Why the bailout?

Pretty simple. Story of supply and demand.

In theory, when there is more demand then supply, price rises. Think the Christmas rush for Wii or Tickle Me Elmo. The inverse is also true. When there is more supply then demand, prices fall. One caveat:

*Prices on big items are sticky*

If you bought a house for half a million dollars, you sure as hell aren't going to sell it for $350,000. You might buy a car for $3000 and sell it for $1500, if you really had to. But $150,000? Five years of your annual salary? Hell no.

There are way too many houses in America for the number of people who are actually able to afford them. For about five years, people were able to temporarily afford them, due to some creative financing. That's over now. But we still have way too many houses.

So housing prices are starting to fall. Which is a curiously bad thing, because a number of people in finance and real estate borrowed a SHIT ton of money from various pensions, 401K investment firms, banks, and investment companies.Your money, your parents money, your grandparents money. And they invested in the housing market. Paying for houses to be build. Those houses aren't worth the money paid for them right now. They are worth about... 3/4 of it.

So, if the free market was actually working, housing prices would fall to a new lower level, and everyone would get on with life. But.

The American Government is in a really tight spot. Seriously screwed, really. They have a bunch of voters who have their money in two places: Investment/pension and houses. If the government doesn't bail out the banking system, all the investors in housing lose money. And all the people with houses lose massive money.

People with houses tend to be wealthier, more settled, better educated, and vote more often. Also, often retired and bored. A dangerous group to piss off.

So, the people on the hill say "oh oh! What do we do"? And that solution has been the tax rebate on houses. If you buy a new house, you get $8000. But only if you do that before a certain date. So this creates a pretty strong incentive for everyone to buy a house. This artificially stimulates demand, and keeps housing prices high.

Detroit did that. IT ONLY WORKS FOR SO LONG. GM offered bonus after bonus after bonus for about a decade.

Notice that the feds just extended the $8,000 tax rebate for another six months,eh? I'd bet on it being extended again.

What the Washington clan of policy wonks is hoping is that the price of houses will rise fast enough in the next few years that the 'natural' rate of appreciation catch up to current price levels.

I'd bet against it, were I a betting man. But I'm not. Because the government does not define the market. It just distorts the market. The things they are doing to fix things are doing weird things to other parts of the market. Housing price depends on supply versus demand. More demand then supply, price rises. More supply then demand, price falls.The funny part is that they are already starting to build more houses. The economy is down, so the price of labor for construction is way down. There are unemployed construction works willing to work for half of what they were two years ago. So even when we have a vast oversupply of houses, people are building MORE of them. Because that $8000 incentive is making more people buy.

This is kind of a clusterfuck. Figure everyone that buys a house gets the $8,000 tax incentive. Figure EVERYONE, whether they buy a house or not, has to pay for it.

Fixing it:

First: $8,000 incentive goes away.

Second: Federal government currently insures any mortgage that meets certain requirements. That changes. They should stop ensuring 'big' mortgages. Unless you live in NYC or DC, you have no need for a $750,000 mortgages. People in Arizona took them out and used them to buy houses in places where the average house price was $250,000. It's a national standard. That needs to end. Simple change, really. Max mortgage size=2.5*Area Median Income.