The Irish Independent reports that taxpayers will be spared income tax increases in next month's "bloodbath" Budget which will unleash a massive €1.5bn cut in public spending.

After a "robust" six-hour cabinet meeting last night, ministers were left facing another round of tough negotiations next weekend in what is expected to be the toughest budget since 1983 -- the last year the country was officially in recession.

The Irish Independent says it has learned that spending is due to be cut by 2.5pc on last year's €70bn figure, reversing years of continuous spending increases for government departments. However, this reduction does not take account of inflation -- currently running at an average of 4.3pc for the last 12 months.

Government sources last night said the forthcoming budget would be a "bloodbath" and that "nothing was safe" from the cutbacks.

But the Government moved to address concerns that the higher 41pc rate of tax would be increased to close the estimated €7bn gap in the public finances.

Defence Minister Willie O'Dea said raising taxes "was not the immediate priority".

"The Government's main priority is cutting public expenditure and bringing it into line with revenue," he said.

There will be a radical culling of state agencies and quangos, with the National Consumer Agency and the multitude of Irish language agencies receiving grants from Foras na Gaeilge believed to be facing the axe.

The €100m Garda overtime budget is also due to be slashed, while more money will be saved by a redundancy programme for around 1,000 HSE staff.

A Government spokesman said yesterday's meeting was one of a series to decide on the content of Budget 2009, which has been brought forward to October 14 due to the crisis in the state finances.

The Departments of Health and Education are both hoping to be spared the brunt of the cuts. However, ministers Mary Harney and Batt O'Keeffe have both been told they will have to reduce administrative costs to preserve frontline staff jobs such as teachers, special needs assistants, nurses and doctors.

The cabinet still has to decide on some of the most contentious issues at another pre-budget meeting next Sunday.

Shortfall

It will also have to take account of the exchequer figures for this month, which are expected to point towards an annual budget shortfall of over €7bn when published on Thursday.

The cabinet has yet to decide how much will be borrowed -- with reports that the total could reach €10bn -- but Mr O'Dea said there would not be a"borrowing splurge".

"We're certainly going to have to borrow to square the circle, we're certainly going to have to borrow but you must be careful about how much you borrow,"he told TV3's The Political Party.

Fine Gael enterprise spokesman Leo Varadkar said Finance Minister Brian Lenihan was preparing to double the national debt before he left office in 2011. "We've had the worst turnaround in the public finances in the history of the State. We are going to borrow somewhere between €7bn and €10bn this year, probably €10bn next year and something similar the year after," he told RTE's Week in Politics.

The cabinet is considering measures to help first time buyers get credit for new homes, but it has ruled out schemes which will prop up the housing market. The Department of Finance believes house prices must be allowed to reach their natural level.

The Irish Independent also reports that the Injuries Board has warned there is no need for insurance companies to raise their premiums in the current global financial turmoil.

Speculation has been rife that insurers could introduce premium increases of up to 20pc on the back of the collapse of investment banking firms such as Lehman Brothers.

However, Patricia Byron, chief executive of the Personal Injuries Assessment Board (PIAB), yesterday hit out at the prospect of such steep rises, pointing out that over the past four years the cost to insurance companies of claims settled through the board has dropped sharply.

"Claim costs are the prime drivers of insurance premiums in Ireland and there has been no significant change in claim costs in recent months.

"At a time of economic downturn, with cost pressures facing business and consumers alike, it is important that the hard-earned cuts in insurance premiums of recent years are not reversed on the basis of tenuous or unsubstantiated links to global investment market turmoil,"she argued.

"Since the Injuries Board was established in 2004, the delivery, or administration, cost to insurance companies of claims settled through the board has fallen from nearly 50pc to less than 8pc.

"This has helped drive down the cost of insurance in recent years," she added. Last year the PIAB made assessments totalling €181m. It is estimated that over €100m a year is saved by processing claims through the board rather than through the old, adversarial, model used in the courts.

Earlier this month, the Irish Brokers' Association (IBA) warned that Irish consumers could see their insurance premiums rise as a result of the meltdown in the global markets.

Canice O'Reilly, president of the IBA, said: "Many of the insurers' reserve funds were badly hit after Wall Street investment bank Lehman Brothers filed for bankruptcy protection and its peer, Merrill Lynch, was swallowed by Bank of America.

"Insurance companies are now likely to become more cautious by shoring up their reserves and taking a more conservative approach to pricing. All of this is likely to lead to a 10 to 20pc increase in overall general insurance premiums over the short term, and 20pc-plus over the medium term,"he added.

The Irish Times reports that it was half past midnight on Saturday night when congressional leaders and US treasury secretary Hank Paulson sealed a tentative deal to inject up to $700 billion into the financial system by taking over "toxic" mortgage securities from vulnerable banks.

Long days of haggling on Capitol Hill over the contours of the controversial plan had left them tired-eyed. Although taxpayer anger and political resistance left the government with no choice but to amend its proposal, the intervention in the public markets will be unparalleled in scale.

Bruised by stinging charges of unAmerican behaviour, the government has argued that the plan represents the minimum required to restore stability in the financial system. Against a backdrop of rising pressure on international money markets - and frantic weekend efforts to prop up three major banking institutions in the US, Britain and Belgium - the package will swiftly go to a congressional vote, most likely today.

While the task now is for political leaders to deliver the votes required to pass the measure into law, Paulson had to grant big concessions to Democrats and Republicans in Congress to get the deal this far.

His original plan was only three pages long, sweeping in scope and conferring virtually unfettered power to the government. The finished article runs to 100 pages, with independent oversight.

Crucially, the government will get the power it sought to buy up $700 billion in illiquid securities. ut only half the money will be immediately available and release of the second half will be conditional on support from Congress following a review of the initial expenditure.

Himself a former chief of Goldman Sachs, Paulson had to swallow a number of other compromises that will make the bailout less palatable to his friends on Wall Street.

These include measures to "guarantee" taxpayers are repaid in full if other protections have not actually produced a profit.

In some accounts, there will be a requirement on the US president to levy a fee on the financial industry if the government does not recover its money after five years.

It also includes measures for limits on top-level pay in participating companies; a ban on multi-million-dollar "golden parachutes" for unsuccessful bosses; restrictions on pay schemes that encourage "unnecessary risk-taking"; and power to recover bonuses paid based on promised gains that later turn out to be false or inaccurate.

In addition, the US government will take shares in participating companies. The government will also be first in line to recover assets if a company fails.

In an attempt to reduce some two million mortgage foreclosures expected in the next year, the government will also have power as owner of the loan securities to facilitate modifications such as a reduced principal or interest rate or a lengthening of the loan term.

The Irish Times also reports that the difficulties at troubled British mortgage lender Bradford Bingley (BB), which is expected to be nationalised today by the British government in another state rescue of a bank, will re-focus attention on Bank of Ireland's loans in the UK.

Buy-to-let investors, a segment of the mortgage market in which BB specialises, accounted for almost a third of Bank of Ireland's £27 billion sterling (€34.3 billion) UK mortgage book at the end of March.

BB, the largest UK lender to landlords and the ninth largest British mortgage provider, has been hit badly by the global credit crisis, the declining British property market and rising bad debts.

The lender's share price tumbled to a record low last Friday and the cost of insuring its debt from default spiralled, leading regulators to seek a potential white knight to rescue the bank. BB has loans of £50 billion, including £41 billion of home mortgages, which are likely to be nationalised on a long-term basis.

Bank of Ireland's share price has suffered on the back of escalating difficulties at BB over recent months. The Irish bank's share price dropped sharply in early June after investors shunned BB's cut-price sale of a 23 per cent stake in an effort to protect itself against rising loan losses.

Sebastian Orsi, analyst at stockbrokers Merrion Capital, said Bank of Ireland's UK loans were of a better quality than BB's mortgages, though the Irish bank's British loan book would face closer scrutiny because of "the space they are in". He said BB's difficulties arose from funding and liquidity concerns given the"state of its loan book".

Bank of Ireland said in a trading statement almost two weeks ago that arrears on its €10.5 billion UK buy-to-let mortgages stood at 0.72 per cent of the loans at the end of August. The bank said this compared "favourably" with arrears of 1.1 per cent across the UK buy-to-let sector in June, according to industry data from the Council of Mortgage Lenders.

Irish Life Permanent also lends to landlords in the UK. The groups €8.5 billion UK mortgage book, which accounted for a fifth of the groups €41.4 billion total loan book at the end of June, primarily comprises buy-to-let mortgages, though the group stopped lending in the UK earlier this year.

Arrears on its UK buy-to-let loans rose to 0.77 per cent of all loans at the end of June from 0.4 per cent at the end of last year.

BB had 2.16 per cent of its mortgage loans over three months in arrears at the end of April.

The financial regulator started to look for a white knight, sounding out buyers such as Santander of Spain - which owns Abbey in the UK - and HSBC earlier this month, after BB suffered a credit rating downgrade by Moodys.

The Irish Examiner reports that tense talks lasted late into yesterday evening as government ministers tried to reach agreement on an extra €700 million in cutbacks sought by Finance Minister Brian Lenihan.

The extra savings are on top of a €1.3 billion reduction in spending already agreed by the cabinet and bring the total planned cutbacks for 2009 to €2bn.

The special meeting to discuss the budget on October 14 took place as US presidential rivals, Barack Obama and John McCain gave their backing to a $700bn (€485bn) bailout of the US financial industry.


The rapid pace of global economic change is said to be behind Mr Lenihan’s plans for a fresh round of cuts.

The additional €700m savings, which were said to be a “starting point” at yesterday’s meeting, could mean the introduction of medical card means testing for everyone over 70 and restrictions on a range of child benefits.

These were two of the big issues that ministers tried to agree at talks that lasted almost 12 hours.

Another meeting is due to take place on the Sunday before the budget to discuss taxes.

Ministers expect that income taxes will not be increased with most of the cabinet favouring painful cutbacks to raising taxes, which could further reduce consumer spending and confidence in the economy.

Yesterday’s meeting started at 9am and some ministers had emerged by mid-afternoon but were reluctant to give any details of the budget discussions.

During a break from the talks Defence Minister Willie O’Dea told TV3 that reducing expenditure “is going to be a very severe, very painful exercise”.

“The Government’s main priority is cutting public expenditure [and] bring it into line with revenue,” he said.

“The alternative would be twofold. First of all, you go on a borrowing spree which you may have to pay back and destroy international confidence in the economy. Second, you have to be careful about raising taxes, especially at a time when the economy is fragile and consumer spending is low.”

He added: “If you take too much money out of the economy by way of taxation you can prolong the economic downturn and even make it worse. The Government’s main priority is on spending. That’s where the main focus will be.”

On RTÉ last night, Minister for Children Barry Andrews said: “It is going to be very tough for people, but I think it is the right thing to do. It has to be done very quickly and send out a very strong message that we are going to get control over public finances.”

The Financial Times reports that residential development land has dropped by a third in value over the past year, and by up to 15 per cent in the past quarter, as problems among housebuildershave accelerated the devaluation of increasingly fallow land banks.

The losses in land values around the country are worse than many had feared, according to Knight Frank’s first annual development land index. The property consultancy expects values to continue to fall, predicting that 10 per cent could be further wiped off prices over the next 12 months.

However, there are signs that so-called vulture investors are entering the market to snap up bargains among the numerous forced sales of distressed builders. “Speculators” now represent a fifth of buying activity nationally, and half in London, where development sites are traditionally in short supply.

There are worries that the fall in land values could have a knock-on effect for many regeneration schemes. Agents have suggested, for example, that the resale value of the Olympic park in Stratford could fall well short of the government’s estimate, which could influence the funding equation behind the 2012 games.

Jon Neale, head of development research at Knight Frank, said: “Over the past year, developers have put their land acquisition activities on hold, which has dramatically reduced demand for sites – by as much as 60 per cent in some parts of the country. Developers ... are selling sites to raise cash and bolster their balance sheets, which has dramatically increased the supply of land ... depressing values.”

Areas outside London have been hardest hit, despite the fact that greenfield sites have fared slightly better than urban land, with falls of 30 per cent over the past year and 13 per cent over the past three months.

Yorkshire and Humberside have been worst hit by the downturn, with land in all categories now worth about half its value from a year ago. The north-west has also been badly affected, with drops of 41 per cent and 36 per cent for brownfield and greenfield sites.

The capital has avoided the full impact, with land prices in inner London falling by just 10 per cent. Outer London areas have fared only marginally worse, with a fall of 15 per cent over the past year.

The only areas that seem unaffected are those earmarked as “super-prime” sites – normally in the most sought-after areas of London. While Knight Frank notes that demand has dropped by as much as half, it still vastly exceeds supply, with some sites still capable of fetching the equivalent of more than £100m ($183m) per acre.

Otherwise, Mr Neale said, only well-located, ready-to-build plots with planning permission are attracting interest, and much of the available land does not fit this description. As a result, offers are likely to include deferred terms and options.

Developers and housebuilders account for 29 per cent of vendors, although government agencies and local councils remain the largest source of supply, providing 31 per cent of the land sales market.

Housing associations, the grant-maintained social housing developers, remain the main prop to the sector. Outside London they represent almost a third of all acquisition activity, compared with just 16 per cent for private sector developers.

The FT also reports that Bavarian voters made political history on Sunday when they robbed the Christian Social Union, sister party to Angela Merkel’s Christian Democratic Union, of its ­ruling majority for the first time in 46 years.

Exit polls put the CSU, which has ruled the affluent southern state for more than four decades, on 43 per cent of the vote, its lowest result since 1954. Such an outcome would leave the CSU well short of the 91 seats needed for a majority in the regional parliament, forcing it to form its first coalition since 1962.

The plunge in popularity, after winning 60.7 per cent in 2003, is bad news for Ms Merkel, the chancellor, and her bid to retain power in next September’s general election. Christian Democratic candidates have historically benefited from strong support in conservative Bavaria at general elections, which could be weaker next time.

The CSU is now expected to seek a ruling coalition with the free-market Free Democratic party, a vocal critic of the CSU’s social and security policies, which exit polls gave 8 per cent of the vote, its highest score since the second world war. This would give Ms Merkel’s “grand coalition” of the CDU and Social Democratic party in Berlin a paper-thin majority in the Bundesrat, parliament’s upper house, and ­possibly a minority if, as expected, the CDU’s Roland Koch, caretaker state premier of Hesse, steps down in November.

A weakened CSU could present the chancellor with an additional problem if it led to a radicalisation of the party which, though firmly in the conservative camp nationally, has been a thorn in Ms Merkel’s side, opposing many of her policies.

SPD officials were rejoicing last night, even though their party was credited with only 19 per cent of the vote. The outcome showed the SPD had yet to stop the rise of the radical Left party, an alliance of disaffected Social Democrats and former east German communists, which scored an estimated 4.5 per cent of the vote.

This was short of the 5 per cent required for the Left to enter the regional parliament and the CSU debacle alone could boost sentiment at the SPD, energised by a coup this month that ousted Kurt Beck, the party’s chairman.

“This is a historical evening for Bavaria,” said Frank-Walter Steinmeier, Ms Merkel’s foreign minister, who will head the SPD’s ticket at next year’s election. “We are not talking of an election result tonight. We are talking of an earthquake.”

The CSU’s performance, far worst than predicted by any opinion poll, could usher in a leadership reshuffle.

“This is a drama for the CSU,” said Jürgen Falter, a political scientist. “Missing the absolute majority is bad enough but falling below 45 per cent is a catastrophe.”

The CSU was in part a ­victim of the erosion of ­popular support for large parties and general voter fatigue after decades of political stability. But Erwin Huber, chairman, and Günther Beckstein, state premier, have been criticised for their gaffs, policy flip-flops and the party’s loss of profile in Berlin.

Mr Huber could prove the first victim of the debacle. Horst Seehofer, consumer protection minister in Ms Merkel’s government, has made no secret of his wish to replace him.

The New York Times reports that the House braced for a difficult vote set for Monday on a $700 billion rescue of the financial industry after a weekend of tense negotiations produced a plan that Congressional leaders portrayed as greatly strengthened by new taxpayer safeguards.

The 110-page bill, intended to ease a growing credit crisis, came after a frenzied week of political twists and turns that culminated in an agreement between the Bush administration and Congress early Sunday morning.

The measure still faced stiff resistance from Republican and Democratic lawmakers who portrayed it as a rush to economic judgment and an undeserved aid package for high-flying financiers who chased big profits through reckless investments.

With the financial package looming as a final piece of business before lawmakers leave to campaign for the November elections, leaders of both parties in the House and Senate intensified their efforts to sell reluctant members of Congress on the legislation.

All sides had to surrender something. The administration had to accept limits on executive pay and tougher oversight; Democrats had to sacrifice a push to allow bankruptcy judges to rewrite mortgages; and Republicans fell short in their effort to require that the federal government insure, rather than buy, the bad debt.

Even so, lawmakers on all sides said the bill had been significantly improved from the Bush administration’s original proposal.

The final version of the bill included a deal-sealing plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions.

“This is a major, major change,” Speaker Nancy Pelosi said on Sunday evening as she declared that negotiations were over and that a House vote was planned for Monday, with Senate action to follow.

The deal would also restrict gold-plated farewells for executives of companies that sell devalued assets to the Treasury Department.

President Bush called the measure “a very good bill” and praised Congressional leaders. “This plan sends a strong signal to markets around the world that the United States is serious about restoring confidence and stability to our financial system,” Mr. Bush said in a statement. “Without this rescue plan, the costs to the American economy could be disastrous.”

House Republicans had threatened to scuttle the deal, and proposed a vastly different approach that would have focused on insuring troubled debt rather than buying it. In the end, the insurance proposal was included on top of the purchasing power, but there is no requirement that the Treasury secretary use it, leaving them short of that goal.

It is virtually impossible to know the ultimate cost of the rescue plan to taxpayers, but Congressional leaders stressed that it would likely be far less than $700 billion. Because the Treasury will buy assets with the potential to resell them at a higher price, the government might even turn a profit.

That provision, pushed by House Democrats, was the last to be agreed to in a high-level series of talks that had top lawmakers and White House economic advisers hustling between offices just off the Capitol Rotunda until midnight on Saturday, scrambling to strike an agreement before Asian markets opened Sunday night.

The bill calls for disbursing the money in parts, starting with $250 billion followed by $100 billion at the discretion of the president. The Treasury can request the remaining $350 billion at any time, and Congress must act to deny it if it disapproves.

The agreement on a bailout plan was greeted with subdued optimism in early Asian trading on Monday. But shares sank by late Monday morning on renewed worries about the credit crisis, with a decision by HSBC to raise lending rates by 0.5 percent in Hong Kong triggering a drop of 2 percent in the Hang Seng Index in Hong Kong and 0.9 percent in the Kospi Index in Seoul.

The stock market in Taiwan is closed on Monday as Typhoon Jangmi passes over Taipei.

The dollar also strengthened in Asia and was worth 106.485 yen by midmorning on Monday after trading at 106.01 late Friday in New York. The euro weakened to $1.4506 on Monday from $1.4614 in late New York trading on Friday.

Ms. Pelosi, Treasury Secretary Henry M. Paulson Jr. and others taking part in the talks announced that they had clinched a tentative deal at 12:30 a.m. Sunday, exhausted and a little giddy after more than seven hours of sparring. There were several tense moments, none more so than when Mr. Paulson, a critical player, suddenly seemed short of breath and possibly ill. He was tired, but fine.

Trying to bring around colleagues who remained uncertain of the plan, its architects sounded the alarm about the potential consequences of doing nothing. Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee and the lead Senate negotiator, raised the prospect of an economic catastrophe.

“If we don’t pass it, we shouldn’t be a Congress,”Mr. Gregg said.

Both major presidential candidates, Senator John McCain of Arizona, the Republican nominee, and Senator Barack Obama, the Democratic candidate, gave guarded endorsements of the bailout plan. Both Mr. McCain and Mr. Obama had dipped into the negotiations during a contentious White House meeting on Thursday.

On Sunday evening, both parties convened closed-door sessions in the House to review the plan, and conservative House Republicans remained a potential impediment.

But the party leadership was circulating information aimed at refuting some of the main criticisms of the bailout, indicating they were poised to support it. “I am encouraging every member of our conference whose conscience will allow them to support this bill,” said Representative John A. Boehner of Ohio, the Republican leader.

A series of business-oriented trade associations with influence with Republicans also began weighing in on behalf of the plan.

The United States Chamber of Commerce issued a statement on Sunday night that said it “believes the legislation contains the necessary elements to successfully remove the uncertainty and stem the turmoil that has plagued financial markets in recent weeks.”

Members of the conservative rank and file remained unconvinced.

“While it creates a gimmicky $700 billion installment plan, attempts to improve transparency, and has new provisions cloaked as taxpayer protections, its net effect is still a huge bailout of the financial sector that will snuff out the free market system,” said Representative Connie Mack, Republican of Florida.

Some Democrats bristled that they were now being called on to do the financial bidding of an administration they had viewed as previously uncooperative in dealing with executives who had performed irresponsibly or worse.

“Financial crimes have been committed,”said Representative Marcy Kaptur, Democrat of Ohio. “Now Congress is being asked to bail out the culprits.”

Throughout Sunday, small groups of lawmakers could be found around the Capitol exchanging their views on the plan. Some said they were willing to take a political risk and back it.

One, Representative Jim Marshall, a Georgia Democrat facing a re-election contest, told colleagues in a private meeting that he would vote for the measure to bolster the economy. “I am willing to give up my seat over this,” Mr. Marshall said, according to another person who was there.

The architects of the plan said they realized they were calling on Congress to cast a tough vote since lawmakers might not get credit for averting a financial crisis since some constituents will not believe one was looming.

“Avoiding a catastrophe won’t be recognized,”said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee. “This economy is not going to have a blossoming on Wednesday.”

But he and others said the support from the two presidential contenders, Senators McCain and Obama, should provide some comfort to nervous lawmakers.

While the House was planning to act Monday, the Senate schedule was uncertain. A vote might not occur until Wednesday or later because of the Jewish holidays and possible procedural obstacles. But Senate vote-counters were confident they could get the needed support.

One of the more contentious issues was how to limit the pay of executives whose firms seek government aid, a top priority for Democrats and even some Republican lawmakers. But it was a concern for Mr. Paulson, who worried about discouraging firms from participating in the rescue plan, which seeks to convince companies to sell potentially valuable assets to the government at relatively bargain prices.

In the end, they settled on different rules for different companies depending on how they participate in the bailout. Firms that sell distressed debt directly to the government will be subject to tougher pay limits, including a mechanism to recover any bonuses or other pay based on corporate earnings that turn out to be inaccurate or fraudulent, and a ban on so-called “golden parachute” severance packages as long as the government has a stake in the firm.

Companies that participate in auctions, or other market-making mechanisms, and sell more than $300 million in troubled financial instruments to the government, will be barred from making any new employment contract with a senior executive that provides a golden parachute in the event of “involuntary termination, bankruptcy filing, insolvency or receivership.”

While some critics said the limits did not go far enough, lawmakers described the provision as a historic first step by Congress to limit exorbitant pay of corporate titans. “I think we wrote it as tight as we can get it in here,” Mr. Dodd said.

Congressional staff from both parties and Treasury worked through Friday night and into the predawn, before heading home for some sleep. They resumed work late Saturday morning, and Mr. Paulson arrived at the Capitol to join top lawmakers in Ms. Pelosi’s suite for a meeting at 3 p.m. At least a dozen major differences remained.

The meeting was initially described as a gathering of the five chief negotiators, Mr. Paulson, and a Democrat and Republican each from the House and Senate. But additional Democrats piled into the talks, angering Republicans who accused Democrats of packing the sessions.

For a brief, nerve-fraying moment at the outset, one administration participant said, Mr. Paulson surveyed the circus-like scene and wondered if everyone was committed to reaching a deal. It was quickly clear that they were — but not before so much information starting leaking out that the BlackBerrys of staff members were confiscated and collected in a trash bin.

At one point, Senator Charles E. Schumer, Democrat of New York, was thumping the table, demanding to release the $700 billion in installments. At another point, Senator Max Baucus, Democrat of Montana, was shouting at Mr. Paulson, accusing him of trying to undermine the limits on pay for executives.

The NYT also reports that the government’s planned financial bailoutis a significant if costly step intended to avert economic calamity, but it may not be the last one, according to economists and finance experts.

The rescue plan would use taxpayer money — $350 billion initially, and up to $700 billion with Congressional approval — to buy mostly soured mortgage-backed securities from Wall Street firms and banks.

These arcane investment instruments, linked to home mortgages, have combined with falling housing prices to ignite the credit crisis, which in turn has dire potential for an economic contagion that threatens even sound businesses and secure jobs in industry after industry.

By taking these securities off the banks’ hands, the bailout plan seeks to restore confidence in the financial system and ensure that banks can still carry on their fundamental role of handling payments and offering credit to the masses.

“Maybe they can restore confidence with the program,” said Simon Johnson, an economist at the Sloan School of Management at the Massachusetts Institute of Technology.

“It may work, and it could get us through the election in November,”he said.

But Mr. Johnson, a former senior researcher at the International Monetary Fund, said further steps might well be needed, with much work remaining for the next administration.

The list, he said, includes overseeing the workings of the rescue plan, helping to guide the contraction and recapitalization of the banking industry, assisting homeowners who face mortgage defaults, and in general shaping policy for a nation that will be less accustomed to easy credit and overspending.

“Managing this issue is going to dominate the agenda of the next president for two years,” Mr. Johnson said.

Besides buying troubled mortgage securities, the main features of the bailout package include restraints on executive pay for companies that sell off weak assets; a shareholder stake for the government in firms that sell large amounts of distressed securities to the government; and a requirement that the government take more aggressive steps to prevent home foreclosures.

The eventual price tag for the bailout is uncertain. It all depends on the price that the government pays for the troubled securities it buys from banks, and the price the government receives when it eventually sells them, years later.

To many, the weekend agreement on a plan is cause for a qualified sense of relief, even for many conservative policy makers and economists, despite qualms that it may be too generous to Wall Street bankers, too weak for struggling homeowners and too costly for taxpayers.

“By far, the most important way to help homeowners and taxpayers is avoid a serious economic recession,”said Robert E. Hall, an economist and senior fellow at the Hoover Institution, a conservative research group at Stanford.

An abrupt downturn, Mr. Hall estimated, would reduce economic activity and opportunity in the United States by 5 percent to 10 percent in terms of production of goods and services, job creation and personal income. That total cost, he noted, would certainly exceed $1 trillion.

“A recession costs way more than $700 billion,”Mr. Hall said.

There was no assurance that the bailout plan would work as intended to ease financial turmoil and economic uncertainty.

Indeed, the reckoning in the finance industry has a long way to go, said Nouriel Roubini, an economist at the Stern School of Business at New York University.

The $350 billion to $400 billion in bad credit reported by the banks so far could eventually exceed $1.5 trillion, he estimated, as banks are forced to write off more bad loans, not only on more housing-related debt, but also for corporate lending, consumer loans, credit cards and student loans.

The rescue package, if successful, would make the recognition of losses and the inevitable winnowing of the banking system more an orderly retreat than a collapse. Yet that pruning of the banking industry must take place, economists say, and it is the government’s role to move it along instead of coddling the banks if the financial system is going to return to health.

Japan’s experience in the 1990s is a cautionary example of the peril of propping up banks after a real estate boom ends. The Japanese government helped keep many troubled banks afloat, hoping to avoid the pain of bank failures, only to extend the economic downturn as consumer spending and job growth fell.

The Japanese slump continued for many years, ending only a few years ago, a stretch of economic stagnation known as Japan’s lost decade.

“The lesson from Japan is that tough love for the banks is what’s needed,”said Kenneth Rogoff, an economist at Harvard.“In the current crisis, you do want to get rid of the bad assets from the banks, to get markets working again. But the key is going to be in the details of how the bailout works. You don’t want it to be a subsidy in disguise that keeps insolvent banks alive. That would just prolong the economic pain.”

History’s most sobering example, though, is the Great Depression. In that case, the government waited too long to do anything to aid the battered banks, and the economy cracked.

The Federal Reserve chairman, Ben S. Bernanke, a former professor at Princeton, has studied Japan’s policy missteps and is also an expert on the Depression. “The lesson of the Depression, failing to act soon enough, very much underlies the urgency behind the government’s proposal,” Mr. Rogoff said.

Sweden in the early 1990s took a middle path, swiftly taking over many of its troubled banks. The American bailout plan, economists say, takes a page from the Swedish example by making the government a shareholder in banks participating in the program. But, they add, the American banking system is so much larger and diverse than Sweden’s that the parallels are limited.

The curbs on executive pay were an essential ingredient to gain political support for the United States rescue plan, blunting the criticism that a bailout would protect the suspect gains of wealthy Wall Street executives. For companies making substantial use of the program, the government would limit the tax deductibility of executive pay to $500,000, prohibit “golden parachute” payments to departing executives, and allow the recovery by the financial institution of bonuses from gains that later prove to have been based on false or inaccurate information.

Earlier legislative efforts to curb executive pay have had little lasting effect, corporate governance experts say. In the early 1990s, curbs on the tax deductibility of executive salaries, they say, were sidestepped and even contributed to the generous grants of stock options, which helped drive executive pay to new heights.

The provision to recover hefty bonus payments is problematic, the experts say. To make a recovery, they say, the government would have to show an executive had engaged in misconduct, not just poor judgment.

Yet by taking such action, combined with the provision to become a big shareholder in companies that take part in the bailout, the government moves could well have an impact on executive pay.

“Even if these steps prove to be largely symbolic, it will influence practices,”said Charles Elson, a corporate governance expert at the University of Delaware. “The government has made a clear statement, and the boards of these financial companies will be under pressure to rein in compensation.”

The bailout effort, economists say, underlines the pivotal role of the financial industry in the economy and the need for proportionate regulation.

When the Internet dot-com bubble burst at the start of the decade, investors suffered, employment dropped, companies went out of business and America slipped into a brief recession. But there were no calls, or need, for government rescue plans for the technology industry.

“Finance is so central and peculiar, so essential, and yet it carries a death threat for the economy,” said Jagdish Bhagwati, a professor of economics at Columbia.“What we’ve seen, once again, is that finance is a very powerful instrument, but one that needs to be intensively watched.”