Bailout deal nears, but will it work?

Do we really need to do this? My ATM machine is still working. Isn’t the government just scaring us into bailing out Wall Street?
The effects of the credit freeze haven’t yet fully worked their way through the system to consumers, though there are early signs that’s it's doing so. Some banks have begun canceling home equity lines of credit. Private lenders have been fleeing the student loan market.

One way to think about the crisis: The economy is like a patient who was just diagnosed with clogged coronary arteries. The patient feels fine and might continue to feel fine for days,  weeks or even months. But without treatment, he’s at grave risk of a heart attack. So think of the government’s plan as a kind of financial bypass surgery — to restore the flow of capital through the economy. The treatment is not without risks, but the risks of doing nothing are much greater.

What about the homeowners stuck with these bad mortgages: Are they getting help too? Or is this just a bailout for Wall Street?
This was one of the biggest objections to the Treasury’s original proposal; Paulson told Congress that once the government buys up mortgage-backed paper, it may be easier to work out better loan terms with homeowners at risk of default. That's a big maybe.

Congressional Democrats countered with a proposal they’ve been pushing for the past year: Give bankruptcy court judges the authority to set more affordable loan terms, and cut through the red tape that has slowed voluntary efforts to get lenders to renegotiate bad loans with ruinous terms. The White House has been dead set against the idea, saying it would make new mortgages harder to get. At this point, the White House appears to be prevailing.

How about the CEOs in charge of the banks that got us into this mess? Are they going to get to keep their millions in salaries and bonuses?
Congress also made clear this week that their constituents would squawk loudly if Wall Street executives walked away from this mess without suffering the consequences of the failed bets their companies made. To be sure, some of those executives already have lost millions in personal wealth as stock holdings in their companies have plummeted in value.

Greening jobs Do you buy into Barack Obama's plan for economic recovery and environmental health via green jobs? Click here to share your opinion and experience.

Congressional leaders have insisted on capping the pay packages for CEOs of companies that will benefit from the plan. But it’s far from clear how that will work: Many CEO pay packages include forms of deferred compensation that, if structured to work  around the new law, could wind up being sheltered over the long term.

So this will keep the economy from getting worse, right?
If the plan works, the hope is that it will minimize the economic damage from the current financial panic. But even before the credit market began to freeze up this month, most forecasters were expecting the economy to get worse before it gets better. Unemployment is rising and home prices are falling. The recent shock to the financial system has spilled over to the wider economy, but there’s a lag as that impact moves through the economy. Even if it doesn’t spread further, the damage won’t be known for some months to come.

AP New home sales drop as recovery teeters The housing market is in the midst of a rocky recovery, but it’s too soon to declare the end of one of the worst slides since the Great Depression. New home sales fall to lowest level since March Incomes rise at fastest pace in six months Home sales surge, boosting recovery hopes Advocates want more for black unemployed

No matter how well the bailout works, the age of easy-money lending is over. Consumers who have been accustomed to borrowing to pay bills will have to tighten their belts. Small businesses may have a harder time getting loans. If foreign investors lose their appetite for Treasury securities — including the latest serving of $700 billion in fresh debt — Uncle Sam will have to pay higher rates to sell bonds. Until lenders' fears subside, tight money will continue to be a drag on economic growth.

What if it doesn’t work?
The plan is still very fluid, and Congress and the White House will likely continue to work on broader solutions in the coming months. The main concern is that financial markets move a lot more quickly than Congress. That’s why the Treasury initially asked for broad powers to act quickly.

If the plan doesn’t free up the flow of money, companies won’t be able to get the short-term loans they need to smooth out the seasonal ups and downs of their cash flow. If they run out of cash, they could be forced out of business. If mortgage lending gets tighter, the housing market will take longer to recover. If the money freeze continues, consumer credit like car loans could become harder to get and more expensive when approved. If consumer spending slows further, that drags the economy down with it.

We may not know for awhile whether the plan is working. Over the short term, if key interest rates come down, that’s a sign that confidence is returning to the markets. But because most of the bad debt clogging the system is hidden from view, it will be months — at least — before the economy and financial markets will flash the “all clear” signal.

Also in msnbc.com business Answer Desk: The risks of investing extensively in gold Your Career: The repercussions of expressing your faith Interactive: 10 cars we’re looking forward to in 2010 ‘Reaching out’ and the other worst buzzwords of the year   Video: Existing home sales make an unexpected jump

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

Is your bank in trouble? More report bad loans Inflation stays in check as housing starts rise Economy gets tidings of hope for holidays One year later, Madoff case is far from over NYT: U.S. forecasts smaller loss from bank bailout Battle lines forming over TARP extension Obama talks of jobs plan in weekly address Productivity rises by largest amount in 6 years Bleak job scene poses challenge for Obama 'Problem' banks at highest level in 16 years Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: