Q&A: How bailout affects consumers

Readers have asked many questions about the financial crisis. Here are some answers.

Q How will the soaring budget deficit affect my investments?

A Not positively. "If the budget deficit grows, that means the government has to borrow a lot more money," said Reena Aggarwal, a finance professor at Georgetown University. "That means there's a lot more demand for capital because the budget deficit has to be financed somehow. Nongovernment entities are also competing for the same capital."

Q What does that mean?

A Higher interest rates. "It's a supply and demand thing," Aggarwal said. The more people want a certain good, the scarcer that good becomes and the more a provider can charge for that good. Put simply, the cost of the debt goes up.

While investors are likely to see higher interest rates for their savings accounts, it also means interest rates on everything from mortgages to car loans could go up, Aggarwal said. The higher interest rates could mean that it will cost companies more to borrow, so they may cut back on capital expenditures or take profit hits, which could hurt their stock prices, which could negatively affect already sagging 401(k) plans.

Said Aggarwal: "It's not a good outlook for investments right now. Ultimately it's the common person who gets affected by all of this."

Q Why is the bailout directed at financial institutions instead of ordinary citizens?

A The problem that the federal government is trying to address is at the macro level. An immediate concern is job loss, said Susan Wachter, a professor at the University of Pennsylvania's Wharton School of Business. If the financial system shuts down, financial institutions will not be able to extend credit and make basic loans. Businesses would be left without cash for payrolls, which, depending on the duration, could lead to massive unemployment.

Q Are lenders more likely to hold on to the foreclosures they own as they wait for the bailout?

A No. Under the current plan, the federal government would not buy foreclosed properties. It would buy troubled mortgages and mortgage-backed securities that may lapse into foreclosure. If they do, only then would the government own these properties.

Kurt Eggert, a Chapman University law professor and a former member of the Federal Reserve Board's Consumer Advisory Council, said: "Banks are not in the business of managing property. They're in the business of getting money back so they can lend it."

WASHINGTON POST