WASHINGTON — The fallout from Monday’s House vote against a bailout package for the U.S. financial system may well be lasting pain for the economy.
The economic wreckage that the administration and Congress have warned about — rising unemployment, shrinking nest eggs and prolonged recession — might not happen immediately, but that doesn’t mean it won’t happen at all.
For now, Treasury was expected to work with other government agencies, including the Federal Reserve and the Federal Deposit Insurance Corp., to deal with problems on a case-by-case basis.
There are some steps the Federal Reserve can take to cushion damage from the worst credit crisis since the Great Depression.
The Fed, which has been providing billions in short-term loans to help banks overcome credit stresses, could keep expanding those loans in an effort to spur financial institutions to lend more freely again. And, it could keep working with other central banks to inject billions into troubled financial markets overseas.
Also, the Fed could make it easier for banks and investment firms to draw emergency loans from the central bank by expanding the type of collateral they pledge to back those loans.
And, if the credit crisis were to turn even worse, the Fed also has the power in extreme circumstances to expand emergency lending to other types of companies and even to individuals if they are unable to secure adequate credit from other banking institutions.
The Fed also could do an about-face and start cutting its key interest rate again. The Fed in June halted an aggressive rate-cutting campaign and has kept its key rate since at 2 percent.
Even if the bailout were enacted by Congress and actually worked, many predicted the economy will probably shrink in the final quarter of this year and in the first quarter of next year, meeting the classic definition of a recession. If Congress doesn’t act, analysts, who were scrambling to downgrade their economic forecasts, believe those contractions will be deeper.
The unemployment rate — now at a five-year high of 6.1 percent — is expected to hit 7 percent or 7.5 percent by late 2009, which would be the highest since after the 1990-91 recession. Some economists say the jobless rate could rise even more.
More banks could fail, too. In the second quarter that ended in June, the Federal Deposit Insurance Corp. estimated 117 banks and thrifts were in trouble, the most since 2003. The threat of more banks failing in the U.S. and abroad forced the government to act swiftly.
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