The Rescue Plan: What It Will and Won't Do

Oct. 15, 2008— -- When the Bush administration announced its new version of the $700 billion financial rescue plan first approved by Congress earlier this month, many observers cheered and optimism helped drive U.S. stocks to record gains.

Now, as the dust settles, economists and other experts are analyzing how the plan will help the U.S. economy -- and how it won't.

"The nature of the financial crisis has morphed from a housing problem to a credit crunch to a full blown modern day bank panic," said Kenneth Rogoff, an economics professor at Harvard University and a former economist at both the International Monetary Fund and the Federal Reserve.

Government officials, he said, "haven't solved the problem that the economy is going into a significant recession, but they've stopped the hemorrhaging."

Experts say that while the plan should help shore up banks, it won't help housing prices recover, it won't stop the U.S. from shedding jobs and it may result in higher taxes down the road. One critic questions whether the new plan is even legal.

Treasury Secretary Henry Paulson, meanwhile, has acknowledged that the plan won't stop the country from facing "some challenges for a number of months."

"There is no doubt that -- that a lack of confidence in the financial system, banks slowing down their lending have had an impact on the real economy," Paulson said in an interview today on Good Morning America. "And businesses haven't been borrowing, jobs have been in jeopardy, people's 401(k) plans have declined."

But, he added, "as we stabilize the system and as banks begin to lend and begin to lend to consumers, begin to lend to businesses, businesses resume hiring, we will make progress here."

Here's how the plan is supposed to work: The government will allocate $250 billion of the $700 billion package to purchase equity in U.S. banks. The list of banks include Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street, which will receive a total of $125 billion. The government is expected to invest the remainder of the $250 billion in smaller banks.