After bailout party, beware the hangover

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - The price of averting a U.S. financial sector meltdown goes well beyond the mind-boggling sums that the government is handing out and may be repaid with years of higher borrowing costs and slower economic growth.

President George W. Bush said on Tuesday that phase one of the $700 billion (402 billion pound) bailout, which involves the Treasury Department investing up to $250 billion in banks, would get money flowing to consumers and companies and kick-start the economy.

Economists said the move was a necessary evil, but questions remained about whether banks would now have sufficient capital and confidence to resume lending into a weakening economy, and how much longer the world would be willing to finance cheaply the ballooning U.S. debt.

"Even with banking being brought back from the brink, lending is likely to be very slow to recover," said David Owen, an economist at Dresdner Kleinwort.

Without a return to normal lending, economic growth will be subdued at best. Many Wall Street economists think that even with the government stepping in, unemployment may reach its highest level since 1983 and corporate profits will suffer.

Judging from Tuesday's stock market slump, investors seem to think that it is too late for government intervention to prevent a recession.

In essence, the U.S. Treasury Department is betting that the slump will be short and shallow enough that banks can muddle through without any more significant damage to their balance sheets, and private investors will feel confident enough to step in and take the taxpayer's place.

Under this scenario, the government would soon recoup its investment and the debt pile would shrink.