The Bailout: New Details, 5 Key Questions

Will the gigantic government bailout calm credit markets and stabilize home prices?

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Officials in Washington have released additional details on the government's plan for the most sweeping financial bailout since the Great Depression. Under the initiative, the government would buy up souring assets from financial firms and then resell them to private investors at a later date. While members of Congress, lobbyists, and the administration will be haggling over the details in coming days, the broad outline of the plan is becoming clearer.

1. How large will the bailout be? Treasury is asking for authority to obtain up to $700 billion to buy up troubled assets. However, the legislation remains fluid at this point and it is possible that the figure could increase significantly.

2. What kind of securities will the government be buying? While souring home loans are at the heart of the financial crisis, the government plan allows it to acquire assets outside the mortgage arena as well, the New York Times reported. In addition, Treasury wants foreign-based companies to be eligible to participate in the bailout.

3. When will the bailout get through Congress? Congress will be moving fast on this one—given the scope of the crisis and election year considerations. Democrats, however, are hoping to attach provisions—such as more oversight, additional aid for homeowners facing foreclosure, and limits on compensation for company executives participating in the bailout—that could frustrate the expediency of the process. Still, because the Treasury Department and lawmakers seem to agree on the central components of the plan, it could be approved as soon as this week.

4. Will this bailout resolve the credit crisis? That's the big question. Brian Sack, a former Fed economist who now works at Macroeconomic Advisers, says it "could" be quite helpful. "The market has gotten to a point where a more systemic and larger solution is needed," Sack says. "This has the potential to really help clean up the balance sheets of the financial sector and to result in a narrowing of credit spreads and kind of a restart to the flow of credit."

But it's the details of the plan—that have yet to be worked out—that will determine the bailout's success, Sack says. The most crucial question is how much the government will be willing to pay for these rotting assets. If banks don't think the government's offer is high enough, they may elect not to participate in the program, thereby limiting its impact. But higher prices could make it a bad deal for taxpayers, who are picking up the check. That decision—whether to structure its offers to favor taxpayers or financial firms—will "determine what the benefits are of the whole package," he says

5. Will the bailout help to stabilize home prices? If the bailout succeeds in restoring credit markets to health, it should help stabilize housing prices as well, Sack says. "To the extent that this improves the terms and availability of mortgage credit, it will support housing demand, which will help to resolve the situation of the overhang of unsold homes and all the other things putting downward pressure on house prices," he says.

Former Republican Rep. Jim Leach of Iowa, now a professor at Princeton University, agrees that government action could help put a floor beneath home prices. "There is no doubt that inaction causes a precipitous drop in home values across the country," Leach says. "Action has the best chance of stabilizing home values."