Impact of Wall Street bailout becoming clearer

Is there really $700 billion in bad mortgage-related investments?
No one knows. For one thing, these investments were not regulated: None of the Wall Street banks that issued them, nor the investors who bought them, have to report their holdings. More than $2 trillion in residential mortgages were issued annually at the height of the boom earlier this decade.

It’s also impossible to put a value on whatever investments are out there because there’s no open exchange for them to trade on. Even if there were, each bundle of mortgages is different, so it’s hard to compare apples to apples.

What’s all this going to cost?
No one knows that one either. A lot depends on what kind of deal the government strikes when it buys up these bad investments. If, for example, the Treasury buys them for 60 cents on the dollar, and they end up losing more value, the Treasury eats that loss.

If the Treasury drives a hard bargain and buys them for 30 cents on the dollar (on your behalf — it’s your money that's paying for all this) we all could end up making money later after the housing market recovers. But if the Treasury drives too hard a bargain, it will put more stress on a financial system that is already on the edge.

Send us your questions Senior producer John W. Schoen answers questions about the financial crisis and how it affects you. Click here to ask your question.

Is this going to raise my taxes?
Most likely. You won’t get a bill from the Treasury for your share of the bailout. In theory, the Treasury could just borrow more money to cover what it needs — just like it’s borrowing another $400 billion-plus annually to provide you with services without collecting enough in taxes to pay for them.

This latest giant government expense will make it much harder to justify extending massive Bush administration tax cuts that are due to expire next year. Doing so would push the annual budget deficit well over $1 trillion. Even for the free-spending U.S. government, that’s a little too much for the world to bear.

It’s the rest of the world, after all, that’s lending us the money. If the U.S. government begins to look like a subprime borrower, living well beyond its means, the global investors and governments who lend us money will do what any subprime lender would do: Charge us more money. The resulting jump in interest rates would add yet another burden to our economy.

What happens if this doesn’t work? Why is the worst scenario so dire?
While you may get a regular weekly paycheck to pay your bills, most businesses see a very uneven stream of money coming in the door. Sometimes it varies widely. Big orders come in at the end of the month, the new spring fashion line launches once a year and stores stock shelves for the holiday well in advance.

To smooth these ups and downs, companies rely on credit, both short- and long-term. On any given day, trillions of dollars of this debt has to be “rolled over” by borrowing fresh cash to pay off older loans.

The problem now is that fears over losses in mortgage-backed credit have spread to the entire credit market and lending system. If banks, lenders and investors who buy this debt get too spooked, the lending machine grinds to a halt. Business can’t function. Bills don’t get paid. Payrolls are frozen. Workers get laid off.

If your business fails, your lender is out the money you borrowed. That leaves less money to lend to someone else. As more business fail, and the lending dominoes fall, the economy slides into a deeper recession.

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