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Home > News > Budget

$700 billion — now what?

Analysts doubtful of speedy recovery

By Patrice Hill (Contact) | Sunday, October 5, 2008

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Now that Congress has passed the $700 billion bailout bill, will calm return to the economy and Wall Street?

While a semblance of normality may come back to some markets, analysts are reluctant to say that all is cured because the damage to the economy and markets from the yearlong credit crisis has gone far and deep.

"Passage of the bailout plan raises expectations that the credit freeze should begin to thaw in the months ahead," said Bernard Baumohl, managing director of the Economic Outlook Group. "But the fact is, no one really has a clue whether this bill will be enough to help fix the balance sheets of financial institutions so they can lend again."

"The U.S. is reeling from two intractable problems," Mr. Baumohl added. "An utter lack of confidence in the economy by consumers and business leaders, and the ever-deepening credit crisis."

Related article:Main Street, Wall Street share blame

While one development on Friday - a bidding war that broke out between two megabanks over troubled Wachovia bank - suggested the bailout bill had achieved a principal goal of rekindling confidence in banks, two other developments illustrated how the grip of tight credit continues to strangle the weak economy.

The Labor Department reported that job losses accelerated to 159,000 last month at the onset of last month's severe credit crisis, while California alerted the Treasury it may need an emergency $7 billion loan because it has been frozen out of the short-term credit markets.

California with its budget troubles clearly is a victim of the stricter credit climate, in which investors are less willing to lend to borrowers deemed too risky. But the jobs news also provides evidence that scarce credit is choking the economy, Mr. Baumohl said.

"The deterioration in the labor market this past quarter was primarily because credit has almost completely frozen up, bringing economic activity to a standstill," he said.

"An increasing number of small, medium, and even large firms have been unable to get short-term financing to cover payrolls and inventories, leaving employers little choice but to cut back on production and lay off workers. In those rare instances where credit is available, the cost of capital is just too high."

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  • GLOOM: Two mourning sculptures outside the U.S. Capitol are memorials to those killed in the Civil War, but critics of a controversial $700 billion economic bailout passed last week have adopted a similar attitude. (Astrid Riecken/The Washington Times)

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