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Time To BailDaniel Gross and Chadwick Matlin take readers' questions on the government's financial-rescue plan.

Posted Friday, Sept. 26, 2008, at 10:57 AM ET

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Fallbrook, Calif.: How does this help homeowners? And why is the moral hazard justified with the banks, and not for the people hurt by unscrupulous lenders?

Daniel Gross: Directly, it doesn't really help homeowners. The way they seem to justify it is this. If I default on my mortgage, it hurts me and hurts the bank a little bit. If a gigantic mortgage lender fails, it hurts its shareholders and bondholders—but also has the capacity to disrupt the entire global financial system. That seems to be their operating theory. In order to get a bailout you have to be big, reckless, highly interconnected with other firms, and international in scope.

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Athens, Ga.: Are these "instruments of mass destruction" still being written? Are the banks wanting to get rid of the old junk so they can write new, or is all that passing the loan around over for good?

Daniel Gross: Some credit default swaps are still being written. And mortgage-backed securities are still being issued. But the volumes are way, way, way down—like 80 percent or so.

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Riverside, Calif.: What are the short- and long-term effects on the taxpayers and the economy if the proposed bail out takes place? What would the be if they were made to fail or other wise close businesses, as "Joe Average" would be forced to do? Thanks from an irate citizen.

Chadwick Matlin: Short term: The deficit and debt go up, as Dan mentions in his latest piece on Slate. But let's be clear: we'll only lose the whole 700 billion thing enchilada if we get our shirts stolen. We're buying assets from these banks (although we don't yet know how), and eventually we want to sell them. When we do, the goal is to break even or turn a profit. Even if we don't make a profit, we'll probably lose $200 billion at most. And really, what's $200 billion, when you're ready to lose $700 billion.

Long term effects: Nobody knows, obviously. We'll know more after Congress gets done crafting legislation, but we'll probably be with our new toxic debt children for several years. Taxes may have to go up to cover the deficit, domestic agendas of the next president will be altered, and the Fed and Treasury's regulatory abilities will be questioned. Fun!

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Washington: Why $700 billion? Why not more? Why not less? Earlier this week I heard that there was a proposal to use $200 billion to start and then force the Treasury to come back. That seemed like a very sane option. What happened to that?

Daniel Gross: It does seem an arbitrary number. I think the idea was to come up with something really big, to set up the notion that the Feds will have the biggest stack of poker chips on the table, and that if anybody wants to bet against them (i.e. use their cash to make bets that banks will fail, etc.) that the government will be able to out last them. It's all about psychology to a degree. Carry a really, really big stick.

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Los Angeles: Doesn't the proposed bailout run contrary to the basic notions that a large, centralized federal government is bad, and that a free, open and unregulated market is good? In other words, isn't this the very type of idea for which the Republicans have villainized FDR for so many years?

Chadwick Matlin: Yes, but the idea is that the free market was no longer performing as is, so now regulation was necessary. The goal is to alleviate the pressure on the banks and then return to a quintessentially American free-market system. That may not happen if the Democrats pack in a lot of long-term regulations in the Congressional bill. But we'll have to wait and see.

Republicans have been running away from small government for a long time. Their hesitant acceptance of this isn't that surprising.

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Behind Enemy Lines: Great articles on the bailout—my gut instinct on the bailout is to reject it, but your article convinced me otherwise with just one statement: "And what's another few hundred billion dollars of debt on top of a national debt that already reaches $9.7 trillion?" The economy, in spite of math, is whatever we want it to be. Keep the Aspidistra flying! And release the funds.

Daniel Gross: Thanks. Unless you were referring to one of Chad's articles, in which case Chad thanks you.

The danger, of course, is that we print so much money that it debases the dollar and inspires inflation. (of course, we're a little late on both those fronts)

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Laurel, Md.: Your answer to my question about distorting the economy suggests I wasn't clear on my point: Did building housing (not just the financial side of lending) become an out-sized portion of the economy? By extension, did that motivate the unfortunate decision to plough under grass and trees to build houses that our society didn't really need?

Daniel Gross: Yes, it did. Housing and housing-related credit swelled to an outsized portion of GDP. Between November 2001 and the middle of 2005, something like 40 percent of all jobs created in the U.S. had something to do with housing. There's no question an excess of supply was created.

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Washington: From my perspective, the root of our financial problem is the fact that, as a country, we've been overextending ourselves and living beyond our means. We spend money that we don't have, whether it's homeowners taking out loans bigger then they can afford, or financial institutions using too much leverage to pile capital into risky assets. How is borrowing another $700 billion dollars from our children to pay for our current excesses going to help us live within our means as a society? It seems that the administration thinks getting drunk again as the cure for our financial hangover. Thoughts?

Chadwick Matlin: Your options, according to the Bush admin:

1.) Borrow money, bail the banks out, continue living outside our means.

2.) Don't borrow more money, still have a huge debt, and watch our "means" shrink further and further.

Throughout history, the American thing to do is #1. #2 just feels better.

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Phony crisis: There's such a liquidity crisis that I got five more blind solicitations for mortgages this week. You know what we need? To put Putin in charge for six months, let him put a few of these guys in jail and nationalize their assets, and then go away. The last part is the hard part. Okay, a joke, but how gullible do you think we are after eight years of lies and spin?

Chadwick Matlin: Putin would like to be woken up when September ends, too:

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Bowie, Md.: While the housing boom was running up, I developed the feeling that keeping housing prices high had become a political value in this country, in the same way keeping the price of gasoline and food low is a priority. When someone buys a home in a community, they simultaneously become a voter in it—and one of the things they do as a voter is limit the supply of housing that can be built. Even though I own a home (that didn't bubble much, despite my location) I'm glad prices have come down and hope they continue to do so, because housing has become an artificially large part of Americans' budgets. Is housing actually becoming more affordable for people who sat out the first part of this decade?