At the time of this writing, and despite Congresses best assurances of acting in 'our' best interests, we arrive at the following situation:

• Treasury plans to use $700 billion to buy bad mortgages of financial institutions; also proposes to raise the ceiling on national debt from $10.6 trillion to $11.3 trillion (the limit was raised to $10.6tr earlier this year under the housing bill). Congress is nervous but will go on with bland commitments to 'reduce compensation' and similar 'principles' without substance. Such is the stuff of political rhetoric without meaningful details, and the details matter; for example, do we mean we should hire less than the 'best and brightest', or go after those who have already legally profitted from existing laws? It's far better to just go after the many that have violated the laws already in place.
• The $700 billion is just a downpayment for a much larger figure, and does not include many prior commitments to large amounts of funding (estimates of totals run as high as $5 Trillion):
  • Treasury is to use up to another $50 B from the government's Exchange Stabilization Fund to temporarily insure investors from losses in money-market mutual funds
  • Fed, remember, is also lending $85 B to AIG for a 79.9% govt stake in the form of equity participation notes, and are asking for more; govt and taxpayers might benefit from sale of equity stake in the future, but this will depend upon the extent to which value is restored to these assets. Expect other insurance bailouts as well.
  • The Fannie and Freddie bailout will cost an additional $200 B (Roubini) to $300 B (William Poole). The CBO also anticipates operations of Fannie & Freddie (incl. credit transactions like mortgage guarantees) may need to be incorporated into the federal budget (this has been opposed so far by the White House, though the next administration may look for favorably at this).
  • Additional Treasury assistance may cost an additional $25 bn during 2009-10 with a 5% probability that Treasury might also need to inject $100 bn into GSEs. Socialism, here we come.
  • An additional Housing Bill to refinance $300 bn FHA-backed mortgages would cost around $2.7 bn during 2008-13 (CBO); but there is additional risk of defaults to FHA and taxpayers due to continued decline in home prices, and rise in future interest rates (which may put further pressure on home demand), esp. if riskier loans are refinanced. Note that a drop of 20-30% of housing values from their peak nationally wipes out between $4 and $6 trillion of household 'wealth', and leaves nearly 10 million with negative equity in their homes. A key indicator to keep in mind is that approximately 50% of all mortgage originations from 2005 through 2007 were subprime lending loans of various types; the default rate for these loans will likely be a closely watched measure of exposure for this paper over time.
• The initial government efforts were clearly botched, an enormous amount of wealth has been eliminated, yet a number of people are getting unfairly rich. Welcome to an unprepared government, proving again that execution matters more than more regulation. There will be no fair test of a 'no-bail-out' option. The risk is that since bailing out seems so 'easy', we will overdo it. 
• The real impact of this crisis will (hopefully) be to put pressure on the next administration to scale back on huge new spending plans and tax reductions. This is necessary in order to address existing commitments already put in place by previous administrations.
• The cost of the bailout is perceived to be much less than the risk to the financial sector, Main Street and U.S. workers from the credit crisis which would result from govt inaction; However, there is also additional risk that any potential upside gain may affect U.S. sovereign debt rating, and an expectation that we are only looking at a piece of what will be ultimately required. Expect that they will be back for additional legislation (and funding) soon.
• The existing bailout is not expected to pull the economy out of a recession, which will likely trigger new calls for more 'stimulus packages'. In the past, this has only delayed the inevitable, like borrowing from credit cards to make payments on other debt, especially when underlying root causes remain unaddressed.
• The impact will be much greater in some parts of the United States than others, as you would expect.
• Treasury assistance to buy student loans from pvt lenders and invest them in loan-backed trusts adds to interest rate risk (in order to reduce credit risk of financial sector) and vulnerability to further student defaults.
• commercial paper money exchanges may require additional federal lending to be offered.
• Regulation of the $596 Trillion derivatives market has been proposed
• Regulation of compensation that has been put in place has already been declared to be ineffective.
• The additional risk posed by credit default swaps is difficult to forecast, due to the lack of transparency on these instruments, but is likely to be substantial.
• The Fed is now accepting equities, investment-grade debt to provide liquidity to securities firms under Primary Dealer Credit Facility.
• Prosecution of mortgage fraud at selected lending agencies is underway.
• The Fed is also accepting investment-grade debt including corporate and municipal bonds as collateral under Term Securities Lending Facility; ending of Treasury securities to pvt sector instead of govt increases risk exposure to taxpayers.
• The Fed's lending of $29 bn to Bear Sterns against collateral of riskier illiquid assets may payback only 40 cents for each dollar in the next 10 yrs. Any losses of these 'off-balance sheet' assets will further impact Fed's dividend contribution to the Treasury's general fund, all of which puts into question the above deficit figures still further. The trends of securitization, especially across the world's financial system, are particularly troubling.
• The overall impact of this on access to credit (aka a 'credit crunch') is also difficult to predict, since it does not appear that the rate of lending has actually yet decreased. Delays in one part of a system from causes in another part are typical, however. When they do appear, their impact on the economy is likely to exceed effects we've seen so far, so hang on, since consumer spending is over 70% of GDP, and households have lived off credit for years.
• The national debt clock has recently past 10 trillion dollars; the public display ran out of numbers. so the dollar sign now has been repurposed to represent the 10 trillions while a new display is being built.
• International relations will continue to play a huge role in working our way through this crisis. The West is in talks to expand credit to poorer nations during this crisis. China is expected to have a hard landing, a significant risk to world stability. The dollar is at it's highest level in five years, against foreign currencies, demonstrating that our nation remains the 'safe haven' for the flows of capital; let us hope future administrations do not do things which will erode that confidence.
• World-wide deflation is now being predicted within 6 months, as a huge excess capacity for the production of manufactured goods exists in the global economy.
• The forecast for fiscal deficits looking forward ($483 bn ytd) are as follows (note also, that in addition to the many above uncertainties against which such forecasts must be considered, that the conversion from investment banks to bank holding companys for these institutions is now underway, implications of which are themselves unpredictable:
  • Merrill Lynch: $500 bn in 2008; $525 bn in 2009
  • Goldman Sachs: $425 bn in 2008 and $565 bn in 2009 and $5.3 tr in next 10 years
  • Morgan Stanley: $420 bn in 2008 and $540 bn in 2009
  • JP Morgan: $650 bn in 2009

The places that politicans will look for funding all of this debt should be of concern to all of us, expecially since discussions regarding elimination of tax savings for 401K accounts are already underway. The level of ultimate recovery funding required or risk exposure resulting from the bailout 'loans' (or policies, if that is the form they end up taking) is very difficult to understand or predict by the experts (and is therefore hopelessly difficult for either legislators or the average taxpayer to fully comprehend, leading to further anxiety, and loss of consumer confidence). The takes of various financial system opinion-leaders (as opposed to press or politicians, who I consider largely clueless) vary widely on how this will play out from here. For example, Roubini is now predicting losses totaling $ 1 - 2 trillion (as a benchmark, the US annual GDP totals only approximately $14T). The Fannie and Freddie Treasury bail-out plan is largely perceived by the public to benefit the rich, well connected and Wall Street, yet due to past incompetent oversight (what will we get when we reduce rewards for these people?), their leaders have already gotten rich (a situation which current legislation will not address). Meaningful reform is unlikely to happen given the involvement of players on both sides in current campaigns. Dozens of large regional/national banks are also thought to be bankrupt (though have not yet declared) due to their "extreme exposure to real estate." Other major banks may be nearly as exposed, due to the real estate bubble.  Rubin said it perhaps best: 'The only way Wall Street's meltdown doesn't spill over to Main Street is if policymakers begin to pay adequate attention to the people whose wallets really keep the economy going, and who merit more help than the Wall Street tycoons whose carelessness and negligence have put it in such jeopardy.'

There are likely to be additional, and perhaps significant, secondary effects of all of this to public hospitals, schools, and transportation, as they face high interest burden on low-risk muni bonds (due to downgrades of bond-insurer monolines), compounded by even more pressure on state budgets from slowing economies. This may force some states to buy back bonds/refinance/shift to other low-cost debt if auctions fail; states have paid high fees to Wall Street firms on failed auctions and penalties for terminating interest-rate swap agreements in the past. Some states have also already begun to look to the federal government for their own bailout, and cities are seeing impacts to transit and other projects. There will also be impacts to industries that require ongoing credit, such as the auto, travel, and airline industries, as those businesses get the triple whammy of constrained credit, inflationary costs, and reduced demand for their products due to a global economic slowdown. The credit crunch will likely introduce further problems in such markets, as it spills over into consumer purchses (this has already happened with auto sales). And internationally, the effects have even begun to impact some entire countries, and thus the impacts will continue to accumulate with time. Let's hope cooler heads prevail about bailouts of the auto industry, as we'd only be rewarding the poor performers (as opposed to encouraging them to engage in fundamental change).

At it's core, what this crisis does is constrain our future options. For governments, options such as implementing needed infrastructure improvements.  For companies, opportunities to invest in new products are reduced. For individuals, the ability to invest discretionary income in investments is reduced, unnecessary purchases (the engine of employment) will be curtailed, retirements will be delayed, and confidence will be further eroded. As all of these factors accumulate, and they contribute to prolonged and more painful impacts.

A humorous email during this period offers sage advice for the american people going forward:

Forrest Gump explains mortgage backed securities:

Mortgage backed securities are like boxes of chocolates. Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard & Poor rated these boxes AAA Investment Grade chocolates.  These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide. Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal. Meanwhile, Hank's buddies, the Wall Street criminals who stole all the good chocolates are not being investigated, arrested, or indicted. 

Mama always said: "Sniff the chocolates first, Forrest".

 This is because there is no escaping the reality that both markets and governments fail.