Explaining the bailouts

For your viewing pleasure, this is from a comment responding to the claim that the bank bailouts were for people who just couldn't handle their checkbook, and that the economy would have done just fine without the bailouts. 

As a conservative estimate, Fannie Mae and Freddy Mac together were leveraged at a rate of about 1 to 50 (actually about 1 to 30 and 1 to 75 for the two). That means that when you look at their cash reserves they have a dollar put back for every fifty dollars they have loaned out. Banks are required by law to have these reserves in case something bad happens and they have to pay back their loans (money the bank has borrowed) and their depositors (individuals with money in the bank). 

Now a ratio of 1 to 3 or even 1 to 5 is really good. At 1 to 5, that means that up to 20% (or one fifth) of the banks investments can go bad and the bank can still support itself. At 1 to 50 however, only 2% of the bank's assets can go bad without the whole bank going belly up. Banks were able to leverage to this crazy point because of the 2006 SEC rules change. 

During the housing crisis, less than 5% of the homes owned by FM&FM were in danger of foreclosure, but because they were so heavily leveraged it would have been enough to take them under. 

The issue wasn't whether people who didn't pay their bills should lose their homes. It was whether most of the US financial sector would have been destroyed in the process, and what would happen to the other 95% of people who paid their bills, but had loans at banks that went under. 

We bailed out the banks. We didn't bail out the people (that's my biggest problem with the bailout). Those people still lost their homes and are still loosing them at an unprecedented rate, so much so that there is a three or four month backlog of foreclosures. But, we didn't do the bailout for the banks, we did if for people like you, who have their savings and their 401k's in a bank that would no longer exist. 

It's important to remember the difference between corporate welfare and social welfare, even when it's convenient to blame the poor for the sins of the rich.