Bailouts have not stopped the market's relentless fall. Maybe spending what we don't have is actually the problem.

As a nation, we have lived far beyond our means for too long. We enjoyed unprecedented levels of consumption, paid for by so much debt that there was never any chance it could all be repaid.

In our interactive feature, read about recent government bailouts since 1970.

We asked our military to fight two wars, without raising taxes to pay the bills. And, we let the government accumulate $2.5 trillion in deficits during the past eight years.
Sure, the bankers and politicians are also guilty. They were the pushers who fed our habit. 
Now, a panicked government is trying to bailout everyone with a handout: $700 billion to the banks for bad loans,  $85 billion for AIG, $29 billion for Bear Stearns, $25 billion for the auto industry, at least $200 billion for Freddie and Fannie and almost $800 billion in short-term loans from the Fed to banks. 
That’s almost two trillion dollars, with the line still stretching out the door.
The markets, however, are apparently unimpressed: practically every time the government announces a new initiative, the stock market falls. Maybe the meltdown of the financial markets is signaling that bailouts-as-usual is the wrong approach. Maybe we need to try something else.
Harvard economist Jorge Dominguez thinks that is the case. He says any solution will require “the country to begin to spend what it earns, reduce its mountainous debt, and address its massive liabilities. That means restructuring Social Security, pension deficits, the military and Medicare.”
Sounds like the party might actually be over.

The Biggest Bailout
From one perspective, the bailout is elegantly simple. The Treasury gets $700 billion to buy up bad loans in a world awash with bad loans, especially mortgages and mortgage-backed securities.
It is difficult to determine how much money is wrapped up in bad loans, although many experts say a soft estimate is $2 to $3 trillion. As of June, outstanding mortgage-backed securities issued by private institutions totaled $1.3 trillion, while banks held another $3.6 trillion in mortgages. Not all are in trouble, but enough are that it should be pretty easy for the Treasury to spend its money.
The devil is in the details. One of the most important facets is the price at which the Treasury will buy the loans. It’s not clear whether anyone knows: Treasury Secretary Henry Paulson, Fed Chairman Ben Bernacke and the president have all given different answers. They do, though, imply that the government will pay more than the owners could sell them today to anyone else.
The Treasury will pay less than 100 cents on the dollar, but probably more than they are now worth. Of course, the more the Treasury pays, the less will be recouped if someday—as planned—the government can resell the loans to private investors.
The theory is that-- if the government buys at least some of the bad loans, the banks will make new loans that will help to restart the economy. But, the checkbook may be too small. 
“Let’s suppose housing prices go down another 10 percent, which would mean total banking losses of $1.5 trillion,” says Liaquat Ahamed, a Washington-based economic historian. “The banking system so far has written off $500 billion, so it’s going to have to write off another trillion dollars in losses.” Surely, some—but not enough—of this money can be raised in Asia or the Middle East. 
Ahamed and many other mainstream economists believe there will have to be another bailout. At that point, the government will not be buying loans; they will be buying banks. The British government has already started doing so, and the Treasury has said that the U.S. may follow their lead.
Just as what occurred after the Great Depression, the idea would be to someday sell whatever banks or bank stock the government owns to private investors.
Only time will tell if the theory is any good. 

What will the Treasury buy with the $700 billion? In our interactive infographic, find out the problems caused by mortgage defaults, rating agencies and the housing crisis all will be bailed out.

“The liquidity crisis is probably the worst anybody has seen since 1907.” Watch a video interview with Liaquat Ahamed, an economics historian.

The Intersection of Wall and Main Streets
By now, everybody knows that the economy stumbled badly in September and early October as the financial crisis intensified, and as the turmoil spread globally. How bad will it get?
“We may see unemployment go up to somewhere between 8 and 10 percent, compared to 6 percent now,” says Ahamed. He thinks we are probably halfway through a recession that will be no deeper than the oil shock induced downturn of the early 1970s.
James Galbraith, a University of Texas economist, isn’t so sure. His only hope for the $700 billion bailout is that it buys time for a new administration to engineer a more comprehensive and equitable set of policies. However, if mortgages aren’t restructured so that people can afford them (thereby stopping the fall of housing prices), he thinks it could take “ten years for the problem to go away on its own.” 
But even if the economy is well managed, Galbraith believes that it is likely to be three years before economic activity returns to normal.

They Broke It, You Own It: In our interactive graphic, find out who let the bankers, investors and accountants run rampant on the economy.

The biggest hurdle is that financial markets have become so traumatized that even creditworthy companies and banks are refusing to lend to one another, and trust in the economy has become the scarcest resource of all.
The longer credit is turned off, the more damage will be done as companies, consumers and governments adjust their spending to whatever cash they have on hand.
Dominguez points out that when Mexico, Brazil, Chile and other Latin American countries were cut off by the markets, the result in each case was “one truly miserable year, with real pain.”
If the Latin experience is any guide, he explains, the result could be a 5 percent drop in the economy, the biggest decline since the Depression.
The truly bad news is that the economy has continued to grow, during the past nine months—yet 760,000 jobs disappeared.
If the economy is now actually falling, how many hundreds of thousands of jobs are likely to evaporate?

“Will the situation be rectified by this new package? No, it will not be.” Watch a video interview with Dr. James K. Galbraith, in which he discusses the underlying symptoms and solutions for the crisis.

We, The People
When President Franklin Delano Roosevelt took office, he blamed bankers for turning the roaring 1920s into the Depression. He could have been been describing 21st-century Americans.
Today’s politicians are less direct. In the presidential and vice presidential debates, no one looked into the camera and said: “To solve this, you—and your government—need to spend less.”
But David Walker, former U.S. comptroller general, is not a politician: “Too many Americans are following the bad example of the federal government, spending more money than they make, charging their credit cards, taking out home equity loans to pay for conspicuous consumption.”
The arithmetic is simple: consumption accounts for 70 percent of America’s total income, which is more than the combined spending of Japan, China, Russia and India. Dominguez outlines the bottom line: “Consumption has to fall and savings rise. Recession will do part of the job, but the rest will require some choices.”   
One final note: Roosevelt’s best-known line from that speech is that “the only thing we have to fear is fear itself.”

Listen to Franklin Delano Roosevelt’s inauguration speech, in which he offers timeless insight in the workings of the American economic system.