On Friday, Congress and President Bush enacted the $700-billion bailout package last week after warning skeptics that the stimulus package was necessary to avoid financial calamity.

But yesterday, the stock market reacted with anything but relief. At one point, the S&P 500 index was down 8 percent in one trading day.

Does that mean the bailout package isn’t the solution to this financial crisis? What should the government do now? Are we headed toward another depression?

We posed those questions, and some others about the banking crisis, to a handful of economics professors at Brown and Bryant universities. Their answers were varied, and some even questioned whether the plan was the right way to address the problem. But they all seemed to agree that it is too soon to pass judgment on the success of the bailout package, and that important details about how it will be carried out remain to be resolved.

David N. Weil, professor of economics at Brown University, said it was clear that nothing substantive would happen for a month or two. “That’s how long it will take to set up the machinery to buy all of these toxic assets,” he said.

Also, he said that the bailout wasn’t viewed as a “magic fix.”

“If it works well, it is part of the solution to the freezing up of credit markets we’re facing now and will be part of a package of measures that will prevent something really bad from happening,” he said.

There’s just as much reason to believe that today as there was last week, he said.

“I don’t think this was ever regarded as a magic bullet,” said M. Cary Collins, associate professor of finance at Bryant, who was also a visiting scholar at the U.S. Department of the Treasury.

“The question is: What did we expect it to fix? If we expected it to fix the financial structure and we expected it to bolster confidence in our financial system, then it may be modestly effective,” Collins said.

“If we expected it to turn around our economy, I don’t think that’s going to happen.”

“I don’t think we’ve enacted the right plan,” he added. “… Invariably, in these efforts, we wind up bailing out some of the lenders who honestly shouldn’t be bailed out.”

Collins’ colleague, Peter Nigro, added that some are calling it the “cash for trash” plan.

“We’re spending $700 billion and we’re basically buying bad assets from anyone –– any financial institution that wants to play.” That includes institutions that are healthy and don’t need the help, said Nigro, a professor of finance at Bryant and former senior financial economist at the Treasury Department

“You can’t save everybody,” he said. “The Fed needs to have a more targeted plan.”

What should the government do instead?

Nigro said it should have followed the lead of famed investor Warren Buffett, who agreed last week to invest $5 billion in the investment bank Goldman Sachs.

By investing in these critical institutions rather than to simply buy their bad assets, the government would be aligning the interests of the taxpayers with the shareholders of the investment banks. It would give the banks the liquidity they need and help them deal with the bad debt.

“There’s no plan the government could come up with that was going to make the amount of outstanding bad assets go away,” Nigro said. “We have toxic assets in the system.”

Ross Levine, the James and Merryl Tisch professor of economics at Brown University, said it’s unclear what specific strategies the government will employ in carrying out the bailout, and that has led to uncertainty among investors. “This uncertainly reduces the price the investors are willing to pay for shares in companies.”

“Furthermore, the U.S. and global economies are weakening as the extent of the financial mess affects financial institutions and corporations around the world,” Levine said. “Thus, future economic activity looks bleak, suggesting low profits, with correspondingly lower stock prices.”

Levine also said that because the bailout is “poorly defined” and Congress chose to add an extra $150 billion in “pork” spending to the bill in the midst of a financial crisis, “the markets question the leadership in Washington.”

“How the country resolves the crisis will have enormous implications for whether we construct a sound financial system that supports growth and opportunity, or whether we construct a damaged financial system that hinders economic expansion for many years to come,” he said.

A key aspect of the bailout plan has yet to be determined. That is, how to value the bad debt the government plans to buy, Levine said. There are two broad approaches: the government can allow the banks to determine the value, which is likely to be too high; or the government can allow the market to set the price, which may be very low.

There are pitfalls to both approaches. If the “toxic” securities are priced too high, the government, and therefore taxpayers, may be paying too much. And it could allow some insolvent institutions to keep operating for a time, even if their owners know that the firms’ liabilities exceed its assets. That could lead to a situation where the institution inflates its profits, bonuses and dividends, taking capital away at a time when it needs it.

On the other hand, if the toxic debt is priced low, he said, some banks may become insolvent. And then the government would be faced with deciding whether to take over such banks, “clean” them up by taking out the bad assets, and then resell them.

None of the academics suggested we are headed toward another economic depression.

“That’s a remote possibility,” said Weil of Brown.

“But the difference between now and the Great Depression is the Fed and Treasury and their counterparts abroad are actively working to keep the banking system functioning. Were they somehow to fail, then we could see something that bad. But I don’t think they’re going to fail.”

Levine, also of Brown, said that a worsening economy certainly is possible.

“We are headed into very bad times,” Levine said. “In the Depression, unemployment was 25 percent and defaults on mortgages were 40 percent. We’re not going there.”

tbarmann@projo.com