These bailouts are precisely why there are so many homes in foreclosure. I'll have to dig up a great article called "Too big to fail". Essentially, there has been federal legislation for quite some time that encourages mortgage lending to people who may not be able to afford to pay it back. The Fed's lowering (and lowering, and lowering) of interest rates post 9/11 combined with bad laws and short-term thinking of both lenders and ordinarily sensible homeowners created a perfect storm.
1) People owning homes that had no business owning homes in the first place. As soon as one lender starts raking in $$ due to irresponsible shortsightedness the pressure is on the others to follow suit.
2) Low interest rates makes borrowing money cheap, makes buying homes easy, drives more buyers into the market, which drives prices of homes up.
3) Driving the prices of homes up so quickly tempts many people to re-appraise in order to tap into their instant home equity (paper wealth)
4) Chaos
Ever since Lee Iococa was given Hero status by "saving" Chrysler with a $4billion bailout ($4bil was a lot bigger then that it is now, inflation adjusted) there has been an idea that certain businesses are "too big to fail". They are considered so essential to the functioning of the US that the taxpayers must step in and keep them from laying off their employees, selling their assets, and injuring everyone they do business with in the process. The problem with creating an environment like this is that it affects decision making, especially where risk is involved. If my business is worth $200million I absolutely have to be responsible or face unforgiving consequences. If my business is worth $70billion, however, my tolerance to risk is much greater since devastatingly poor management might not cause my stock to be worthless when the Fed rides in to lend me money.
If it was an unambiguos policy that we let irresponsible businesses fail, we would see different actions taken by the "leadership" in companies like AIG.
