Experts: Bailout no great fix

Maybe a small sigh of relief is warranted, but Friday's passage of the $700 billion government bailout plan is no reason for Arizonans to feel too confident about their economic futures, experts say.

"They can feel better than they would have been able to feel had Congress not acted, but on the spectrum of security we're still in dicey economic and financial times," said Herbert Kaufman, professor in the W.P. Carey School of Business at Arizona State University, and a former economist with Fannie Mae.

"However serious it is right now, had Congress failed to act, it would have been considerably worse."

The core of the bailout plan remains the Treasury Department will have $700 billion at its disposal to purchase bad mortgage-related securities that are weighing down the balance sheets of institutions that hold them. That, in turn, has slowed the flow of credit.

After the plan was defeated earlier in the week, lawmakers increased congressional supervision over the $700 billion, and temporarily increased from $100,000 to $250,000 the deposit insurance guarantees by the Federal Deposit Insurance Corp. (FDIC) for banks and the National Credit Union Administration for credit unions.

Of the roughly $7 trillion in domestic deposits in the U.S. banking system, about 38 percent would be considered uninsured prior to the increase in insurance protection, said David Barr, FDIC spokesman.

The plan is "absolutely critical" to at least start mending the credit system, which is the biggest problem, Kaufman said.

"Credit is pretty well locked up for companies, for consumers, for others," he said. "It will help ... to unclog the credit system."

Businesses that regularly borrow from banks are seeing their credit terms changed and lines reduced, and in many cases credit is now being denied, Kaufman said. This ripples through the economy quickly through unemployment and economic slowdown, he said.

"What this deals with is getting these underwater assets off the books of banks so that they can actually make additional loans," he said.

The most immediate effect for consumers will be the increased protection for deposits up to $250,000, said Tanya Wheeless, president and CEO of the Arizona Bankers Association. A lot of small businesses and nonprofit groups keep a large amount of money in the bank, and this will provide further protection and increase confidence in the banking system, she said.

Passage of the plan will help make funds available for small businesses that are trying to get loans, and consumers who are seeking student loans and other financing, she said.

"Availability of credit is critical, especially to your small businesses, which are the backbone of our economy," Wheeless said. "They have to have access to credit to fund their overnight payrolls, to buy equipment and create expansion. If they can't do that, we're going to see layoffs within those companies, and, in the worst case, we'd have companies close down. That means people are without work."

The extended guarantee for deposits up to $250,000 is important to everyone, not just those who actually have that much money at their disposal, said Scott Earl, president and CEO of the Arizona Credit Union League.

"It is the federal government stepping up and reassuring the public that they can have confidence in the financial services industry," he said. "For the average consumer, there's auto loans, hopefully small-business lending, some of those kinds of things should loosen up a little bit. But I would emphasize, too, that credit unions never really tightened up on those things."

It's important to remember that no one has lost any money in any of the recent bank failures, including the collapse and pending sales of giants Washington Mutual and Wachovia, Barr said.

"We just had two extremely large bank failures, the largest ones in our history ... and that didn't even put a dent in our $45 billion we have in our insurance fund," he said. "The FDIC and the banking industry in general, we're both in pretty strong positions entering this economic downturn."

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