by Catherine Perez

Created on: March 28, 2009   Last Updated: March 30, 2009

The question has become quite rhetorical considering the fact that Treasury Secretary Tim Geithner has announced on Monday 23, 2009 the details of his toxic-asset plan. The Federal Government is indeed implementing its plan of eliminating those assets that are contaminating and jeopardizing the banks' financial equilibrium.

But, the real question you should be asking is why would the Obama's administration consider such a plan? Is this a new Bush's bail out in disguise, or is it the way to economic recovery? I know that there is much controversy on the matter, but politics and opinions aside, let's take a closer look at what happened to our economy. As for many things, by looking at the whys you can determine the hows to fix it. So how did we get into this mess? Well it all started with the Housing Market. I am just going to outline the main points without elaborating too much, otherwise you still will reading this article coming Christmas 2010.

So, like I said, it all started with Real Estate. Banks started to extend too much credit to the sub prime market. In other terms they were lending money to people with a less than perfect credit score and/or insufficient level of incomes. They counteracting the risks by increasing the interest rates. But what good is the high interest rate if no one pays any installments?

But that's not all.Banks were trading derivatives on the Market as well. Derivatives are financial contract whose value is attached to the underlying asset, in this case: residential mortgages.

They were trying to hedge the risk taken on the sub prime market by buying and selling options on a group of mortgages.

They were hoping that good mortgages value would go up balancing up the bad ones. It worked for a while and banks and other financials institutions made millions of dollars. However, whenever there is a great potential reward, lies a great risk. Banks started to take too much risk and the whole system went belly up.

It all started with people defaulting on their mortgages, setting a chain reaction in motion that would hit the World global economy. It went like this: Some started to default on their mortgages, which resulted in the banks losing money, and more houses for sale on the market. House prices went down. Then, banks decided to limit the credit flow in order to save cash to cover their losses. Businesses were unable to raise the cash they needed so they started to lay off. Because many were out of a job, the consumer spending went down putting

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