Politics: This bailout thing is so huge and complicated ...

Am trying to get my head around the issue.

Robert J. Samuelson of Newsweek tries to explain. Excerpt:

Under Paulson's proposal, the Treasury could buy distressed mortgage-backed securities. Consider a batch of hypothetical securities originally worth $100 million and paying an interest rate of 6 percent. They're no longer worth $100 million because half of the homeowners have stopped making their monthly payments. Suppose, then, that the government buys the mortgages for $50 million. It earns 6 percent on its $50 million, and if it borrowed money at 4 percent to buy the securities, it would make a tidy profit. If the government holds the securities until maturity and all the remaining homeowners repay their mortgages, the government would come out ahead.

Would something like this happen? It could, and Pimco's Bill Gross argued in the Washington Post that it might, but there are several reasons it might not.
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One of the reasons is the uncertainty of the price the Treasury will actually pay for that $100 million example. Will it be less than the $50 million and thus come out even more ahead. But then again, if they pay more than $50 million they would at some point come out behind.

And of course, what percentage of the homeowners ultimately default on their mortgages which will affect the future value of those securities?

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How did we get in this mess in the first place?

From what I'm hearing, it started with the decision by the government to encourage home ownership and the various decisions that got made by other institutions in response and people who bought homes who financially might not have really been ready to.

In short, their is blame to go around to everyone.

Home ownership sounds like a laudable goal though, right?

But what happened?

Follow the bouncing ball ...

Lending standards had to be loosened to loan money to people who normally wouldn't be able to buy a home. I.e. lower down payment requirements, teaser interest rates, etc. Banks went along because they might be able to profit.

Package all the loans into mortgaged-backed securities (Freddie Mac and Fannie Mae's charter) which they sell to US and World markets. They probably wound up taking more risks figuring that since they were chartered by the Federal government they might get bailed out if they get into trouble.

Economy slows down and people start defaulting on their loans and the system cascades downward into the mess we are in now.