If you are confused by the complexities of the current market crisis, you are not alone. The American economy is a delicate and complicated machine. Like a stone dropped in a pond, there can be ripples caused by the slightest disturbance. However, the current market crisis can be boiled down to some very basic events.

The Stone - Improper Lending Policies

There is little doubt what triggered this crisis. Banks and brokers were encouraged by the government to make unreasonable loans and they stumbled over themselves to make it happen. In 2003, the Bush administration warned that these bad loans would lead to a financial crisis, but the warning was ignored by congress. Democrat Barney Frank ridiculed the administration's notion:

"These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (From U.S. News & World Report)

Congress pushed the "feel good" measures to allow the undeserving-of-credit to obtain a mortgage. Not everyone believed it was a good idea, but most Americans can't accept the concept that the majority of poor people deserve to be poor. Popular demand allowed the liberal measures to pass without serious contest.

The First Ripple - Foreclosures

True to form, the majority of those who didn't deserve a mortgage in the first place defaulted on their loans. Hundreds of thousands of loans went into foreclosure. Banks found themselves holding paper and property with little to no value.

Some assert that adjustable rate mortgages (ARMs) are to blame, and that lenders acted in a predatory manner. As someone who has experienced an ARM, I admit it isn't the most fun loan to repay. However, I wouldn't blame the lender if I wasn't able to pay it. If I know payments on a loan can increase by two percent per year up to a maximum percent, I'm going to figure out if I can pay the maximum percent, not the current percent. That's just common sense. I feel no sympathy for people with no common sense.

The Second Ripple - Fannie May and Freddie Mac

As the top two mortgage lenders, these two institutions found themselves holding the majority of the worthless loans. Investors in these two companies, as well as a number of other financial institutions, lose confidence. They start pulling money. Seemingly overnight, America's financial giants are brought to their knees.

A few CEOs may have caught on and pulled out at the last minute, taking huge investment profits and walking away. Smaller investors wake up one morning to find that many of their investments were worthless. Some people raise an outcry against "corrupt" CEOs that pull out and leave investors holding the bag.

The Third Ripple - A Banking Crisis

No longer assured of any value in a large quantity of their mortgages (referred to as "worthless paper"), banks are also in trouble. People who had no part in the bad investments find that their banks are in trouble. The government at this point steps in because the crisis threatens to overwhelm those who are innocent in the whole mess.

The Fourth Ripple - The Bail-out

This is where we are now. The federal government is now trying to figure out how to fix the national problems that they previously caused by their insistence that everyone deserves a mortgage. Americans are worried that any fix will end up benefitting those who deserve it least. In addition, Americans worry that the fix will be worse than the problem. Any mishandling of the crisis could commit the U.S. economy to a generation-long recession.

Treasury Secretary Henry Paulson is pushing for 700 billion dollars to prop up the failing financial institutions by buying out those worthless mortgages. Cautionary legislators are reluctant to dump that much money into a currently-worthless investment and leave the American people holding the bill for the next fifty years. Somewhere in the middle, an agreement may eventually be reached.

If we are all very lucky, Congress will act rationally and build some controls into whatever they decide to do. These controls need to include accounting reform, industry oversight, and some guaranteed return-on-investment. The last is the most important here. It is possible that by holding the "worthless paper" long enough to ride out the crisis, the paper may increase in value and possibly be sold back at a profit. There needs to be some guarantee that that profit won't go to line someone's pocket, or to pork barrel spending, or to implement some new social program. The only way that money should be used is against the federal deficit or otherwise returned to those who fronted the money in the first place - you and I.