Federal bailout: Where will rest of $700 billion in funding go?

WASHINGTON -- With the economy falling into what could be the deepest recession in decades, the government is struggling to find a coherent way to quickly help homeowners and businesses — and the clash of politics and economics is hitting a fever pitch.

The administration is still working on the best way to deploy the remaining money in the $700 billion financial rescue plan passed last month. Treasury Secretary Henry Paulson said Wednesday that the government will no longer buy troubled assets from bank balance sheets, the original intent of the legislation, and will mainly focus on injecting money into the financial sector.

Congress and the administration are debating several approaches, including a new round of economic stimulus and an all-encompassing approach to help people who are facing foreclosure stay in their homes. Wednesday, the dispute about help for automakers intensified as Paulson suggested Treasury would not be open to directly aiding the industry through the $700 billion program, while lawmakers said they would force the government to step in.

Such issues are being complicated by the fact that the administration has just a little more than two months left. President-elect Barack Obama has made it clear that he favors supporting the auto industry and more economic stimulus, while the Bush administration has been leery of further government involvement.

All this is leading to more politics at a time financial markets need more, not less, clarity.

"It seems the dominos are falling rapidly and in more than one direction," Charles Crane of Scotsman Capital says.

Paulson, however, said the government was forced to change its approach because of the rapid deterioration in the economy. "My focus has been how to get the maximum bang for the buck," he told USA TODAY, noting the government couldn't snap its fingers and make everything all better. "There's only so much government can do."

Investors had no shortage of reasons to sell stocks, but the flagging confidence in the government's actions to fix the economy was a big one Wednesday, says Peter Cardillo of Avalon Partners.