Commentary: Bailout -- will consumers win?

-- Vinod (Vinnie) Aggarwal is chief economist at Frost & Sullivan and Director of the Berkeley Asia Pacific Economic Cooperation Study Center at the University of California at Berkeley. The opinions expressed here are his own --

By Dr. Vinnie Aggarwal

MOUNTAIN VIEW, Calif. (Reuters.com) -- Paulson and Bernanke may have lost the battle - but they haven't lost the war. Though the proposed $700 bailout plan was defeated by the House this week, stay tuned for more wrangling and proposals as the presidential election nears.

Much has been argued about how this will affect consumers. In day-to-day personal finance scenarios, very little will change: consumers will still use their credit and debit cards, make monthly car payments, contribute to their IRAs, take out student loans, and apply for home equity loans. In the next few months, people may be stunned to notice that their familiar Washington Mutual ATM is now Chase, but other than that, most consumers will not be affected by recent industry events.

Changes will be noticeable in the long term, however. Though the decisions of the last few weeks seemed quick and tidy, the consequences will resonate for years. For consumers, it means less choice and the potential for higher fees, as banks gain pricing power over their smaller regional and community bank rivals. In any industry consolidation, this is usually the case.

However, the numbers show quite the opposite. Large banks typically don't chase deposits with aggressive rates - community banks actually offer better rates than those offered by the big guys. A quick search on Bankrate.com shows the annual percentage rate on a 6-month CD with Corus Bank in Chicago offered at 4.25%, compared to that of Chase, with 2.00%. With many other consumer finance products, rates are not expected to change dramatically, and consumers can actually reap benefits by switching accounts to local banks and credit unions - who were for the most part not stuck holding Wall Street's bag of CDOs, CMOs, and credit default swaps.

The Treasury and SEC would like the public to believe that consolidation is necessary, as the increased size of these banks means that they can survive big systemic shocks. Diversified business lines - consumer credit, commercial lending, investment banking, and wealth management, among others - should provide much-needed buffers in the short- and longer-term.

Yet these banking leviathans will now only be encouraged to assume risk and recklessness, because they can be certain that they will receive a federal bailout in the future. Are these banks too big to fail? "The crisis has not gone away," said House Speaker Nancy Pelosi.

So how could the proposed legislation not have favored the banks and instead have supported the average consumer? An indiscriminate deposit of $700 billion into the checking accounts of mortgage-holding Americans in order to help pay off the trillions of mortgage debt would be highly unlikely. The bailout package only represents 7% of total mortgage holdings - a few drops in the bucket - but anything can help.

Unfortunately, politicians are generally more excited about shutting the barn door after the horses have left. A little regulation when speculative fever is high is preferable to wholesale regulation after the crisis has begun. This is hardly the first debt crisis that ended up with taxpayers footing the bill, and unlikely to be the last.