Main Street is already starting to feel the effects of the Wall Street meltdown. Banks and lending institutions have started to cut off the flow of loan funds and the credit crunch looms larger.  Congress is pressed to pass the $700 billion bailout plan lest the wheels of the economy ground to a screeching halt. In Bush’s words, [the plan] “is aimed at helping American families who need to borrow more money to buy a car, or fund a college education."

U.S. auto dealers are feeling the pinch because the finance arms of the Big Three Automakers are tightening lending standards. Consumers can’t get financing, cars aren’t selling, jobs are being lost, and GMAC LLC, Chrysler Financial and Ford Motor Corp. are lobbying to be included in a bail out that was originally designed to take on troubled mortgages.

Although the hard data is not yet in, access to capital is being cut off for small businesses as well. The Federal Reserve reported that 65 percent of domestic banks have been tightening their lending standards for small-business loans over the past few months.

Help is obviously needed, but we wonder if using taxpayer money to buy bad debt and troubled mortgage securities is the right approach. Certainly not all economists and financial experts are drawing the same conclusions. The main problem is that nobody can explain exactly what we’re getting for our $700 billion.

We looked around and found some thought provoking ideas being exchanged at The Wharton School of Finance and Commerce, where not everyone was in agreement.

Here’s a brief excerpt from their report entitled, The $700 Billion Question: How Much Is That Exotic Security?

Wharton finance professor Jeremy Siegel believes the plan could channel enough money to enough banks to get them to resume lending. "I think this is the best way to go," he says. Mark Zandi, chief economist and cofounder of Moody's Economy.com, concurs, describing the plan as "a very elegant idea. The principal benefit is that it establishes a market price for these assets that have no price. This will allow banks to write down [losses] appropriately, which is absolutely necessary to get capital flowing back into the banking system."

But Olivia S. Mitchell, professor of insurance and risk management at Wharton, is not as convinced. "The plan is not doing anything to remedy fundamental problems with the mortgage market." To work, a remedy must help homeowners renegotiate mortgages on properties now worth less than the owners owe, she says. "That fundamental problem is not being dealt with in this bailout."

You can read the entire report here

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