Asset-backed time bombs bailed out?!

I think I finally understand the way securitizing debt works, thanks to Paddy Hirsch’s of Marketplace’s champagne-at-a-wedding whiteboard illustration (see the video), and it is what I feared and could never really fathom: investors tried to make money off of people’s debt, their massive, unrelenting debt.  Even worse, companies like Citibank could get the debt off of their books by selling it as bonds to investors and then expect to get their failed ventures paid for by the U.S Government.  This is why a bailout is so problematic, as has been said before: these companies took great risks in order to profit off of people’s debt–which credit card companies abetted with draconian interest rates and fees, but now they expect the government to pay for these risks.

Every bailout, Tom Friedman and many news outlets tell us how disastrous it would be to let another bank go into debt, I have to wonder how disastrous it will be when we are faced with the even more immediate bailout of millions of indebted American who will not be able to make any kind of payment–in a car, a house, a credit card, a student loan–and have not yet been given any kind of bailout.  How much inflation will all of these guaranteed debts wreak as the U.S. is forced to print money to fund them?

It is also worrisome that the bailouts seem so targeted at preventing the market from melting down.  Sure, the Citi bailout provides a brief market boost, but it is an irrational one.  Investors are putting their money in the appearance of stability without having a good idea of what is on their books.  The government’s priorities appear to be skewed toward investment and commercial banks.  I am not an expert on anything related to the economy, but I think I can, like many people, think common-sensically about it, which is why I find the bailouts so problematic–because they do not address the real problem of individuals facing severe indebetness or bankruptcy.

I suspect the government has gotten so in over its head with these bailouts because no one fully understands how toxic these banks’ “assets” are and how bad individual American’s mostly yet-to-be-dealt-with financial problems are.