The voters will sort out the blame on all this in November. Anger at Washington will feed a hunger for change, and it’s likely to fall harder on the GOP as the party that holds the White House. But for the next president and the next Congress, whatever its makeup, Monday’s performance should be looked at as an example of what it was, a performance designed to undermine the public’s confidence in its elected leadership.

—An article in today’s Washington Post by Dan Balz

…there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid.

It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.

Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis how A can lead to B, B to C and C to Depression.

Read it all.

Update: A related article from AP is here.

In a surprise move to resurrect President Bush’s $700 billion Wall Street rescue plan, Senate leaders slated a vote on the measure for Wednesday – but added a tax cut plan already rejected by the House. Majority Leader Harry Reid, D-Nev., and GOP Leader Mitch McConnell of Kentucky unveiled the plan Tuesday.

The Senate plan would also raise federal deposit insurance limits to $250,000 from $100,000, as called for by the two presidential nominees only hours earlier.

The move to add a tax legislation – including a set of popular business tax breaks – risked a backlash from House Democrats insisting they be paid for with tax increases elsewhere.

But by also adding legislation to prevent more than 20 million middle-class taxpayers from feeling the bite of the alternative minimum tax, the step could build momentum for the Wall Street bailout from House Republicans. The presidential candidates Sens. John McCain, R-Ariz., and Barack Obama, D-Ill., intend to fly to Washington for the votes, as does Sen. Joe Biden of Delaware, the Democratic vice presidential candidate.

Read it all.

MARGARET WARNER: And, Jeanne, in fact, we only had 60 percent of the Democrats vote for it, 40 percent against, and only a third of the Republicans. That’s a pretty wide repudiation. What do you think happened? What was behind this?

JEANNE CUMMINGS, Politico.com: Well, I think we had a combination of things going on. We had — ideology was a problem. This was totally against where some of the free-market Republicans would ever want to be.

We had politics at play here. Many of these no votes came from members who are in tight races. And they are really going to need the base to come out.

And I was hearing that their calls were like 99 percent to 1, you know. It was the local community bankers who were saying, “Please do this, because we’re next.” But otherwise it was very negative public response to this.

And then, of course, we had some partisan petulance. I mean, it was sort of Washington at its worst. It was a really toxic mix.

Read it all.

[Kai] Ryssdal: What was it about this bill you didn’t much care for?

[Peter] DeFazio [a democrat from oregon in the House]: Well, I thought the whole premise on which it was based was false, but somehow if the taxpayers borrowed $700 billion and took a bunch of bad debts from Wall Street, that this would bring about liquidity and then ultimately would somehow filter down help Main Street, help housing, help the basic economy. But beyond that, we’ve heard from William Isaacs, head of the FDIC. He ran it during the last, previous greatest financial crisis in the history of America, savings and loan, and he said a couple of simple steps could deal with the bank liquidity issue.

So I think there are practical proposals out there that just weren’t heard. And in addition to that, Paulson didn’t at all get, in my mind, to the underlying part of the economy — the problems in housing and the declining housing market. There are credible economists who said: Hey, if you don’t deal with housing, you may be taking care of this week’s bad securities, but guess what? Next week, if housing goes down another 5 percent, there’s gonna be a whole batch more bad securities out there. You’ve gotta deal with the underlying problems in housing and the underlying problems in the economy.

Read (or listen to) it all.

This is standard politics, but perhaps both could hold off on the blame game until a solution to the immediate crisis is in place. There’s still plenty of time to argue about who caused what, but not much time to keep the economy out of crisis.

Read it all.

What should Congress do now?

First, rescue the money markets and the toxic securities by refinancing the underlying mortgages — rather than bailing out the banks. In the Great Depression, Franklin Roosevelt’s Home Owners Loan Corp., a branch of the government, refinanced one out of every five mortgages. Roosevelt’s administration saved about 1 million Americans from foreclosure. No middlemen got rich.

If we can stop the wave of foreclosures, we brake the collapse in housing prices. The bondholders would get bought out at so many cents on the dollar, just as they would have in the Paulson plan. But with the Kuttner plan, homeowners are the primary beneficiaries. Under Paulson’s approach, the bondholders get bailed out but many homeowners still lose their home or keep paying Mafia mortgage rates. It’s just what you’d expect from a guy who still operates as if he were the chief executive of Goldman Sachs — which Paulson once was.

Second difference: The government should take over failing banks directly and get rid of toxic executives as well as the toxic investments they made.

Read both pieces carefully.

The problem for Washington was that all of this seemed far from the daily lives of American citizens. Congressional leaders came hard up against the “no blank cheque” mentality of ordinary Americans already under pressure from the collapse of the housing market and the down-turn in employment figures. Barney Frank, chairman of the Financial Services Committee, put the situation succinctly: “It is hard to get political credit for something that has not yet happened.” This helped Republicans to argue that economic freedom means letting businesses go to the wall, conveniently ignoring the likely consequences. Congressmen of both stripes were also irritated by what they saw as Mr Paulson’s excessive demands for authority. Not everyone was attracted to the idea of Mr Paulson as de facto President.

A second aspect of the problem is that this is 2008, not 1929. Events in global markets move at internet speed. It took more than six months to pass the legislation to set up the Restoration Trust Corporation in 1989, and that was not an election year. This week alone has marked the bailouts of banks in six countries. It took seconds from the congressional vote for the Dow Jones to start falling. The fallout will be felt globally, but the world was looking to America for a solution. If America’s elected representatives do not realise the potential damage they have caused, they need to think again ”“ fast.

Read it all.

For the second time in less than a week, Washington has thumbed its nose at Wall Street and in the process might just have brought the global financial system to the brink.

The defeat of the $700bn banking bailout plan by the House of Representatives today was a much larger and more stunning blow than the disorderly collapse of last week’s White House meeting in which the bailout plan unravelled for the first time.

Negotiators had worked all weekend to accommodate some of the doubts of conservative Republicans who objected to such a massive outlay of taxpayer funds on the financial sector. But in the end the largely superficial changes made to the original plan were not enough and more than three-quarters of Republicans voted against. Worse, perhaps, more than a third of Democrats also opposed the measure, which they saw as a handout to rich bankers on Wall Street.

Now, in effect, the politicians have called the bluff of Hank Paulson, the US Treasury Secretary. Since he first proposed the plan ten days ago he has repeatedly warned that its passage was absolutely essential to avoid a complete freezing-up of the US financial system.

Read it all.

In a stunning vote that shocked the capital and worldwide markets, the House on Monday defeated a $700 billion emergency rescue for the nation’s financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it. The Dow Jones industrials plunged nearly 800 points, the most ever for a single day.

Democratic and Republican leaders alike pledged to try again, though the Democrats said GOP lawmakers needed to provide more votes. Bush huddled with his economic advisers about a next step. The House was to reconvene on Thursday instead of adjourning for the year as planned.

Read it all.

The stock market is falling like a rock. Credit markets remain frozen.

Right now it is 206 yes,-227 no.

218 needed to pass. they are keeping the vote open and trying to persuade people who voted no on the floor to change their vote.

How did they come up with 700 billion dollar figure for the bailout?

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

—Forbes

[BOB] ABERNETHY: Father Martin, just step back just a minute and, quickly, what are the big lessons here about, maybe, things that go beyond just the bailout itself?

Fr. [JIM] MARTIN: Well, I think one thing is that, you know, these assets were highly valued because they were risky. In economics there’s a risk-return relationship, and I think one of the things we see that hasn’t been commented on is just that the CEOs sort of lost the sense of personal responsibility to their investors and, you know, to the people they were giving mortgages to. I mean, you know, you check out a lot of magazines in the past few months, they were talking about the coming collapse. It’s not, you know, it’s not as if people didn’t know this was going to happen, and yet the investment was still being made. So I think there’s a certain level, I agree with Jim Wallis, of personal responsibility that needs to be accepted by the CEOs. So in other words what I’m saying is it points out is that, you know, people really do have the responsibility for making conscientious decisions in the workplace.

[BOB] ABERNETHY: Jim Wallis, quickly.

Rev. [JIM] WALLIS: I think there’s an opportunity here for redemption. If our congregations begin to look at these questions — we ought to have adult Sunday school curriculum on money and how to be responsible in our economic lives. That could be a real opportunity for the pulpit to get involved here and start talking about what Christians and Jews and Muslims ought to do in responsible ways about how they live.

Read or watch it all.

Check it out.

Despite all the constraints Congress supposedly wrapped around him, Treasury Secretary Henry M. Paulson is about to become the most powerful mortgage financier of the modern era — most likely of any era.

Buried beneath the 100-plus pages of detail that Paulson’s financial rescue plan has picked up during its 10-day journey from a Bush administration wish list to a bipartisan congressional compromise is the striking fact that the Treasury secretary got almost everything he sought — an eventual $700 billion and the authority to spend it largely as he sees fit.

Read it all.

Update: An article from the New York Times on the same theme is here.

But we should be under no illusions that, even if it works as well as its authors hope (a large aspiration), it is already too late to avert a serious economic downturn ”” not just for the US, but for the world and, like the residents of New Orleans that fateful weekend three years ago, we seem ill-prepared for what is about to hit us.

I say this with great reluctance. It is no business of journalists (who, as someone once said, are like harlots, who wield power without responsibility) to go around scaring people. What’s more, until a few months ago I’ve been a relative optimist, convinced that we would get through this with not much worse than the kind of mild recession we’ve seen in the past 20 years. Now I think it might be time to panic.

The US is already in a recession that, even if financial conditions returned to normal today, would still be very unpleasant. In the quarter that ends tomorrow, it seems almost certain that US total output declined. Consumer spending and investment have been alarmingly weak in the past two months. On Friday we are quite likely to get another depressing report on the labour market, expected to show the ninth straight month of job declines in September. The housing market still seems to be getting worse, with sales falling faster than new construction, adding to the excess supply.

Britain’s economic activity is already declining, as is that of most of the big eurozone countries. So much for “decoupling”. We may have got into this predicament by different routes, but we’re all going the same way.

Read it all.

The 110 page pdf of the whole proposed bill is here.

106 pages-oh my.

The Financial Times summarizes:

The US financial services sector could be forced to reimburse the US government for any losses on its $700bn rescue plan under a breakthrough agreement that paves the way for congressional approval as early as Monday.

After a weekend of frenzied talks, Hank Paulson, the Treasury secretary, and Nancy Pelosi, the Democratic House speaker, announced early on Sunday that a tentative deal had been reached authorising the government to buy up to $700bn of troubled assets from financial institutions.

The more I understand about the current financial situation, the more I’m persuaded that some form of government bailout of the financial sector really is necessary. This is not to say that I love the Bernanke-Paulson plan. If time permitted and private financing were avilable, I’d very much prefer a plan that looked more like the Chrysler bailout, in which the government acted as a guarantor rather than a principal.

What’s not acceptable, however, are the barnacles already attaching themselves to the bailout.

Read it all.

Check it out.

I see over on Intrade that the chances of the bailout bill passing have sunk below 50 and are currently at 48.9.

A breakthrough came when Democrats agreed to incorporate a GOP demand ”” letting the government insure some bad home loans rather than buy them ”” designed to limit the amount of federal money used in the rescue.

Another important bargain, vital to attracting support from centrist Democrats and Republicans who are fiscal hawks, would require that the government, after five years, submit a plan to Congress on how to recoup any losses.

Lawmakers could block half the money and force the president to jump through some hoops before using it all. The government could get at $250 billion immediately, $100 billion more if the president certified it was necessary, and the last $350 billion with a separate certification ”” and subject to a congressional resolution of disapproval.

Still, the resolution could be vetoed by the president, meaning it would take extra-large congressional majorities to stop it.

The presidential nominees came behind the outlines of the bailout.

Read it all.

Yes, this bailout is necessary. This is a credit crisis, and credit crises involve a breakdown in confidence that leads to no one lending to anyone. You don’t fool around with a credit crisis. You have to overwhelm it with capital. Unfortunately, some people who don’t deserve it will be rescued. But, more importantly, those who had nothing to do with it will be spared devastation. You have to save the system.

But that is not the point of this column. The point is, we don’t just need a bailout. We need a buildup. We need to get back to making stuff, based on real engineering not just financial engineering. We need to get back to a world where people are able to realize the American Dream ”” a house with a yard ”” because they have built something with their hands, not because they got a “liar loan” from an underregulated bank with no money down and nothing to pay for two years. The American Dream is an aspiration, not an entitlement.

When I need reminding of the real foundations of the American Dream, I talk to my Indian-American immigrant friends who have come here to start new companies ”” friends like K.R. Sridhar, the founder of Bloom Energy. He e-mailed me a pep talk in the midst of this financial crisis ”” a note about the difference between surviving and thriving.

“Infants and the elderly who are disabled obsess about survival,” said Sridhar. “As a nation, if we just focus on survival, the demise of our leadership is imminent. We are thrivers. Thrivers are constantly looking for new opportunities to seize and lead and be No. 1.” That is what America is about.

Read the whole thing.

Congressional leaders and the Bush administration this morning said they had struck an accord to insert the government deeply into the nation’s financial markets, agreeing to spend up to $700 billion to relieve Wall Street of troubled assets backed by faltering home mortgages.

House and Senate negotiators from both parties emerged with Treasury Secretary Henry M. Paulson Jr. at 12:30 a.m. from a marathon session in the Capitol to announce that they had reached a tentative agreement on a proposal to give Paulson broad authority to organize one of the biggest government interventions in the private sector since the Great Depression.

Full details of the plan were not immediately available. Lawmakers said their staffs would be working through the night to assemble the package and post it on the Internet.

Read it all.

It has become fashionable to fret that the current crisis on Wall Street marks the end of American capitalism as we know it. “This massive bailout is not the solution,” Sen. Jim Bunning (R-Ky.) warned Tuesday. “It is financial socialism, and it is un-American.” It is neither. The near-collapse of the U.S. financial system and Washington’s sudden and massive intervention to try to shore it up certainly mark a major turning point, but a bailout would represent a thoroughly American next step for our economic system — and one that will probably lead to better times.

Americans may assume that the basics of capitalism have been firmly established here since time immemorial, but historical cataclysms such as the Great Depression strongly suggest otherwise. Simply put, capitalism evolves. And we need to understand its trajectory if we are to bring our economic system into greater accord with the other great source of American strength: the best principles of our democracy.

No, our economy is not a shining example of pure unfettered market forces. It never has been. In his farewell address back in 1796, 20 years after the publication of Adam Smith’s “The Wealth of Nations,” George Washington defined the new republic’s own distinctive national economic sensibility: “Our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing.” From the outset, Washington envisioned some government involvement in the commercial system, even as he recognized that commerce should belong to the people.

Capitalism is not really the best word to describe this arrangement. (The term was coined in the late 19th century as a way to describe the ideological opposite of communism.) Some decades later, people began to use a better term, “the American system,” in which the government involved itself in the economy primarily to develop what we would now call infrastructure — highways, canals, railroads — but otherwise let economic liberty prevail. I prefer to call this spectacularly successful arrangement “financial democracy” — a largely free system in which the U.S. government’s role is to help citizens achieve their best potential, using all the economic weapons that our financial arsenal can provide.

So is the government’s bailout a major departure? Hardly. Today’s federal involvement offers bailouts as a strictly temporary measure to prevent a system-wide financial calamity. This is entirely in keeping with our basic principles — as long as the bailout promotes, rather than hinders, financial democracy.

Read it all.

After a marathon round of negotiations that ended in the predawn hours on Saturday, Congressional leaders and Bush administration officials said they were nearing consensus on a $700 billion rescue plan for the nation’s financial system, and that a deal might be announced Sunday evening before the markets open in Asia….

On the bailout, Mr. Reid said, “We hope that sometime tomorrow evening we can announce there has been some kind of agreement in principle,” adding that it was crucial to send a reassuring message to the financial markets. “We may not have another day.”

Senator Judd Gregg, Republican of New Hampshire, who is the lead negotiator for Senate Republicans, also said there was an urgent need for action: “Failure to do this will lead to a massive fiscal meltdown in the credit markets, which will lead immediately to a meltdown on Main Street.”

Read it all.

KAI RYSSDAL: Been a heck of a week, hasn’t it? The deal was on. Then it was off. The economy was collapsing, but not yet it seems. We’re going to take a couple of minutes here and try to digest all that’s happened.

Katie Benner’s with Fortune magazine. David Leonhardt’s at The New York Times…

RYSSDAL: David, do you get a sense of anger out there when you do your reporting?

LEONHARDT: I definitely do, and I was talking to a friend of mine who does more reporting out in the country, as opposed to in Washington and New York, and he said that he thinks there’s a good chance that people in Washington and, to some extent, New York, are underestimating the level of the anger there. And I think, to some extent, that is a criticism of Bernanke and Paulson, because I think they’ve done a good job of explaining the stakes here to members of Congress; I don’t think they’ve done a good job at all of explaining to the public what they’re afraid of. And so, in the end, this really does feel like a Wall Street bailout to a lot of people. Which it is, to some extent, but it does not feel like something that the Fed and the Treasury feel that is necessary in order to stem a credit crisis that very much will affect Main Street.

RYSSDAL: Katie, what stands out to you about the way this whole thing has evolved, from a week ago yesterday when Bernanke and Paulson had that first meeting up on Capitol Hill?

BENNER: The crushing speed with which things have unfolded, and it sort of feels like that moment after Enron, where people were piling in to try to create legislation, or to create rules, to stem a problem because people were angry. This is that times a thousand, and we’re not even sure what they’re doing. Nobody really understands the plan.

Read or listen to it all.

I mean, so that — if you say — just say for purposes of argument that the poison was put in by Fannie Mae and Freddie Mac, by putting them in subprimes, and they were not a good investment.

Well, they just spread like a virus, like a global virus, by the securitization of them and selling them as securities. And so now you’ve got all these other financial institutions who have a stake in them.

And David’s point about, what do you price them at? I mean, if there’s one place where the government ought to be able to exercise some leverage, it’s establishing what the price is. I mean, they ought to be able to go in. I mean, they ought to be able to go in low.

DAVID BROOKS: With one bidder, it’s hard to get a price. Steve Pearlstein of the Washington Post had a good observation, which is you can either punish Wall Street or you can stabilize Wall Street. You can’t do both. We all want to punish Wall Street, but we just can’t do it.

And I think the argument for Republicans is, “You may hate this. A lot of people hate this. But serious people like Bernanke, who are not prone to nationalizing industries, think they’re in a panic.”

And the other thing that’s happening today, by the way, is a lot of community banks are calling up their House members. And the tide of opinion may be against this, but among the bankers and increasingly local businesspeople, they are calling up and saying, “You guys better do something.”

Read it all.