Well, I guess we will all see in a short few hours how the market responds to the latest news.
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updated 2 hours, 53 minutes ago
WASHINGTON - The New Deal it is not.
The government’s biggest economic bailout since the Great Depression is aimed not at relieving unemployment or reforming questionable business practices, but at resuscitating financial markets debilitated by lousy bets on the housing market.
Put simply, the hastily crafted plan lawmakers agreed to in principle on Sunday is intended to revive jittery and fragile banks on Wall Street and Main Street with enough money — by using taxpayer funds to purchase billions upon billions of their worst mortgage-related assets — so that lending, the lifeblood of the American economy, flows freely again.
If it is working, signs will emerge almost immediately in the interest rates on short-term Treasury securities and in an array of obscure — but crucial — financial benchmarks.
Loans — particularly those made from one bank to another — would be more available and less expensive in a matter of days, if not weeks.
And as the government gobbles the banks' toxic assets, the industry would gain the confidence and strength needed to make it easier and cheaper for families to borrow for homes, cars and college — and for businesses to secure ample debt to pay for plants, equipment and workers.
Still, rising unemployment, high energy prices and falling real estate values will not disappear overnight.
"At first, there will be some sort of sigh of relief, which I'm afraid would be misplaced, because when you get through the shorter-term terror, you're left with an economic landscape that will be very fragile," said Michael Farr, president of Farr, Miller & Washington, which manages investment portfolios for people and businesses.
Were the clogged credit markets of the past year — and more crucially, the past few weeks — left to fester without a massive government intervention, the United States faced a financial calamity that could have plunged the economy into a deep recession, putting the livelihoods and investments of millions of ordinary Americans at risk, President Bush and Federal Reserve Chairman Ben Bernanke warned.
"Bernanke told us that our American economy's arteries, our financial system, is clogged, and if we don't act, the patient will surely suffer a heart attack maybe next week, maybe in six months, but it will happen," said Sen. Chuck Schumer, D-N.Y., chairman of Congress' Joint Economic Committee.
Once the liquidity floodgates have been opened — the government will have as much as $700 billion at its disposal to buy banks' bad mortgages and other rotten assets — the benefits of the bailout proposed by Treasury Secretary Henry Paulson and modified by Congress are expected to trickle down through the rest of the economy. But Americans should be braced to feel economic pain well into next year.
More people will lose their jobs, foreclosures will go up, paychecks will be strained and home values — people's single biggest asset — will keep falling, experts predict.
Even if the plan is successful, many predict the economy will probably shrink in the final quarter of this year and in the first quarter of next year, meeting the classic definition of a recession. The unemployment rate — now at a five-year high of 6.1 percent — is expected to hit 7 or 7.5 percent by late 2009. That would be the highest jobless rate since after the 1990-91 recession.
So, how exactly will we know if the credit clog is breaking up?
Some of the banking industry's first responses won't be immediately visible to most Americans, but they are critical to the proper functioning of the U.S. financial system.
For instance, a drop in a crucial short-term lending rate called the London Interbank Offered Rate, or Libor, would be a telltale sign that banks are less anxious about extending credit to each other — and the rest of us.
Libor is the rate many banks pay for the short-term loans essential to their daily operations. It's also the base rate for an enormous amount of commercial lending and for many adjustable-rate mortgages.
Another sign of growing confidence in financial markets would be lower rates on "commercial paper," a crucial short-term borrowing mechanism that many companies rely on for financing day-to-day operations, including payrolls and other expenses.
Economists said a properly designed bailout should also cause interest rates on Treasury securities to rise relatively quickly.
If that happens, it would signal that investors — who have been flocking to Treasurys because of their perceived safety relative to other investments — are more willing to bet on riskier types of debt and securities.
