Wall Street has been in disarray since last October and has plunged nearly 40 percent from its highs in October 2007. The economy is tanking, and unemployment is rising. It is a complicated time in the financial world and this is a break down of what it all means.

Banking Woes:

Monday morning the Obama administration announced its latest financial rescue plan. The reason any of these “bailouts” are necessary is because many managers in the company made a lot of poor business decisions with things called mortgage backed securities. These things are becoming more and more harmful as housing prices continue to decline, which is why banks are in such dire straights these days.

The purpose of the first financial bailout under the Bush administration was an attempt to “recapitalize” the banks, or provide them with money to lend to consumers after they had massive write downs, or losses, due to these bad securities. That plan was proving unsuccessful, as it seems banks are holding the money in anticipation of more future write-downs.

In his latest version of the financial rescue plan, Obama’s new approach is to include private investors to basically buy these assets from banks and free them up to lend again. This is popular because it is mostly using private investment money rather than taxpayer dollars. The plan’s ultimate goal is to remove the assets from the banks and free them up to lend somewhat normally again to allow money to flow into the economy.

The main argument against the Wall Street bailouts is that all of these “Wall Street Fat Cats” got rich and left average investors and tax payers with the check, and then to fix it, the government is handing them seemingly a blank check to fix the problems. But the counter argument, according to business journalism professor Mark Vamos, is that of a drunken sea captain that crashed the cruise liner into the iceberg. He was at fault for the mess but you cant stand by and not help because of his poor judgment because the whole ship is going down. He related this to the economy, that without bailouts, the economy would be in serious trouble.

Faltering Economy:

In addition to Wall Street turmoil and a tanking stock market, the economy is heading in the same direction. The issues are greatly inter-connected as without banks being able to lend, people aren’t able to buy cars, get a home, go to college, businesses aren’t able to get credit for future projects or any other large purchases. Because of this, businesses are becoming less profitable and must lay workers off. As workers are laid off, there is less spending in the economy, resulting in more layoffs. This creates a downward cycle and a very pessimistic consumer, and pessimistic consumers save, not spend.

This is what the much publicized stimulus bill from February is all about. Obama pushed a bill that had spending on many projects including money for alternative energy research, infrastructure spending, education subsidies, and other projects to get money flowing through the economy again.

The stimulus bill and financial rescue package are two separate items and have created a lot of strong opinions for and against, but both are aimed to shore up the American economy and lending facilities.