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Analysis: Rescue is tip of the economic iceberg

'This is only the first step': Legislators acknowledge the bailout is far from the end of the economic task they face.

Chicago Tribune

October 4, 2008 at 1:52AM

Even while legislators and business leaders celebrated the hard-fought passage of a historic $700 billion financial rescue package Friday, it was clear the economic challenges facing the country are still revealing their magnitude.

The measure sets in motion an unprecedented federal action aimed at loosening a credit market choked for businesses and consumers alike. The new law authorizes the U.S. Treasury to start buying as much as $700 billion in bad mortgage-related debts from banks and other financial institutions.

But rather than cheering the moment, investors turned skittish, preoccupied with other bad economic news. And credit-market participants remained unwilling to loosen up, fearful of the risks of lending cash. The Dow Jones industrial average Friday fell 157.47 points, or 1.5 percent, to 10,325.38, as the government reported the largest monthly job loss in five years.

'It will take some time'

President Bush called the plan "essential" and signed it within two hours of passage but warned that the effect would not be immediate.

"Americans should also expect that it will take some time for this legislation to have its full impact on our economy," Bush said.

The outcome was widely expected by the time of the vote. Even so, political and financial leaders around the world had been waiting anxiously and reacted with relief, given the House's rejection of the bill's first version Monday.

The final version offers taxpayers more than $100 billion in relief, putting millions out of the reach of the Alternative Minimum Tax and providing tax breaks for specific businesses. In addition, it raises federal insurance for depositors in banks and credit unions to $250,000 per account from $100,000.

It was these added incentives -- as well as a sense of urgency and relentless lobbying -- that turned a reluctant House around after the first version went down 228 to 205.

Some Democrats also cited the intervention of presidential nominee Barack Obama, who personally urged fellow Democrats such as Rep. John Lewis of Georgia to support the measure. John McCain also rallied Republicans.

It's not a boost, White House says

But legislators acknowledged that the bailout is far from the end of the economic task they face. Democratic leaders say the next Congress and president will be compelled to follow up with not only tougher regulation of the banking and financial institutions but also more economic stimulus measures aimed at creating jobs.

"This is only the first step," said Rep. Rahm Emanuel, D-Ill., chairman of the House Democratic Caucus. "While we address the balance sheets of banks, the next steps must address the checkbooks of families and the challenges they face."

The White House, which had long held that the economy was "sound," now acknowledges the many storm warnings compounding the credit problem, citing September's job-loss report. Spokesman Tony Fratto noted, however, that the rescue package is not designed to boost the economy.

"No one should be over-promising what this legislation will do," Fratto said. "This legislation is to fix a problem in our financial markets. It's not sold as giving a boost to our economy. ... It's averting a crisis."