because i've gotten so many questions about the economy

I've had lots of people ask me about the economy, the bail out and what's really going on, how it all happened, etc. So I've drawn some pictures to help explain it. Please bear with me, I'm no artist.

This is generally how mortgages and loans work now:
1-
We get our loans from local banks, often. To sustain the lending, these banks essentially sell the loans/mortgages to larger companies who in turn do the same to these mammoth Wall Street companies--and international ones for that matter--whose names we've been hearing recently. To stay afloat, the big companies depend on the upward flow of money from our loans and mortgages--hence the importance of "Main Street."

Starting in the early to mid 90s, there was a push to deregulate Wall Street and financial institutions and by the end of the decade the market was blown wide open.

This opened up the possibility of lots of movement of money and it thus appeared that the economy was expanding and even survived the end of 2001.

Because of this expansion and deregulation, a bulge appeared in the housing market and homes and real estate was where to be financially. Realty was a booming business and there was a lot of pressure from the huge lenders and regional powerhouses to expand the loans:
2-
Why expand the number of loans? The empty spaces are where the mammoth companies spread themselves out, waiting for these thousands upon thousands of mortgages and loans to begin to ship money upward.
3-
All the companies from the ground up hoped this enormous financial growth would happen, no hitches, spreading the money love around. The home owners also hoped that somehow they'd be able to make payments on their loans.

Then we have the problems with the mortgages and loans. Because of the pressure coming from above, realtors set up tons of the subprime loans that we've been hearing about. These were for higher financial risk people (low pay, unstable jobs) who wanted loans, thus got higher interest rates based on poor or no credit. A large portion of these new home owners received gargantuan loans--we're talking $300,000 and more--that they couldn't even make one payment on.
Other people got variable-rate loans or adjustable-rate mortgages. These were extremely problematic, because, at first, they looked great because of the low interest and an economy that seemed to be doing well.
*Addendum* Lauren makes the good point in her comment and I totally forgot to point this out: There were lies and half truths coming down the chain to the smaller, local lenders about what these loans really were. There was so much pressure from above to get these loans done. Then other small businesses didn't tell some of the people what the loans really were.
However, there are plenty of people doing the right thing who've been hit hard, mortgage companies and people getting loans.
She is right, why on earth were these loans existent in the first place and so easy to obtain?: greed.
Another addendum to come later.
4-
But then the subprime junk loans and mortgages started to crash. This created an upward cash flow problem. So the variable rates and adjustable rates went up, meaning that people who could pay, say $800, on their mortgage were now asked to pay $950ish or more once the interest rate went up.
5-
Remember when the Fed lowered the interests rates a while back? That was an effort to help people out with their loans, to meet their payments. But there were still thousands of junk mortgages out there popping holes in the base of the loan bubble. Even with the increased funds from the variable-rate mortgages, the large companies weren't getting enough money to sustain themselves, much less ship more money down to us.

So what came of all of this? With no money going up and thousands of loans defaulting, the smaller lenders struggled to send money up the totem pole. Then the mid-level lenders were struggling financially. The mammoth lenders tried to help out, but didn't have enough money to drop down. Their big lending bubble burst (exploded?).
6-More and more people are defaulting. No funds are going up or down. The whole system is weakening. Businesses are folding or they're being bought up nickels on the dollar of their original worth. The value of homes is tumbling down now as no one can afford to buy a home at their bubble prices. This especially hurts people who are trying to flip houses.
Because of this the equity of a home crashes. This is a huge problem now for people with good, stable loans, because a lot of them have gotten loans based on the equity of their home which is now next to nothing. People had used this money to improve their home which is now worth less that 10 years previous. Other people have used this money to buy boats, TVs, new cars, other toys, but now can't make their loan payments. They can't sell their toys because of a depressed market. Now people with the good loans are defaulting.

We're brought to a full financial spiral as a nation.
All of this means that what we thought was a steady financial growth as a nation, was actually not real, because people were using inflated money. If we adjust the last few years with what we know now, the idea of financial growth is a non-starter.
It's also important to note that the FBI is now looking into the major companies, especially those that have crashed to see if there was any illegal activity. (I say, "duh" to that.)

On to the bailout:
This $700 billion dollar bailout is disgusting because we taxpayers have to cover the rears of people who were inflating the loans, pushing for junk mortgages, and being greedy. We've also had to cover for a Congress that years ago didn't look to our future, rather pushed thru bills that got rid of the regulation that had kept our financial systems running, even thru recessions, for nearly 70 years.

So what now about the bailout? The original bill handed over all of the power to one man, Henry Paulsen, a former head honcho of one of the largest Wall Street firms, Goldman Sachs, to let him do what he wanted with the dough. He said that if there were money left over, no worries, he'd give it back. Wink Wink Nudge Nudge.
Right.
So Congress has been working to get a committee of experts to handle the situation. They've been working to get money to the home owners who have been hit by the poor money managing of Wall Street.
Here's why this is important:
7-
Even though it's revolting that we'd have to give money to these big lenders, and even if some of the home owners were too big for their britches, if this connection breaks anyone along the continuum, that's a second Great Depression, or the complete stoppage of money flow.
8-
Oversight: The reason people are pushing for government oversight on the bailout and then further, is to stop what's happened the last 10 or so years.
Bailing out both sides keeps the money flowing back and forth, allowing for a financial equilibrium and the eventual stabilization of our markets. (fingers crossed!)
Notice how in picture 8 the holes are patching up, defaults are much fewer, the majority of the homes don't need government bailout help and the major lenders are more stable. Also note how in the picture there is still a bulge in the bubble, but it's smaller, showing a healthy and steady growth. No longer is there crazy inflation based on junk loans and illegal mortgages.


*Now, to be fair, it's possible that the market could stabilize itself without the bailout. The problem is no one really knows because it's hard to see where our country is heading financially. All bets are off right now, especially after the myriad junk mortgages and adjustable-rate loans that are out there somewhere.

**Another addendum: Lauren also added in her comment a good point about the CEOs that I should've mentioned: the golden parachute. Some of these CEOs have been fired and with that firing came a HUGE chunk of money, usually around 25-50 million dollars. I agree with Lauren that this is so horribly bogus. They were the ones who should've stopped their companies from doing this and creating this problem. Let's take their golden parachutes and start passing the money around to people with the good loans to help them pay them off. Can we get an "Amen?"

***Yet another addendum: I think I made it look like I'm way more excited about this bailout than I really am. I've had friends ask me what it is and why people think we need it, so I drew pictures to that effect. I'm still not completely sold on it at its current level. I think something needs to be done, but $700 billion this way? I dunno. I need to hear more. They need to explain this better.