$700 billion — now what?

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.”

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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.”

Stephen Stanley, chief economist at RBS Greenwich Capital, said the bailout package came too late to repair the extensive damage from the cascading events of the past month, including the failure of Wachovia, Washington Mutual, Lehman Brothers, American International Group, Fannie Mae, Freddie Mac and numerous lesser financial events.

In addition, public confidence in such pillars of the financial system as bank deposits and money-market accounts has been shaken, causing upheavals and dysfunction in those one-time smooth-running markets, and threatening the finances of even top-rated corporations like GE and Constellation Energy, he said.

“The financial crisis has passed the point of no return in terms of having a significant - and, unfortunately - persistent impact on the real economy,” he said. “Collateral economic damage can no longer be avoided. Households are going to face tighter credit and a weaker labor market, which will more than offset the beneficial impact of falling energy prices.”

Ironically, economists say the long-stressed housing and mortgage markets stand to gain the most from the bailout bill, even as the rest of the economy sinks under newfound credit stresses.

“Mortgage-backed securities should see an immediate lift in prices, even though actual purchases by the Treasury should not be expected until November at the earliest,” said Brian Bethune, chief U.S. financial economist with Global Insight.

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