A clear, plain English explanation of the $700 billion bailout, and what it means to you.

Nobody in their right mind would agree to a $700 billion financial bailout. If it actually were a bailout, each of those people would be correct. But it is not.

To understand the current economic situation, it’s necessary to examine how it happened. Then – and only then – can we make an informed decision as to whether this is actually a bailout, and whether it is a good idea.

Throughout its history, the mortgage business ran on a couple of principles. They were based in the underwriting standards upon which they relied in order to make lending decisions. First, the borrower was expected to put 20% down on the house. This 20% was to be in the form of cash – not an additional loan. Sometimes young people received help from their parents, but that fact was not disclosed on their mortgage application.

In addition, total housings costs were to be no more than 30% of gross (pre-tax) income, or 25% of net (after-tax) income. Housing costs included mortgage payments, insurance and property taxes. So, the mortgage business went on, largely in the form of “savings and loan associations” until the 1980’s, when their deposits were slowly siphoned away by “money market funds” at brokerage firms and commercial banks.

In order to remain competitive with these new instruments to which they were losing their depositors, Congress deregulated the rates that savings and loans could pay to their depositors, but did not deregulate the rates they could charge their borrowers. The result? They paid more for money than they could charge to lend it out, and began to go out of business. Thus, the savings and loan crisis began, and in order to save themselves, savings and loans designed “adjustable rate loans” to keep themselves afloat. After many failures, and deregulation of the rates that they could charge their borrowers, the industry was saved.

Fast forward to the 1990’s, when President Clinton approved repeal of the “Glass-Steagall Act,” which was enacted after the Great Depression to separate the activities of investment bankers (brokerage firms) and commercial bankers (and savings and loans). This opened the door for your local bank to offer brokerage services, as well as brokerage firms to offer banking services – including mortgages. In the early 2000’s some Wall St. whiz kids presented research that showed a remarkable fact: at no time in history had housing prices fallen in the entire country at the same time.