Will bail-out mean the crisis is over?

The United States' House of Representatives today approved a new version of the country's 700 billion US dollar (£396bn) bail-out plan for banks.

Q: Does this mean the crisis is over?

A: Far from it, but it is a step in the right direction. The move should begin to restore confidence to the markets and boost liquidity as banks should be less reluctant to lend to each other now that the so-called toxic assets are being removed from their balance sheets.

If the deal had not gone through, it would have had a severe impact on confidence and certainly made the situation worse, but there is still a long way to go before things return to normal.

Q: How long it will it take before the scheme starts to improve things?

A: World stock markets are likely to receive a short-term boost from the scheme's approval, but this will be limited as it had been widely expected to pass.

The key issue relating to the scheme is what price the US government will pay for the assets. If they pay too much they will be strongly criticised, but if they pay too little the scheme will not have the desired effect. Pricing the assets is likely to take several weeks and may even have to be done on a case-by-case basis, meaning nothing will change overnight.

Q: What impact will the scheme have on the UK?

A: Some UK banks, such as Barclays, Royal Bank of Scotland and HSBC, are likely to be able to take part in it. It has been estimated that UK banks hold around £95 billion of assets that will qualify for the scheme.

There should also be some indirect benefits. Banking is a global industry and just as the problems that began in the US have spread to the rest of the world, so should any improvements.

If banks are more willing to lend to each other again, this should also help to bring down the inter-bank lending rate, Libor, which could filter through to cheaper mortgage rates.

Q: What other action are central banks taking?

A: Central banks have poured billions of pounds of liquidity into the money markets in recent weeks.

The Bank of England also announced today that it would widen the scope of its funding lifeline for the banking sector, allowing banks to use some highly rated corporate and consumer loans for the first time as collateral for its weekly cash injection.

Any improvement to world financial markets is likely to be due to a combination of the efforts being made by central banks and the US bail-out plan.

Q: Are the current problems confined to the banks?

A: No. The credit crunch began as a banking problem but its impact has spread across the economy. The problems in the mortgage market have exacerbated the housing market downturn, which in turn has badly hit consumer confidence, contributing to lower retail sales.

Q: Will the Bank of England cut interest rates next week?

A: The Bank of England's Monetary Policy Committee (MPC) is now widely expected to cut interest rates on Thursday for the first time since April, with some commentators saying there is a chance they could shave as much as 0.5% off the official cost of borrowing.

But while this is obviously good news, it is thought that one cut alone will not be enough to make a significant difference to the problems the economy faces.

Q: What about inflation?

A: Inflation still remains high at 4.7% - more than double the Bank's target rate of 2%, and some economists argue that this will prevent the MPC aggressively cutting interest rates by 0.5% next week. But inflation is expected to peak at around 5% next month, before falling rapidly during early 2009, opening the door for further cuts in the official cost of borrowing.

Q: What is the economic outlook like?

A: Not good. Economic fundamentals have deteriorated sharply in the past few week, leading to warnings that the MPC can no longer afford to sit on its hands. The latest figures show that activity in the manufacturing and service sectors has now fallen to record lows, while house prices fell at the fastest rate ever recorded during the year to the end of September. Unemployment is rising and the chances of the UK going into recession are increasing after economic growth stalled during the second quarter.