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But then more homeowners began defaulting on their payments. Foreclosures rose and with no buyers, real estate values plummeted, taking down the value of
mortgages with them. Wall Street firms stopped buying riskier subprime mortgages, while smaller banks, who had borrowed heavily to buy mortgages, could no
longer sell them and went bankrupt. Homeowners couldn't renegotiate the terms of their mortgages because they had been sliced and diced and resold, sometimes
by firms that had since closed down.
Global investors began fleeing from risky investments, making it more difficult for banks to find buyers for their subprime loans. To stay afloat they began
cutting back on issuing credit, making it difficult for everyone from individual homeowners, to small businesses, to entire countries, to get access to low-interest
loans.
Enter into the picture a government bailout: meant to restore some stability to a very troubled market.
Supporters of the bailout say it benefits both the major banks and the average consumer as the two sides are inextricably linked by the nation’s financial system.
The credit crisis has put pressure on banks to raise interest rates, cap credit card limits and restrict loans to riskier customers.
Proponents of the bailout say selling bad mortgages to the government frees up banks to make new loans to a wider pool of consumers and entrepreneurs at lower
interest rates. That means remortgaging a home, buying a car, or financing a start-up company will come at a lower cost to more consumers as banks rid themselves
of debt obligations from the housing market.
The economic crunch precipitated a flight from the stock markets, resulting in tumbling investments, including retirement savings, and college education funds.
A bailout is expected to help to bring investor confidence back to the markets, boosting the portfolios of the average consumer.
If it works as promised, the bailout will open up new credit that allows businesses to grow and create new jobs. It will keep the housing market competitive and
such growth will in turn generate new tax revenue for governments. But critics of the bailout question whether all of this will go as planned. They say the bailout
is designed to boost Wall Street, while leaving Main Street in the dust.
To begin with, few regional and community banks embroiled themselves in the kind of risky mortgage investments that got major firms into trouble. A bailout will
do little to help banks who are traditionally the cornerstone of small-business lending, though it could raise insurance rates for all banks in the future.
It's not surprising that some smaller community banks are complaining that the bailout is a way for the government to reward major institutions for making bad
investments, while penalizing those who stayed away from risky mortgages.
A bailout allows the banks to sell their mortgage assets to the government for market value, or above. Critics question whether the banks will in turn use this
cash windfall to extend credit to consumers and small business, or whether it will use the money to fund acquisitions, while keeping tight lending restrictions
for the average person.
Those who say the bailout won't go far enough, argue that the government should also be funding an economic stimulus package that would include greater social
assistance, aid to state governments, and infrastructure projects that could create well-paying jobs.
Perhaps the most persuasive argument by those opposed to the bailout is that it does nothing to repair a broken system, leaving lenders and borrowers vulnerable
to repeat the mistakes of the past.
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