The Obama administration has launched a multipronged effort to arrest the economic downturn, but its success likely depends on how quickly the banking sector regains its footing. Despite its $787 billion stimulus package, any fiscal boost would be temporary if credit markets remain dysfunctional. The government is already largely standing behind much of the banking sector, insuring unprecedented levels of deposits and even guaranteeing new debt issued by many banks.
A weakened banking industry makes it harder and costlier for businesses and consumers to get loans. But restoring confidence in the banking sector is proving one of the trickiest parts of the economic plan. Banks are still heavily exposed to the housing market, and rising foreclosures combined with falling house prices are putting enormous strain on banks and making it hard to determine how much money they have.
Regulators are bracing for dozens of additional bank failures. Federal Deposit Insurance Corp. officials are pushing Congress to raise the amount of money the agency can borrow from Treasury to $100 billion, more than triple its current limit, with talks intensifying in recent days, say people familiar with the discussions.
And housing isn't coming back anytime soon.