Assuming the federal government’s economic plan works as expected, the effects of the Wall Street rescue are expected to be felt on Main Street as well. Economists weighed in on the most popular topics among consumers and how they might be affected by the bailout plan.
Mortgages
Existing fixed-rate mortgages: The terms will not change as long as the homeowner is current on the mortgage payments.
Existing adjustable-rate mortgages or ARMs: The bailout is expected to lower a key benchmark rate used to determine most adjustable rates, an immediate benefit. Long term, the interest rate may adjust upward if the markets come to view the bailout as inflationary.
New mortgages and refinances: Consumers will still be able to get mortgages, but it is likely they’ll have to make larger down payments, as opposed to the no or very low down payment mortgages that had become the norm in recent years. Some predict that mortgage rates will move higher as federal deficits increase inflation.
Mortgage terms that were available a year ago were more attractive than today’s mortgage terms. Still, experts say prospective buyers should apply for a mortgage if their situation demands they purchase a new home. However, they should go back to the traditional values, that is, purchase a home they can afford — be able to pay 10 percent or more down and be able to pay the monthly payments on a 30-year fixed-rate mortgage.
Businesses
The economy runs well when businesses are confident enough about the future that they invest and innovate. It also relies on consumers to be confident enough to spend.
The main goal of the bailout is to free up the credit markets, to allow businesses to grow and take risks on new products or hiring new employees to expand their operations.
Retailers and other businesses are expected to have increased access to credit, which would allow them to invest in inventories and keep a good selection of products on the shelves. If consumer confidence — and consumer credit — are restored, shoppers should feel more comfortable spending on everything from dental procedures to food products.
Auto loans and credit cards
The bailout plan would effectively add cash to banks’ assets and reduce their debt. This would make it easier for banks to expand credit, not only to businesses, but also to consumers in the form of auto loans and credit cards.
The eventual effect on consumer interest rates will depend on whether the financial markets view the bailout as inflationary. If the markets come to believe the bailout debt will eventually spur inflation — perhaps during a future administration — long-term consumer rates will eventually increase.
Money-market funds, retirement accounts
The bailout should help stabilize money-market funds and savings vehicles such as 401(k)s, retirement and pension accounts. It’s worth noting that the credit crisis, which started in the summer of 2007, has been acting as a drag on the economy, making it unlikely that stock markets will come roaring back soon.
Economists say the real challenge is for those who are close to retirement and need to tap those accounts and for those with kids heading to college dependent on college savings funds. Those families, experts say, must weigh the costs of staying in the market and waiting to recover their losses or cashing out now, likely taking a loss in the process.
Gas, food prices
Gas and food prices will not directly be affected by the bailout plan. Oil prices are determined by many factors including supply, demand and weather.
The only effect will be on demand. If consumers have more money to spend and are more comfortable, they may go back to previous levels of consumption, which will increase demand.
Food prices will hardly be affected. Food prices are determined by supply, demand and energy prices.
What grocers may see is sales of more expensive items, such as gourmet products and choice cuts of meat, once consumers are confident in the economy and feel financially secure.
Sources: Sanjai Bhagat and Michael Stutzer, professors of finance, and Nathalie Moyen, associate professor of finance, Leeds School of Business, University of Colorado at Boulder; Charles Calomiris, professor of economics, Columbia School of Business; Tucker Hart Adams, president of The Adams Group, a regional economic analysis and consulting firm.
