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Bank Rescue Will Take Time to Work


The latest version of the bank bailout plan may be getting more support than others but even those who think it's a good idea say it won't lead to a quick economic turnaround.

The Bush administration announced Tuesday that it plans to invest $250 billion in the nation's banks, with nine of the largest banks receiving about half of that amount.

While this and other moves announced Tuesday should help convince banks to start lending to one another more freely, economic experts caution that the thawing of the credit markets will be a relatively slow process. It will take time before the benefits reach many businesses and consumers.

"Banks are still going to be a little hesitant about lending, particularly to borrowers with lower credit ratings. My hunch is [the economy} will come back faster than we think [it] might, but it's still something that'll likely takes months, perhaps a year," said William Isaac, a former chairman of the Federal Deposit Insurance Corp.

Economists say the credit crisis adds to underlying problems, including rising unemployment, a likely drop in exports due to slowing economies overseas and a decline in both corporate earnings growth and consumers' purchasing power.

"All of this unsticks the credit market, but at best that's half of the problem," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute. "The other half of the problem is that we're in a recession here and in Europe and Japan. Global recessions are nasty."

Achuthan said job losses are likely to accelerate because of the recent credit problems and that will only put more downward pressure on housing prices -- no matter what steps are taken to limit mortgage foreclosures.

And if house prices continue to fall, he said the financial sector will, at best, limp along for the foreseeable future. However, Achuthan thinks the government made the right move because the alternative would have been worse.

"What we were looking at when credit markets froze up was a recession totally out of control, a recession on steroids," he said...
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