Government bailout could impact loans for consumers and small businesses

by John Paul (jpaul@wsbt.com)

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$700 billion bailout will affect consumer and small business loans

The government's $700 billion bailout would allow banks to have more lending power, but the requirements for receiving a loan will change.(WSBT photo)

By WSBT News1

Story Created: Sep 25, 2008 at 4:50 PM EST

Story Updated: Sep 28, 2008 at 8:27 AM EST

SOUTH BEND — A $700 billion federal government bailout proposal is expected to give banks more lending power. While that may benefit some people looking for a loan, there will be tougher requirements.

The hope from financial and banking officials is that this bailout will stimulate the economy.

"We're in a difficult spot right now," said finance professor Mike Robinson.

Industries from construction to banking to small businesses are all reeling from the nation's mortgage mess.

"The balance sheet has these bad debts from the mortgage backed securities," said 1st Source Bank Senior Vice President Jim Seitz.

"We need the credit," said Robinson. "Without the credit, we just cannot get the economy going."

The government has a proposed $700 billion solution. The plan would be paid for by taxpayer money.

"This should reduce the severity of the recession," Robinson said. "If this doesn't work, we're going to have to try something else."

The proposed bailout would give banks more money and lending power.

"This will allow the financial institutions to receive an in-flow of cash," said Seitz. "It will get that bad asset off their balance sheet and the end result, they'll start lending again."

That process would help stimulate the economy and benefit potential borrowers, including small businesses planning to establish or expand.

Phil Damico, Director of Business Growth at St. Joseph County's Chamber of Commerce, believes small business is a very big part of our economy here. But the nation's financial situation has changed the dynamics of lending money.

"When the economy takes a turn and the housing values go down and you don't have the cash flow to be able to make the payments, it put it into a snowball effect," said Seitz.

That is a concern for the Chamber. The organization fears if banks make it difficult for smaller businesses to receive loans, shoppers could find empty store fronts and chained doors in shopping areas.

St. Joseph County has about 11,000 smaller businesses. The companies are divided in two stages. Stage One features companies with employment levels from 1 person to 10. Stage Two features employers with employment levels from 11 to 100.

"These are the ones that we really need to try and support," Damico said. "Moving forward, we need to try to do everything humanly possible to help them succeed."

Economist and analyst believe the government could profit from this billion-dollar bail out, if assets were sold higher than the current purchase price. There is always the possibility that plan could backfire.

"Only time will tell if this bailout works," Robinson said. "If it doesn't work, there could be programs established to help people whose mortgages are in danger of default or foreclosure."

He adds, it's also a possibility the government could deliver another round of rebate checks.

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