During the housing boom these were the events that took place:

Easy Loans

Loans were made available with very low teaser rates that would be jumped to a higher rate after 3 or 5 years

Converting Loan Into Investment

Lenders sold those loans to banks and investors around the world telling everyone that such notes were having safest ranking (AAA) and that the home owners will definitely pay the mortgage on time and the promised return will always come. What a great investment! At least I expected so called high IQ wall street professionals to evaluate these before jumping into it.

People Buying Unaffordable Houses

Common people bought houses they couldn't afford thinking that they would sell the houses in 3 to 5 years and walk away with thousands in profit. It was made possible by the low monthly payment (low teaser rates) offered by several lenders.

Everyone Was Jumping Into Housing Boom

On the promise of making quick money on flipping condos and houses everyone in USA was getting into buying houses at a low teaser rates and get profits by selling the houses before the rates become higher. Many of them made money too. It was supposed to be the get rich quick formula of the post dot com bust.

As more and more people wanted to get into flipping condos and houses more and more lenders came into the business offering teaser rates and approving loans without verifying income and affordability power of the clients. More and more loans were sold to more and more investors. More and more investors kept coming with greed lured by so called guaranteed return. As more and more investors kept buying those investments lenders were lending more and more as they were sure that they could sell the loans to banks and walk away with profit. It was a self fueled cycle powered by greed from everyone involved.

Did the cycle continue forever?

No party lasts forever. As the housing market boomed it came costly. Rising cost kept many buyers at bay because they couldn't afford the houses. Also the intelligent buyers kept themselves at bay from the teaser rate loans.

As a result everyone was sitting with their houses and nobody was coming to buy from them. Since people couldn't sell their houses in 3 to 5 years in the time their rates were going to get higher they started facing the pinch of rising monthly mortgage because of new rates.

More and more people couldn't afford their houses anymore in real sense as the teaser rate was gone and banks & investors were demanding their promised interests.

Since people couldn't afford their houses they left the houses to bank and more and more houses went into foreclosure.

As houses went into foreclosure the loans were not repaid to banks and the so called guaranteed returns started vanishing.

In the event of no return and no value to those mortgage backed securities they started becoming worthless and banks had no choice but to write down those bad assets and suffer losses.

As we have all seen in the recent weeks once thought to be unshakable investment banks were crumpled to dust by their worthless mortgage backed securities.

Bear Sterns got bought by J.P. Morgan. Lehman Brothers filed for bankruptcy. Fannie Mae and Freddie Mac were taken into conservatory. Merill Lynch got acquired by Bank of America. AIG was given closed to $80 billions to get back to life. And finally congress is preparing to pass $700B bail out package by buying these mortgage backed securities from the banks.

Will $700B bailout help anything?

Sure! Banks would be happy to see that government is buying all those bad assets (worthless mortgage backed securities) from them. As a result banks won't have to suffer from losses and that will improve their chances of getting funds from other sources. That would improve the credit market and people can go their merry ways to get car loans, house loans and spend freely on credit card as more credits will be available to them. Sounds great!

But wait! That's not all!

So what will happen to the mortgage backed assets that the government is buying?

Well, it is hoped (by the people in Washington) that as things improve, people who are stuck in unaffordable houses would be able to sell it to buyers who can afford them and pay regular monthly mortgage. It is also hoped that there would be fewer defaulters on the loan resulting in the recovery of the housing prices.

As a result some investors would come back to the government and say "Hey! Remember those toxic asserts that made me suffer so much? I want to buy that from you at a higher price than what you paid to get them from me".

What a long shot!

Do you think that you will buy something that is worthless? Who defines how much worth those securities are? People who defined have ended their careers in Wall Street. Do you want to give it a try?

Washington is fooling everybody and common taxpayers have absolutely no choice.

Banking and investment industries have very a strong lobby. Wall Street firms pay a lot of money to leaders in congress in their campaigns and other perks. If the leaders don't help them they won't help our so called leaders.

Why help someone who in the first place started this mess?

Economy will not come to a stall if a few of these firms go out of business because of their bad judgment and greed.

American economy is not running on the mortgage backed securities. It will have its impact but let the free market come to equilibrium on its own.

American leaders are doing nothing but promoting the concept of living in debt, credit and falsely assuring people that they will print more and more money to help them whereas the new money will help the wall street firms who will cook up something better and create another mess pretty soon. And they will look up to the government for another "bail out".