Wall Street Bailout Fails in Congress

The House of Representatives voted down the $700B Wall Street bailout package earlier today.

Good! Congressmen felt the wrath of the American voters they are about to face on November 4th, and that's a very healthy impulse. This bill was a rotten turkey, opposed by nearly all professional economists, with some saying it could do more harm than good.

The Fed, Treasury, and FDIC have ample tools at their disposal. (Paulson begrudgingly conceded as much.) It's ridiculous for political leaders to try to ram this turkey through without a fully transparent process, including public hearings, expert testimony, committee votes and review, open amendments, and open debate. The American financial system is suffering due to a lack of transparency, so why would anyone think that a closed political process could solve that?

Japan faced similar problems with their real estate market several years ago, and the government took a similar path to the one in the Wall Street bailout package. Experts now understand that the Japanese government deepened and lengthened the economic downturn, and Japan still has not recovered. (In fact, Japan is falling into another serious recession now.) Bad companies must fail, wiping out their shareholders and (hopefully) executives. The faster that happens, the more quickly the economy can recover. Otherwise financial companies will pause, waiting for government handouts and not taking the necessary steps promptly to correct their structural problems.

Some politicians seem to think that "painless" is still an option. It's not. This process will be painful. (It will be personally painful, too.) But let's get this process going, now, so we can recover more quickly. The Treasury, Fed, and FDIC still have awesome powers to provide liquidity, together with their central bank allies around the world, but solvency issues must be allowed to correct themselves. The rest of the U.S. Government can take a few simple steps: increasing unemployment insurance benefits, adopting the Obama tax plan (which would be highly stimulative since it is progressive), raising FDIC insurance limits to $250,000 and providing 90% coverage up to $1,000,000, indexing capital gains and equalizing the rate with ordinary income, and a few other, noncontroversial steps.