[srmom]

A good and understandable explanation of the problem.

I don't think Paulson and Bernanke et al. are doing a good job of explaining the real problem. I'm not an expert, though I talk to a number. Here's my semi-educated sense. Most significant US banks have some direct or indirect exposure to bad assets. These banks (all banks) are leveraged and because of the credit squeeze, the bad assets have to be marked down to market. However, the market is not functioning. As BCEagle says, an asset worth X is being marked down to X/3 (say). Given their leverage, many banks cannot withstand this extreme write-down and will quickly have to fold or get for very little (and this is happening). But, what is causing the extreme write-down is not fundamental insolvency but a liquidity crisis (exacerbated by the mark-to-market rule).

If there is no short-term liquidity, companies including huge ones like P&G have trouble getting the short-term financing to do things like make payroll. They will have to conserve cash. Eventually, the economy could find a new equilibrium without the same kind of liquidity in the capital markets, but it would involve a permanent destruction of wealth and lots of layoffs in the meantime.

If you want to see a substantial destruction in the wealth of the US middle class and the reduction in their incomes, let your representative know that you'd like him/her to block the bailout. I'm not sure what the best way is to support our country's financial structure, but every day we delay for political grandstanding actually destroys value. My sense is that the Republican right (including the libertarian economist quote above) is unwittingly positioning itself to become the next coming of Herbert Hoover, who I believe cut back credit and government spending to dramatically exacerbate the Great Depression

and another talking about the consequences of a credit crunch

I heard a guest on CNBC tell the story of his grandfather who owned a factory in 1929. The grandfather considered the 1929 stock market crash a comeuppance for those Wall Street types and had no sympathy for them. One year later, his company had gone bankrupt and he was unemployed. Wall Street and Main Street are inexorably connected.

I also heard the CEO of General Motors talk about 10 days ago. When asked what the biggest problem GM faces, he didn't talk about having to retool assembly lines, or getting new designs that people are willing to buy, or finding $$ for the next generation of gas saving cars. He said the biggest problem GM faced was a credit crunch--buyers couldn't get loans to buy GM cars! This was the first time I had seen a "real world" manifestation that Wall Street problems were Main Street problems.

What if people couldn't find financing to buy cars, houses, pay tuition, increase the size of their businesses, etc? Main Street would grind to a halt, and I fear that many people don't see that danger. All they can talk about is how we shouldn't bail out Wall Street.