Bailout: a temporary euphoric reception?

Bailout won't put the brakes on downward slide


But, at best, all a government program can do is keep things from getting dramatically worse, economists say. In the worst case, a government bailout program won't keep financial conditions for households and businesses from deteriorating much further.

The public detests the idea of bailing out lenders and investors complicit in the stupid decisions to offer mortgages to home buyers who couldn't afford them. But almost all financial market pros and the great majority of economists stress that failure to help financial institutions with bad loans would be a recipe for a deep recession or worse.

"Something does need to be done in short order," said Aaron Edlin, a professor of economics and law at UC Berkeley and one of 122 economists who signed a letter to Congress critical of the Treasury Department's original bailout plan.


In the short term, the financial markets emergency is a classic crisis of confidence. The catastrophe that nearly befell markets last week was driven by overwhelming and, in many cases, unjustified fear. After Wall Street's Lehman Bros. went bankrupt two weeks ago and insurance giant AIG needed government intervention to keep from going under, every company became suspect, even highly creditworthy borrowers far-removed from the housing market.

Quick, forceful action from Washington is essential to restore confidence and loosen loan markets, financial professionals and political leaders say.

"The markets need a message from us," House Speaker Nancy Pelosi, D-San Francisco, said at a news conference Friday.

Indeed, it's possible a bailout package could get a euphoric reception from both the stock and credit markets. But any psychological effect would be temporary, experts caution. In the medium and long term, it's by no means certain a bailout will succeed.

"I'd give the government a 50 percent chance of stabilizing the markets," Edlin said. "The reason for optimism is that there will be an enormous amount of money. The reason for pessimism is that nobody knows how the money will be spent."

The idea behind the bailout is to buy bad loans from financial institutions, freeing them to turn on the credit spigot again. But if those institutions have to take big losses on the assets they sell to the government, they could still be too strapped to lend freely again. In addition, they are likely to remain wary of extending credit in the midst of a recession. On top of that, a movement is under way throughout the economy to cut back on debt, a phenomenon known as deleveraging.

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