How Did We Get Into This Financial Mess?

WASHINGTON, DC (WUSA) --- With Monday's news of take-overs, bail-outs, and bankruptcies, many Americans are trying to figure out both how we got here and what it means to the overall economy. 9NEWS NOW asked a senior researcher at the Urban Institute, Howard Gleckman, for some insight. "Well, what happened was a lot of very big name Wall Street firms made the same really bad bet, which was that housing prices were going to continue to go up. They lost a fortune in the mortgage market, tens of billions of dollars. Making it worse, the money they lost was money they borrowed from other people, and what you got was a run on the bank. "Lenders looked at these firms that were going south and they all wanted their money out first. A what you've seen over the last few weeks is, basically, a panic. Everybody is trying to get out. The firm is going out of business and here we are, " Gleckman said. "Doesn't the government keep on eye on these things," asked 9NEWS NOW. "Well, we used to back in the 1930's after the Great Depression, and we had a series of laws that limited some of these investments, required banks that made these loans to have capital to back them up. Many of those laws have been repealed in the least decade or two, so it's much more of a wild and wooly market. They've also invented a lot of securities that no one ever imagined before, that people don't really understand; so-called derivatives, and nobody knows how to regulate them. Nobody knows who should regulate them, so they're out there, again in this kind of cowboy atmosphere," Gleckman said. "So far, the impact on the overall economy has been relatively limited. Unemployment is still relatively strong, although people are losing their jobs. People, of course, have lost their homes, but the overall economy is still weak, but alright. "The fear is that what's going to happen is what they call a credit crunch, which means lenders won't lend to anybody no matter how credit-worthy they are, and when that happens, the impact on the overall economy will be very severe. That's what the Fed is trying to prevent," Gleckman said. "How likely is it?" "Hard to know. There is no way to know. It depends on what happens to house prices. It depends on how many more large firms go out of business. These are questions we can't answer. "It's interesting that Bank of America is acquiring Merrill Lynch. Bank of America has had its own financial problems and it has had to write down an awful lot of bad investments over the years. So, in effect, they are now acquiring another company that has had worse financial problems. Now, they are two firms together with financial problems. You have the potential for having even more severe financial problems, " Gleckman told 9NEWS NOW. "One of the issues that people are going to ask after the episodes of the last couple of months is: When should the government bail out firms, and when should it not? And will firms be more prudent in the way they invest their money if they don't think the government is going to bail them out in the end...It is pretty clear that when you think you are going to get bailed out, you're going to take much riskier investments, and that makes it more expensive for all of us," Gleckman said.