The $700 billion dollar bail-out needs to pass quickly. We need to remove the weight of all the bad loans sitting on the balance sheets of banks from the American economy. If we do not free up the banks to make loans the American economy will spiral to depths unseen since the Great Depression. To avoid a Depression like scenario the bail out must pass quickly otherwise the downward spiral we are already on will continue.
The bail-out provides a buyer for all these bad loans on the balance sheets of banks who otherwise no buyer exists for. The reason there's not a buyer besides the government is because there's no one big enough to buy all these loans and hold them. As a buyer, even if the loans represent a good deal right now, you can't buy only a small portion of the loans because it leaves a huge supply outstanding that puts downward pressure on the price of the loans you just bought. It would be like having an entire block of houses for sale and only being able to buy one. Because all the other houses are still for sale, the house you bought is subject to the downside price pressure created by the oversupply of houses on the block. However, if you could buy all of the houses on the block and hold them until buyers emerged offering reasonable prices you would create price stability. Unfortunately, not many entities exist that can afford to buy a whole block of these loans and the government can fill that void. If the government doesn't fill the void, banks will continue to fail due to the shrinking value of the loans on their balance sheets.
The intrinsic value of the loans equals the total value of the real estate underlying them. Right now, this value is not recognized in the market because no one can afford the risk of buying the loans, even at prices much less then the underlying real estate. The oversupply of loans in comparison to the small piece any buyer can afford creates too much risk of losing money for the buyer. If the bail out doesn't go through the real estate market will start to collapse because the loans will be worth less and less. The downward spiral we are already experiencing will continue to descend at a faster and faster rate.
The rate of descent accelerates because as banks can loan less there is less money available to buy houses. If banks don't have any cash they can't lend money to people to buy houses and before long we will be in a situation where nobody can get a loan to buy a house. If there are no loans available to buyers then they can only pay prices equal to the cash they hold. This is a dramatic reduction in prices from the price a buyer could have paid previously with a conservative 20% down and 80% loan. Prices must fall to an equilibrium level between buyers and sellers, and without the bail out, the equilibrium price equals the cash available to purchase homes without the additional buying power of mortgage loans.
If the prices of real estate begins to spiral down towards "cash only " prices the values of the loans on that real estate will follow suit. This series of events is the reason no one is willing to buy a small piece of the outstanding loans. Any buyer faces a serious risk of further collapse in the value of the loans. Only a buyer with a huge balance sheet and access to a lot of cash can buy a majority of these loans. Buying a majority of the loans infuses banks with cash which they can then lend to people to buy houses. This supports real estate prices and the values of the loans. The government is one of the few buyers remaining with a big enough balance sheet and access to enough cash to buy a majority of the outstanding loans. The bail out transfers these loans to a buyer who can afford to hold them and provides cash to banks allowing them to make loans to the rest of the American economy. The loans will stabilize prices in the housing market and stabilize the prices of the loans the government would own. Without the bail out, prices will continue to fall until we reach a "cash only" level and the American economy faces another Depression.
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