Originally Answered: What does the bailout mean? What is that the govt. doing when they say that it is planning to bailout banks?
1) Technically the taxpayers are not paying for the bailout, for now. Average tax payers ran out of cash a long time ago. So much of the bailout package will have to be funded by the foreign governments (especially the Chinese), while we will have pay a large interest rate + principal back to the foreign entities over a number of years. The rest of the bailout will be borrowed directly against our own future, working much the same way as social security. It all depends on the probability that we as a nation remain financially capable to one day completely pay off this portion of the bailout bill.
2) Banks have to be bailed out because average Americans depend on their financial services. If banks and insurance industry fail, then you can kiss your life insurance, car insurance, and home insurance policies goodbye. You can also kiss low interest rate credit cards goodbye. Further, you will not be able to get a loan you can afford to do anything, including starting your own business, paying for your kid's education, and paving your cracked driveway. Since we all use financial services provided by the banks and insurance industry, they are considered everyday tools like cars and planes, so they have to be bailed out.
3) It may seem unfair that those running the financial industry screwed up so badly but are getting taxpayers' help. It is in fact unfair. But pragmatically speaking, we are better off bailing them out then leaving them to die. If we allow them to fail, then foreign investor confidence in America will cease. Since we literally run on foreign loans, our economy will tailspin because those loans will no longer be forthcoming. The worst case scenario in real terms is this: imagine inner city Detroit, except it becomes what the rest of America is like.
4) To balance this unfairness, heads should roll aplenty on wall street. A lot more regulations should be in place to prevent this kind of speculation in the future. Bush deregulated banking industry 7 years ago, and the bankers ran amok. Now we are just reaping the consequences now. We need go back to more regulations, for sure.
5) A final thought, and this is going to be harsh. It takes two to tango. American consumers are equally to blame. We have been spending too much and saving too little. Our personal irresponsible spending habits have as much to do with the current crisis. In fact, we save so little that our government can't even borrow enough against its own people to cover urgent needs such as repairing infrastructure, upgrading education facilities, etc. We have to borrow from the Chinese just to cover our shortfalls. This will not last.
Solution to all this? We should start with a mandatory savings rate of 20%. More regulations to rein in speculation. Get our troops out of Iraq so we won't bleed so much borrowed money. Tackle the rest one by one. There is a lot of work ahead.