"Well, senators, through this economic crisis, most of the people that I know have had a difficult time. And through this bailout package, I was wondering what it is that's going to actually help those people out?"The questioner simply wanted to understand how a bailout would help the average American. That was simple enough. But McCain flubbed his answer in two ways. First, he had no response to how the bailout would help anyone on Main Street. Instead, he chose to blame Obama and Democrats for creating a problem by supporting mortgage giants Fannie Mae ( FNM) and Freddie Mac ( FRE). Second, McCain completely misdiagnosed the root of the problem and the bailout. He said:
"So this rescue package means that we will stabilize markets, we will shore up these institutions. But it's not enough. That's why we're going to have to go out into the housing market and we're going to have to buy up these bad loans and we're going to have to stabilize home values, and that way, Americans, like Alan, can realize the American dream and stay in their home."Fannie Mae and Freddie Mac were certainly hurt by falling home prices. However, the two overleveraged government-sponsored enterprises didn't engage in unscrupulous lending to unqualified buyers, like Countrywide or IndyMac. The GSEs already had been taken over by the government prior to the $700 billion bailout. In reality, the serious errors were made by the investment bankers on Wall Street whose big bets on bad debt backfired spectacularly. Not only did those firms -- Goldman Sachs ( GS), Merrill Lynch ( MER), Morgan Stanley ( MS), AIG ( AIG) and Lehman -- package absurdly mispriced mortgage-backed securities, but they also made the mistake of ensuring them with complex credit default swaps.