How the Bail Out Bill Will Affect You

Four days after the Bush administration's financial rescue package ran off the rails in Congress, the House of Representatives gave the plan a second look and — after loading it up with a bunch of goodies — liked what they saw.

The plan, passed by the House and quickly signed into law by President Bush Friday, is supposed to jump-start the crippled credit markets and get the money flowing normally again to consumers, businesses, corporations and governments. But it remains to be seen whether it will work.

Here’s a look at what may — or may not — happen next.

Are my taxes going up to pay for this?
Over the long term nobody really knows, but in the short run, your taxes may actually go down. To get the bill passed, Congress loaded it up with more than $100 billion in tax breaks and other special provisions.

The biggest was a fix for the alternative minimum tax, a measure originally designed to make sure rich people paid their fair share. But over the years, millions of middle-income taxpayers have been mauled by the AMT beast. Many of those people will catch a break under the bailout bill.

Over the long run, though, those tax breaks will have to be made up with tax increases or spending reductions elsewhere. For decades, the rest of the world has been happy to loan its hard-earned savings to Uncle Sam to help our government fund its deficit spending. Those days are rapidly coming to a close.

Taxpayers also could be on the hook for some — but probably not all — of the $700 billion being used to buy up bad mortgage-backed investments, which the Treasury calls "troubled assets."

How, exactly, is this going to work?

That's still the $700 billion question. What Congress has done is to set up what amounts to a government-run hedge fund to buy up troubled securities that nobody else will buy because it is virtually impossible to figure out what they're worth.

The reason is that no one can predict how many more homeowners will default on the mortgages backing up these investments. Once they do default, it's even harder to predict how much the house backing the mortgage is worth.

Under the plan, the Treasury will buy these securities and hold them until credit and housing markets settle down, hoping that their value will increase. If so, Uncle Sam will make money. But no one has explained how the government will come up with the right price. Treasury officials have deflected any questions about what they call "implementation issues."

In theory, the program will jump-start a market for these “trouble assets,” and private investors will then finish the job when they see what Treasury pays for the paper.

I keep hearing that the credit markets are "frozen." But when I stick my ATM card in the machine, money still comes out. What’s the big deal? What do I care if these big Wall Street firms lose money?

The problem is that for better or worse, the global economy runs on credit. And that credit is drying up. It’s already harder to get a mortgage or a loan to buy a new car than it was even six months ago.

The credit drought has spread to the multitrillion-dollar pool of money that businesses use to fund their operations. The problem has begun to hit big companies such as General Electric, which recently had to pay 10 percent interest on what amounted to a private loan from Warren Buffett.

If that problem continues to spread, businesses will have to start laying off people faster than they already are.