Congress crafts U.S. rescue

WASHINGTON — The proposed $700 billion bailout of the financial system is staggering, for sure, but there have been times when American debt relative to the size of the whole economy has been just as big — sometimes much bigger.

The Bush administration plan to shore up banks rattled by the meltdown of the housing market and clenched-up credit markets would raise the federal debt to an all-time high of more than $11 trillion.

Details are still being worked out in Congress — and both political parties on Tuesday rebuffed dire warnings that a recession, layoffs and a rash of foreclosures would occur if the bailout plan isn't quickly approved — but the proposal would lift the legal limit for government borrowing to $11.3 trillion, $700 billion higher than what it is now and twice what it was a decade ago.

Economists warn ballooning the federal debt could weaken the U.S. dollar, raise interest rates and weaken the already faltering economy.

Wall Street continues to be jittery. The Dow Jones industrials sank 161 points and now are off more than 500 this week after initially surging on the bailout announcement last week.

Deepening market trouble was just one piece of the economic havoc that Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told senators would ensue if Congress lags in acting on the administration's proposal to rescue tottering financial institutions.

But without the bailout plan, Paulson and Bernanke sketched out a dire scenario for senators at a contentious daylong hearing: Neither businesses nor consumers would be able to borrow money, and the world's largest economy would grind to a virtual halt.

The legislation the administration is promoting would allow the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis.

If the plan works, it should help lift a major weight off the national economy that is already sputtering.

Democrats were determined to wrest concessions from the administration on domestic spending and middle-class economic aid. And they said Republicans had to share in the politically tricky task of pushing through a financial bailout six weeks before the elections at a time when millions of everyday Americans are economically strapped and would struggle with higher taxes to help pay the national debt.