Prepare to be disappointed: The Bailout of the Century will probably do little to make life better anytime soon for the taxpayers footing the mammoth bill.
The Emergency Economic Stabilization Act of 2008 may help avert the unspecified economic disaster that Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke keep hinting at. But for most of us, it's hard to fathom this freakish financial monster lurking in the darkness, unseen by anybody except Paulson and Bernanke. Instead, we cling to quaint notions, like the idea that for $700 billion in taxpayer commitments, we ought to get something tangible in return.
That's false optimism. The legislation establishes new government procedures to "protect home values, college funds, retirement accounts, and life savings." Good priorities. But that word "protect" doesn't mean you'll end up better off. No checks are going to arrive in your mailbox. Your retirement portfolio won't suddenly rebound. You won't get an iPod as thanks for your contribution to the Bailout Olympics. You'll simply be spared some sort of wipeout.
Meanwhile, the economy is likely to continue its down drift, with all the hallmarks of a recession. If strained consumers expecting some kind of immediate relief grow cynical when it doesn't arrive, it could even deepen a downturn as consumer confidence quakes once again.
So, do the economy a favor, and curtail your expectations. Here's what the bailout will and won't do, in the areas that matter most to consumers:
Housing. Homeowners at risk of foreclosure won't enjoy much of a bailout at all. The plan calls for the government to "encourage" banks to help out borrowers who are in arrears by writing off some of the loan amount or negotiating more agreeable terms. But voluntary programs to help stressed homeowners have been marginally effective at best.
The ultimate financial fix would be a fast-forward button that rushed us to the end of the housing bust, which underlies the entire meltdown. But that's beyond the government's powers. After rising to unsustainable levels, home prices nationwide have fallen by about 18 percent. Most economists think they need to fall by about 25 percent—at least—to return to levels in line with incomes. Until that happens, foreclosures will mount, unsold homes will continue to pile up, and potential buyers will stay on the sidelines.
Once the housing market does bottom out—in 2009 or perhaps early 2010—the bailout will help buyers get back in the game. One of the doomsday scenarios—without the bailout—is credit that's so tight that banks require down payments of 30 or 40 percent and lend only to the very safest borrowers. That would have perpetuated the housing bust for years. The bailout ought to free more money for lending, and juice a recovery once the housing woes work themselves out.
Stock markets. Beware a sucker's rally. Wall Street has basically been banking on a bailout, which means the markets would have tanked if it had fallen through. But any surge in stocks could be short-lived, because the global economy is still weak and possibly getting weaker. "After markets settle post-bailout, we do not expect substantial improvement in underlying economic conditions," Merrill Lynch researchers wrote in a recent note to clients.
The bailout could boost market confidence, because investors will no longer have to guess whether the feds will help troubled companies. That might reduce the manic market swings we've seen in recent weeks. But the bailout could also backfire. If economic conditions get much worse, it will appear that even an epic government intervention couldn't stop a financial meltdown. And the feds won't have too many more levers to pull.
Jobs. It certainly won't help create jobs, but the bailout could make life easier for a lot of companies and their employees. The credit crunch everybody keeps talking about has been felt acutely by companies that need to borrow money, especially those, like the Detroit automakers, with substellar credit ratings. In some cases, lenders are demanding such high interest rates that it's better not to borrow at all. But without fresh capital to finance operations, businesses would be forced to slash costs and payrolls, which would lead to another doomsday scenario: a dramatic spike in unemployment.
If it works as advertised, the bailout will eventually restore confidence in the banking system and make more money available to big and small businesses. But American companies will still have to deal with a pullback by consumers, a slowdown in overseas demand, inflation, and other stresses that the bailout won't ease. And the job picture could get worse before it gets better.
Consumer loans. The era of easy money is over, and the bailout isn't likely to change that. Banks have pulled way back on a variety of loans—from credit-card limits to home equity lines—because the risks of losing their money have gone up. The bailout does nothing to guarantee that banks will get paid back if their borrowers default, so banks will continue to tighten their lending standards, select the most creditworthy customers, and charge much higher rates—or simply say no—to riskier borrowers.
What the bailout does is address other problems faced by banks, which, theoretically, should free more money for ordinary lending. Over time, that ought to help the banking sector get healthy again, which will benefit consumers. If they can stay solvent until then.