How massive bailout plan will affect you

Four days after the Bush administration's financial rescue package ran off the rails in Congress, the House of Representatives gave the plan a second look and — after loading it up with a bunch of goodies — liked what they saw.

The plan, passed by the House and quickly signed into law by President Bush Friday, is supposed to jump-start the crippled credit markets and get the money flowing normally again to consumers, businesses, corporations and governments. But it remains to be seen whether it will work.

Here’s a look at what may — or may not — happen next.

Are my taxes going up to pay for this?
Over the long term nobody really knows, but in the short run, your taxes may actually go down. To get the bill passed, Congress loaded it up with more than $100 billion in tax breaks and other special provisions.

The biggest was a fix for the alternative minimum tax, a measure originally designed to make sure rich people paid their fair share. But over the years, millions of middle-income taxpayers have been mauled by the AMT beast. Many of those people will catch a break under the bailout bill.

Over the long run, though, those tax breaks will have to be made up with tax increases or spending reductions elsewhere. For decades, the rest of the world has been happy to loan its hard-earned savings to Uncle Sam to help our government fund its deficit spending. Those days are rapidly coming to a close.

Taxpayers also could be on the hook for some — but probably not all — of the $700 billion being used to buy up bad mortgage-backed investments, which the Treasury calls "troubled assets."

How, exactly, is this going to work?
That's still the $700 billion question. What Congress has done is to set up what amounts to a government-run hedge fund to buy up troubled securities that nobody else will buy because it is virtually impossible to figure out what they're worth.

The reason is that no one can predict how many more homeonwers will default on the mortgages backing up these investments. Once they do default, it's even harder to predict how much the house backing the mortgage is worth.

Under the plan, the Treasury will buy these securities and hold them until credit and housing markets settle down, hoping that their value will increase. If so, Uncle Sam will make money. But no one has explained how the government will come up with the right price. Treasury officials have deflected any questions about what they call "implementation issues."

In theory, the program will jump-start a market for these “trouble assets,” and private investors will then finish the job when they see what Treasury pays for the paper.

I keep hearing that the credit markets are "frozen." But when I stick my ATM card in the machine, money still comes out. What’s the big deal? What do I care if these big Wall Street firms lose money?

The problem is that for better or worse, the global economy runs on credit. And that credit is drying up. It’s already harder to get a mortgage or a loan to buy a new car than it was even six months ago.

The credit drought has spread to the multitrillion-dollar pool of money that businesses use to fund their operations. The problem has begun to hit big companies such as General Electric, which recently had to pay 10 percent interest on what amounted to a private loan from Warren Buffett.

If that problem continues to spread, businesses will have to start laying off people faster than they already are. ( is jointly owned by Microsoft and GE’s NBC Universal unit.)

Will this keep the economy from getting worse?
If it works, it will prevent a deeper recession than otherwise would be expected. But it should not be expected to to boost economic growth, according to the White House.

"No one should be overpromising what this bill will do," White House spokesman Tony Fratto said Friday. "It's not been sold as giving a boost to the economy — it's to avoid a crisis."

It could be months before the impact of this plan would be felt. Though the stock market can — and does — turn on a dime, the problem in the credit market is a lack of confidence. That takes longer to fix.

In the meantime, there are clear signs that the economy is still on a downward path. Friday’s employment report showed a ninth straight month of job losses. While the governm,ent's official jobless rate held steady at 6.1 percent, that counts only people who are actively job hunting. If you count people who have given up looking, the so-called “augmented” jobless rate rose to 9.1 percent in September from 8.9 percent in August.

Consumers are nervous and are cutting back sharply on spending. Roughly two-thirds of the economy is based on consumer spending; if that spending slows further, so will the economy.

What about home prices?
In theory, repairing the credit markets could lower mortgage rates and make loans more available for home buyers. That boost in demand could help pull the housing market out of its deepest recession since the 1930s.

But it won’t help reduce the backlog of unsold homes — especially foreclosed, bank-owned homes that are being dumped on the market at fire-sale prices. Every time a bank sells a house cheaply to get it off their books, that price becomes the neighborhood's new market rate.

It’s also harder for a lender to extend a loan for willing buyers in neighborhoods where home process are still falling. That means buyers have to put up more money, reducing the number of eligible buyers.

Why isn’t more being done to stop foreclosures?
Good question. Many of the House Democrats who balked at approving the plan last week cited the lack of foreclosure relief as their biggest problem voting for the bill. Congress has been debating this issue for more than a year.

Various plans have been floated, but opponents insist that home buyers who borrowed more than they could afford should not be “bailed out” by the government. That’s one reason supporters of this emergency plan are calling it a “rescue” — not a “bailout” — of the financial system.

The debate over how to stop foreclosures will likely continue, though. Lenders say they’ve been working with homeowners to work out some of the worst mortgages written during the easy-money lending frenzy. But it’s been slow going.

Democrats have argued for more than a year that these voluntary efforts won’t fix the problem. Some want to change the bankruptcy law to let judges set new mortgage terms that will keep people in their homes. The idea a came up again last week, but was shot down once more. If judges can cut payments on a mortgage, lenders say they'll have to charge more for all mortgages to make up for that new risk.

Bottom line: Is all this going to work?
No one knows. Nothing like this has been done before — certainly not on this scale.

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