Bailout: Will it Work?

The $700 billion bailout plan that has now been signed into law may get banks to start lending to each other again. But it remains to be seen how long that will take to jumpstart an ailing economy.

The goal is to unfreeze the credit markets. Financial institutions have become paralyzed with fear and though they have plenty of cash on hand, they’ve been hoarding it. Without this intra-bank lending, businesses are having trouble getting the financing they need even for daily operations, much less loans for longer-term projects.

The centerpiece of the bill allows the government to eventually buy up to $700 billion in assets tied to shaky mortgages. Getting the bad paper off banks’ balance sheets hopefully will give institutions more confidence to start lending again.

As long as the constant drumbeat of bad economic reports continues, consumers and businesses may not be so eager to borrow money anyway even if banks start extending more credit, and then it just continues a vicious cycle.  If consumers don’t spend, the economy fails to improve. The jitters may return to the financial markets, prompting another government intervention. That’s why many fear the $700 billion rescue may not be the last step.

What do you think? Will this bailout package work? Will it accomplish the goal of getting our economy out of the tank? Click the comment link below and tell us what you think. We’d love to hear from you.