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With worldwide economies in turmoil and the collapse of the U.S. housing market, everyone from Wall Street CEOs
to mom-and-pop shops have been watching to see how governments handle the crisis.
In the U.S., much of the debate has centred on the $800 billion federal bailout, which promises to buy bad mortgages off of the nation's
faltering banks. Questions remain as to whether the injection of taxpayer cash into large lending institutions will do anything to
benefit the average consumer, or merely line the pockets of wealthy bankers.
So who benefits from a bailout of major banks: Wall Street or Main Street?
To understand this question you should understand that the two sides aren't quite as far apart as they seem.
It can be difficult to see how a single mother struggling to keep her home in Monterey, California is connected
to a Wall Street investment banker selling repackaged mortgages to global investors. But both became links in a
chain that helped to bring about the biggest economic crisis in more than a decade.
The global credit meltdown can be traced back to the start of the decade when global investors, anxious for higher returns,
began looking beyond traditionally low-risk, low-return investments, and started putting their money into mortgages that paid better rates.
The global demand for higher returns encouraged U.S. banks to extend credit to riskier customers, those with little income or assets.
They were known as the "sub-prime market" because they were traditionally seen as less desirable customers. Intense competition for new mortgages
meant brokers started to overlook the usual requirements, such as proof of a job and savings.
In essence, brokers began selling mortgages to anyone, even if they had a proven history of not paying their bills. Homeowners, too, began tossing
out the old rules that said if a loan seems too good to be true, it probably is.
Brokers could afford to issue risky mortgages because they could then sell the mortgages to small banks, who often took out huge loans from bigger banks
to finance their mortgage purchases. The small banks would then repackage the mortgages and sell them to major Wall Street firms, using their earnings to
pay back their loans. Wall Street firms would repackage the mortgages again and sell shares to global investors.
With rules for credit relaxing and a strong housing market, even homeowners who couldn't make their mortgage payments could use their homes as assets to
take out new loans. Even if some homeowners ended up defaulting on their mortgages, most investors figured they would be able to seize a home and resell
it in a hot market.
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