Explaining the Banking Bailout
I was going through my morning exercise routine here in Cairo, Egypt this morning and was watching CNN International. A caller had a question for the "financial experts" who promptly blew it!
The question, approximately, was: "I have a mortgage with Bank of America. They have received bailout money - how does this help me?"
The answer, of course, is "it doesn't, directly." But then, the "experts" could have easily explained the whole problem and the bailout like this:
Suppose that a hundred people are lined up out in front of B of A to apply for a mortgage loan like yours. A couple of years ago, all one hundred would have likely been given a loan. The expression was, "If you can fog a mirror, they'll give you a mortgage."
Right now, maybe five or ten of the hundred would get a loan. These would be the people who already have enough money to just pay cash for their house. That's' why this is called a credit crisis.
After receiving the bailout assistance, maybe forty or fifty would get loans from B of A. Credit would be granted more readily.
If the caller has children or friends in the line, this is a big deal.
We hope that not all one hundred would receive a loan - that would just put us back into the problem that got us here.
See? Financial issues are not difficult to explain, you just have to make a little effort. Of course, I left out a lot of control, monitoring and supervision issues. But, I'll just bet the government left them out too.
And those numbers, I used - five, ten, thirty, forty? Those are just wild guesses when a blogger like me states them. In a financial model (a bunch of formulas used in a spreadsheet - see, for example, the Congressional Budget Office) those are called planning assumptions.
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