get more funds from overseas investors, too much money not enough people to borrow it, sub prime risk becomes more and more acceptable..... and so on. I'm not sure how I feel about all this...