Li'l Help Here?

I'm trying hard to understand the United States' economy. I've read more about economics today than I have since high school in an attempt to comprehend what's going on with Fannie Mae and Freddie Mac. But it's like starting to watch a soap opera. I know that soon I will be familiar with the important players and their history and relationships, but at the moment, I can only ask, "Wait, who's that? Why's she so mad at her husband?" Here's what I get so far. Maybe you can help me fill in the blanks.

Lorraine goes to the bank for a loan with a fixed interest rate. She gets it and is now a borrower from the bank. The bank has to pay a variable rate of interest to its depositors. This means the bank might have to pay more interest to its depositors than it's getting from its borrowers. Bad for the bank and its depositors.

The bank can fix this if it sells bonds to investors at the same interest rate at which it gave Lorraine her loan. But if Lorraine doesn't make her payments, the investors are screwed. Fannie Mae and Freddie Mac were created to guarantee these bonds even if Lorraine misses a payment. So investors feel safe till Fannie Mae and Freddie Mac go bankrupt.

Which, I think, is what almost happened. But our Republican administration bailed them out. This looks like socialism for the rich-only to me, but here's what the Treasury Secretary, Henry M. Paulson, Jr. said in the New York Times today:

“This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”

Commenters on the article seem to recognize spin when they see it.

Public funds will have to, in effect, subsidize the fraud and theft that took place in originating and selling mortgages.

Let's hope that we, the public, will make sure that new lending regulations are written and enforced, so that another bail-out of this sort will be avoided.

— David, New York

And who pray tell will bail out the US Government?

— Ed, Bronx

Think of the children who will die due to lack of health care (because lack of insurance = lack of care) while our tax dollars bail out stupid and/or greedy investors.

Will this at least be the death knell to privatization? Our and our children's futures now carry second mortgages already.

— New Yorker, NY

A Dismal Science thinks the bail-outs

[W]ill result in the housing market used as a deflationary counter to world inflation.

Why? Think about it. We've got huge current account deficits and can't control market action on all the foreign treasuries we have out there, but we CAN control domestic lending in the huge mortgage markets. This will mean further collapse in home prices, higher interest rates, less homeownership, and less credit in exchange for commodity price stability and currency stability. I would argue that this is exactly what America needs, but Keynesians would likely differ. Then again, Keynesian lending got us here.

My brain's a little mushy now, but I think Keynesian economics have to do with the government's spending for infrastructure and the reduction of the interest rate, in case you were wondering.

OK. I'm a smart person who has, till now, buried her head in the sand when it came to all things economic. I'm sure that as I continue to study, I'll be able to offer up some meaningful opinions and advice for the financial direction of this country. For now, I can only comment on my own personal economic disaster of a bank account. The bail-outs remind me not to spend money I don't have. As a yoga teacher and freelance writer, I don't have any money. That means I won't spend. Does that mean I'm slowing down the economy? Anyone want to help me out?

[NYT] [A Dismal Science]