When you add the interest, because this make and sold $700B money is borrowed from the banks, and then add in the fees they'll charge to figure out what home values are relative to their toxic mortgage, the cost will be $3T.
Gas prices by raising costs 25% pushed stupid negatively amortized keeping-up-with-the-jones families over the edge on the outer rings of sprawl nation. And as these home compete in the foreclosure market, and future gas prices and related food and energy prices rise, the effect of increased poor quality inventory, will continue to be felt in declining home values.
So if a bailout is to occur it should change the way we do business, particularly the fossil fuel economy of the warfare state, that brings us to this stage, with incentives for walkable cities and penalties for a jobs housing imbalance. Interesting to see that houses on the outskirts of the driving economy, like Modesto, Merced and even the suburbs of Sacramento, if you google foreclosure and put in a destination like North Fairoaks, will show houses in the 50ks which is no where near where housing prices are in San Jose or SF, are, an equivalent price decline putting values at 220k; while Cheney is still having wet dreams over sending our kids to Iran. The papers are full these days about hedge funds. If I draw up a list of the first hundred people I'd care to talk to tomorrow not one is in a hedge fund. So who are we bailing out and why not do something useful to help people get local jobs and walking access to services and food.
We actually have affordable housing these days. And 5 to 7% unemployment is not horrific. And there are many good solutions out there. For example the government could take a house before foreclosure and negatively capitalize it. i.e. take the loss in value plus 10% (for a down payment if necessary)and park it, until the house is sold (the same way a senior can borrow from a house until they die and then the sale pays back the loan). Simultaneously reduce the mortgage by the parked value and fix the rate to the new mortgage less 10%. Very little out of the government's pocket, it keeps people in their homes, and when the market stabilizes (not recovers, because just as pets.com is not coming back, so this housing bubble is not going to realize the same high prices as before in our life time; and on another topic its all relative) the government can share the loss with the lending authority. Amortize and defer in other words.
There are other more complicated schemes out there like this one by Stiglitz who projects in addition that the $3T cost of the Iraq war will hamper future generations for decades.
The majority of the "market drop" is not related to the fundamentals but to hope that this administration's scorch and burn policy can once more allow their funders on Wall Street, of what Norman Solomon in Made Love Got War calls the Warfare State, to once more bank on their irresponsible actions.
This looks like the Japanese Economy (which looks like it foretells us by about 5 years), the bubble in the late 80s and 90s was similar to the 1920s. Many sane heads have been saying for twenty years that we should reduce debt and address the consequent ecological problems like dead seas and fish stocks and poisonous air, and depleted resources like oil and water, which lead to conflicts like Iraq, and Darfur.