WASHINGTON — Though a package of changes pushed by policymakers to stabilize the housing market is billed as a sweeping and systemic way to solve the crisis, it includes several ad hoc provisions that will need to be revisited within two years.
Chief among them is the proposed hike in deposit insurance to $250,000 per depositor, which was added to the bailout bill expected to pass the Senate Wednesday. The provision is meant to stabilize the banking sector and would last for only one year, but observers agreed that lawmakers would make it permanent before it expired.
"There's no going back on that. It will get renewed for sure," said Lawrence White, a New York University professor and former member of the Federal Home Loan Bank Board.
The situation is much the same for the fund to be created for the Treasury Department to guarantee money market mutual funds. That provision is also due to expire in one year, but policymakers are likely to face questions about whether letting it expire would confuse investors and increase market uncertainty.
Even the centerpiece of the bill — a facility to buy and hold $700 billion of troubled assets — has an expiration date of two years.
"The whole rescue package is essentially temporary," said Camden Fine, the president and chief executive of the Independent Community Bankers of America. "There's nothing permanent in the entire package."
The expiration dates ensure that Congress will have to reassess many of the fixes as time goes on, likely as part of a debate next year on restructuring the financial regulatory system.
"The one-year deadline creates a requirement for Congress to ensure a hard look at the Deposit Insurance Fund, and now the money market funds, when they take up restructuring legislation," said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc.
Of the temporary changes proposed in recent days, observers were most uniformly in agreement that lawmakers cannot afford to return the Federal Deposit Insurance Corp.'s coverage to $100,000.
Under the Senate bill, the increase would begin Jan. 1 and end a year later. The FDIC — which is scheduled to propose 2009 deposit insurance premiums Tuesday — would have unlimited borrowing access from Treasury to fund the increase, but it could not use the higher coverage as a factor in setting assessments.
Industry representatives argue that depositors are likely to become anxious if large portions of their deposits are insured one day and uninsured the next. The result could be deposit runs before the expiration date, potentially destabilizing the system.
The legislation does not provide "an exit strategy for how you undo what is being done," Mr. Fine said. "What are you going to do on Dec. 31, 2009? When the bank closes on Dec. 31 for the holiday and reopens on Jan. 1, does it drag out its FDIC signs that say, 'You're only insured up to $100,000?' That's a big problem."
James Barth, a finance professor at Auburn University and a senior fellow at the Milken Institute, said an extension of the deposit insurance limit is more likely than extending the guarantee for money-market funds.
Congress may decide "down the road with some sort of legislation next year that perhaps $250,000 is not such a bad limit," he said.
But longer-term protection for money-market funds means "they become direct substitutes for insured deposits at commercial banks. … People are meant to take some risk presumably. The government can't guarantee everything. Then, they'd have to levy premiums on money-market mutual funds."
Though the Senate bill would ban the FDIC from using the expanded coverage as a reason to increase premiums, that is not likely to last forever, either. That would ultimately leave banks footing the bill for the increase.
Diane Casey-Landry, the American Bankers Association's chief operating officer, said how much premiums increase will likely determine how bankers lobby on the issue next year.
"The last time we had this debate about increasing deposit insurance, there were sentiments for increasing it, but balancing it with what the cost is to the industry, and what does this mean to the consumers?" Ms. Casey-Landry said. "Does it help you attract deposits? Does it not? In some ways, we are getting a chance to test it out."
A Treasury fund to guarantee certain money market mutual funds could face the same test. Currently the program only guarantees such funds in place on or before Sept. 19, when the Treasury announced it would create a backstop. The $50 billion fund is due to expire next year.
Unlike the deposit insurance increase, expanding that fund and making it permanent would not require an act of Congress. If the housing crisis persisted, the Treasury would face pressure to keep the program in place. And even if the market returned to normal, questions would come up about whether withdrawing coverage could be destabilizing.
"The next Congress will be faced with the very real issue of 'How do you now structure the FDIC insurance and money market mutual fund insurance to either exit from the increased levels or make them permanent in some form or fashion?' " Mr. Fine said.
