Emergency measures
Bailout plan will help most Americans,but not as much as you might like
By Andrea Coombes &Ruth Mantell,MarketWatch
Last update:11:30a.m.EDT Sept.28,2008Comments:173SAN FRANCISCO (MarketWatch)--The proposed multi-billion-dollar bailout package is aimed at Wall Street,but how will it affect U.S.homeowners,consumers and savers?
The good news is the expected injection of capital into Wall Street likely will help to prevent certain things,most notably the job market,from getting much worse,economists said.The bad news is it won't necessarily make the financial situation of most Americans much better.
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ooking Ahead
All eyes will be watching the negotiations of the bailout closely but it's a full week ahead with economic data,including Case Shiller data and the jobs report on Friday.Stacey Delo reports.(Sept.26)And whether the package will do anything to resuscitate the ailing housing market is an open question.
On Sunday,U.S.policy makers said they'd reached accord on a financial-market bailout but needed to put it on paper before declaring it final.See full story.
No matter what its ultimate shape,the final bill isn't expected to turn the economy around --plenty of economists see more economic sluggishness and job losses ahead even with a rescue plan in place --but the credit freeze constricting the financial markets will likely start to thaw,helping more U.S.companies tap the funds they need.
That,in turn,will help prevent a major increase in job layoffs,experts said.
The housing market is another story."We have a collapsing housing bubble,"said Dean Baker,co-director of the Center for Economic and Policy Research."This bailout won't do anything,as best I can tell,about the collapsing housing bubble,nor should it.The bubble has to collapse."
Meanwhile,the rescue plan may lead to a slight increase in credit available for consumers seeking auto loans,mortgages and credit cards."There may be some improvement in [credit]availability in the sense that banks might be a little more willing to take risks with people that don't have perfect credit histories,"Baker said.
That doesn't mean a return to the no-holds-barred leaps of faith lenders took during the heyday of the housing market,but lenders might again take small risks that they are unwilling to take today,some say.
Consider a consumer who defaulted on a car loan five years ago,but who has since regained his footing and is otherwise a good credit risk,Baker said."Banks are erring now on the side of not giving those people credit,whereas if this [bailout]goes through,things settle down,maybe they will be more like to give those people credit,"he said.Still,lenders won't be opening their purse strings to borrowers who would stretch to afford loan payments,he said.
Importantly,small-business owners who today can't get a loan might see that change with the bailout.But this easing of the credit crunch could take months,or longer."You're not talking about $700billion coming into the marketplace tomorrow,"said Greg McBride,senior financial analyst at Bankrate.com,before the details of the bailout plan were clarified.
"If it's successful,[the bailout]would bring about greater availability of credit,particularly in the mortgage market,"he said."Lenders that today are on the sidelines because they're unable to sell mortgages to the secondary market and because they need to boost their capital base could come back into the lending marketplace,"he said.But borrowers will "still need good credit,proof of income and money for a down payment."
And there are naysayers.Without serious executive-compensation reform,said Peter Morici,an economist at the University of Maryland,"this is not going to free up a lot of credit,"Banks "cannot create enough value creating financial products when you pay 30-year old MBA's $10million a year."
Here are the five key areas of concern to consumers where the bailout will likely have an impact:
1.Mortgage rates
If you're shopping for a mortgage,the bailout might make a loan more available --but higher interest rates might make it less affordable."The prospect of an additional $700billion in Treasury issuance is suggestive of higher Treasury yields and consequently higher mortgage rates,"McBride said.
Already,the prospect of a bailout has mortgage rates hopping higher,with the 30-year fixed-rate averaging 6.09%for the week ending Sept.25,up from last week's 5.78%average.See full story.
Still,McBride expects mortgage-rate volatility for a while."Longer term,there's a lot of concern about inflation,which would ultimately push mortgage rates higher.But in the short-term,concerns about the economy could lead to some dips along the way."
Meanwhile,savers should keep an eye on the Fed and its rate-cutting penchant,he said.Certificate of deposit yields "have been rising pretty consistently over the last five months,"McBride said."I'm not expecting a whole lot of movement as long as the Fed stays on the sidelines."See related story.
2.On the job
Thanks to the bailout,the job market should avoid a dramatic drop-off,many experts said.
Companies "will be able to fund their expansions and their inventories,"said Jim Hardesty,president of Baltimore-based Hardesty Capital Management.Going forward,"we will see lower levels of economic activity than would be desired,but they'll be substantially higher than if this bill were to fail."
Without the bailout,the unemployment rate could hit as high as 12%,said Brad DeLong,a professor of economics at the University of California at Berkeley."A successful bailout could help keep the unemployment rate below 8%for the next year,"he said.
