The $700 billion question: Can bailout fix economy?

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - The best test of whether the government's $700 billion check will be enough to save the U.S. economy is how much of that money flows back to consumers and companies.

Even if the government gets Congressional approval this week to buy bad debts off banks' books, satisfying some of their cash needs, the financial sector will still need to raise money -- and investors haven't exactly been lining up to help. Unless banks can find funding somewhere, they won't be eager to resume lending, and that will leave the economy sputtering.

The good news is, outside of the financial sector, Corporate America is remarkably cash-rich with some $620 billion sitting on the books of large firms, so companies should be primed to spend once confidence is restored.

But household wealth has taken an unprecedented double hit from the real estate and stock market shocks, and it could be years before consumers feel flush again -- particularly if credit conditions remain tight.

Treasury Secretary Henry Paulson argued on Sunday that opening up federal coffers to Wall Street would benefit Main Street by preventing a deeper economic downturn.

"Last week as the credit markets were frozen, the capital markets were frozen, we had a situation where American companies weren't able to borrow money," Paulson said on ABC's "This Week". "This could ultimately affect small banks, loans to businesses, loans to farmers, jobs, people's retirement."

U.S. companies have cut more than 550,000 jobs this year, sending the unemployment rate up to a five-year high of 6.1 percent in August. Those figures are likely to worsen in the coming months, with or without a bailout.

The housing market is at the root of the year-long financial crisis, and some members of Congress -- expressing concern that Paulson was taking a roundabout route to helping homeowners -- are expected to push for more direct mortgage assistance when they hammer out terms of the bailout legislation this week.