Bring Congress Back into Session After the Election...

...and go for the Swedish plan: nationalize the insolvent large financial institutions: dare Bush to veto that after the election.

Vote Count:

Democrats: 141 Yea, 94 Nay
Republican: 66 Yea, 132 Nay.

This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt...

Comments

[Funkhauser]

Darnit Nancy! Close the vote! Throw it in their faces: see that DJIA? You did this!

(Her DC office line keeps being busy.)
(Not to echo Falwell too much.)

[jhh]

I never thought we 'd actually be in this position. Gulp. With regards to the GOP, Brad is right, this is the equivalent of war. Cato put it famously by beginning every speech with "Carthago delenda est! " ("Carthage must be destroyed.")

[Matt Johansson]

Glad that Sweden can contribute a positive example here. Just one thing. The swedish bailout plan was passed with a center-right government in place with a sympathetic socialist opposition.

So this is not socialism but really an attempt to save the market economy. And it succeeded.

Mats Johansson
Stockholm
Sweden

[Neal]

Politics first---how else can you remove the sign "irresponsible spender" from the elephant and hang it on the donkey's ears.

[Steve Jones]

...and don't forget to urinate on the ashes. I used to be a Republican - former Republicans can be as mean as former smokers.

[Leah]

Can anyone figure out another word to use besides "nationalize." This is the good ol' US of A, after all.

[Leah]

Can anyone figure out another word to use besides "nationalize." This is the good ol' US of A, after all.

[Leah]

Can anyone figure out another word to use besides "nationalize." This is the good ol' US of A, after all.

[Cal]

I hope that the people on Wall Street now realize that most of the coalition of crazies that the Republicans have cobbled together is not their friend. Their campaign money and lobbying money should be directed at keeping these people out of office for a long long time.

[ogmb]

Burn Pelosi along with it. How fucking stupid do you have to be to let Lucy pull the ball on you again?

[Davis X. Machina]

This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt...

People will be angry enough to do it, but by January they won't be able to afford the salt, or the rental of the plough.

Revenge is a dish best eaten cold, perhaps, but not a nourishing diet for long.

[jim]

After the election? Can action wait until then? The quarter ends tomorrow. Tomorrow and Wednesday are going to be very interesting days in lower Manhattan (not that today is uninteresting).

[Neal]

Consider:

Wachovia with 300 billion in credit derivatives-now folded into Citi.

HSBC with 1 trillion.

Citi and Bank of America with 3 trillion each.

JPMorgan with 8 trillion.

Which is too big to fail?

[Alexey]

the thing is that this is NO LONGER "good old US of A"... welcome to the post-US world... today's events just nail the fact that the US no longer deserves to be regarded as a responsible issuer of reserve currency or, to that end, a leading world economic nation... i wonder what happens to US GDP in the next 1-2 years after the 40% of that GDP contributed by the financial sector are halved or worse...

[Joe]

Can't disagree with your urge to burn down the GOP. But maybe we should also put the fire to the 94 congressional dems that also voted Nay. How did the dem party leadership lose so many of their own?

[democracy in action]

why so glum chum?

and you wonder why you get matched against Grover Norquist on TV? Maybe it has something to do with TV producers actually reading your blog vs. your academic stuff.

This country is broke no matter what. The key question was if the bailout would do what it was supposed to, and no bailout will do that without draining the fever swamp of derivatives/credit default swaps. Instead, the "bailout" suspended mark to market in favor of mark to fantasy and reduced bank reserve requirements to 0.

and there were Democrats voting against the measure too.

[Davis X. Machina]

"George W. Bush is the prime mover behind this bailout."

He's not the prime mover behind his morning trip to the toilet.

[Alex]

I wonder what are the arrangements for the 40% of the Democratic Party that voted "No" on the Paulson proposal in this DeLong-Cato_the_Elder plan of burning the Republican Party.

[4degresnord]

Think you can wait for a new congress? Are you raving mad ! Considering the behavior of credit markets worldwide today, there likely will be no banking system to nationalize, Swedish-wise or any-wise by the end of the week.

[Patrick]

Given that a vast majority of the public hated this bailout, the Repubs probably come out ahead on this one.
Even if that is the wrong move economically, it plays well politically.

[j h woodyatt]

"Can anyone figure out another word to use besides 'nationalize.'"

How about "seize?"

[Kate G.]

Over at If I Ran the Zoo http://tehipitetom.blogspot.com/2008/09/common-sense-capitalism-not-emergency.html Shiltone proposes "Common Sense Capitalism" and I proposed "share the risks? share the rewards" as a little step towards a new way of thinking about "nationalization." Brad proposes what I wanted all along, from a better class of dems. I wanted them to offer to back the bailout along with the most draconian set of regulations and buy outs imaginable--everything from CEO pay to the end of lobbying on financial matters. Personally, I would have liked Paulson and Bernake to have been executed as well pour encourager les autres. I'd love the dems to take Brad's advice now but a smarter and more progressive set would already have done the job.

Kate G.

[Kate G.]

Over at If I Ran the Zoo http://tehipitetom.blogspot.com/2008/09/common-sense-capitalism-not-emergency.html Shiltone proposes "Common Sense Capitalism" and I proposed "share the risks? share the rewards" as a little step towards a new way of thinking about "nationalization." Brad proposes what I wanted all along, from a better class of dems. I wanted them to offer to back the bailout along with the most draconian set of regulations and buy outs imaginable--everything from CEO pay to the end of lobbying on financial matters. Personally, I would have liked Paulson and Bernake to have been executed as well pour encourager les autres. I'd love the dems to take Brad's advice now but a smarter and more progressive set would already have done the job.

Kate G.

[Brock]

Is there a list online of the Democrats who voted nay?

[Mandos]

Oooooh, that wascawwy pubwic.

[Mandos]

The phones were off the hook against this bailout. I'm sorry to say it, but democracy finally worked for once.

[eatbees]

"This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt..."

In fairness, people like Kucinich as well as Blue Dog Democrats like my Representative, Heath Shuler, also opposed this bill. At one point, only 11 votes were needed to switch over to change the outcome, but Pelosi didn't have those votes from among 90+ Democrats who voted Nay. I agree that Republicans are more to blame, because by their logic, lower taxes and less market oversight are the solution, when that's what got us here in the first place. But I would have been happy to have a bill today with those 11 extra Democratic votes.

[fgw]

Remarkable that the current NYT and WaPo articles do not explicitly break down the vote by party. You might think a headline along the lines of: "House Republicans shoot down rescue plan, Dow Jones in downward spiral", or "Republicans in disarray, ignore appeals from President and party leaders" would come to mind. Guess not.
In any case, I'm afraid the Republicans would like nothing better than to run the House and Senate races against a "swedish plan" Get ready for McCain to turn on a dime, its his only chance.

[Uncle Jeffy]

"...burned, razed to the ground, and the furrows sown with salt."

Man! That's harsh!

Personally, I would envision the fate that Mason Verger had in mind for Hannibal Lecter. But where are we going to find hogs that are (a) big enough, and (b) aren't already members of the Republican party?

[mike]

I'm 55 and have never ever said anything good about the Republican party before. But I sure will now. God bless them, and thanks from the bottom of my heart. This is the end of any credibility the Democrats may once have had. To support that bill goes beyond irresponsibility and dishonesty. It was scandalous in the extreme. It was very obvious that the only people who wanted or supported it were those with corporate investments. I can't find a single person who doesn't own stock and who didn't stand to directly profit from it that supported it. A tremendous victory for the American people. And this will be very good for the economy in the long run. Now the system will collapse and we can begin to rebuild on a rational basis.

[low-tech cyclist]

"Is there a list online of the Democrats who voted nay?"

Brock (and anyone else interested), the House roll call vote is at the following link:

http://clerk.house.gov/evs/2008/roll674.xml

[mike]

I'm 55 and have never ever said anything good about the Republican party before. But I sure will now. God bless them, and thanks from the bottom of my heart. This is the end of any credibility the Democrats may once have had. To support that bill goes beyond irresponsibility and dishonesty. It was scandalous in the extreme. It was very obvious that the only people who wanted or supported it were those with corporate investments. I can't find a single person who doesn't own stock and who didn't stand to directly profit from it that supported it. A tremendous victory for the American people. And this will be very good for the economy in the long run. Now the system will collapse and we can begin to rebuild on a rational basis.

[Matt Johansson]

Another thing. In Europe, if a government would lose a vote this important it would have to resign immediately. You have an election in just a month so it's no problem, but if this vote had been in midterm you would be stuck with a government without the support of the parliament for another two years.

[Mandos]

40% voted against the bill which is probably small compared to the size of the (D) electorate against it, not to mention the (R).

The latter two facts make me happy.

[lemuel pitkin]

Awesome.

Whatever plan passes eventually, it will be better than what just got voted down. And just as importantly, a lot of very rich people are very unhappy right now.

A good day.

[dlcox1958]

OK, learned colleagues on this site, a few questions from a scientist who is not an economist, but concerned from the sidelines.

1) I appreciate the sentiment of this post, Prof. DeLong, but is it not possible that a month is too long to wait in this case? As one example of evidence I cite this post on DailyKos, which has some corroboratory remarks in the comments:

Credit lines evaporating for car dealerships (link is
http://www.dailykos.com/story/2008/9/29/141752/273).

2) It is clear that the Wall street crisis is being driven directly by the problems in derivatives, with the ultimate source of problems being mortgage failures, and that the problem for the Wall street banks is holding too many credit default swap and/or other derivative obligations coming due for payout, while the largest winners would be hedge funds, who hold lots of the speculative buys of CDS, ripe for payout.

SO there is this concern out there that the Oct. 1 day when hedge fund investors can call in payments could be what pushes the economy off the cliff. Is this a legitimate concern, or more fearmongering, and if it is legitimate, is their any legislative action which could effectively freeze hedge fund action until the crisis clears?

[Colin Danby]

NYT has a list of votes.

Interesting to see how it polarizes in comments. People, the house is on fire and you're worried about water damage from trying to put it out.

4deg is right that there may be less time to play with than people think.
http://www.bloomberg.com/apps/news?pid=20601009&sid=ax897imBfjfY&refer=bonds
TED at 3.3, 3-month Libor at 3.88. We could see a lot of disorderly deleveraging and collapse in a short time, irreversible changes in the sense that you can't come back 2 months later with a better bailout and patch it all up.

[Sandy]

Are we now headed for a global recession?
EU is where US was about an year and half ago..
And just look at thrashing that commodities have got today (expected weaker global demand)

[j h woodyatt]

"How did Nancy Pelosi screw up this badly?"

Consider this from Animal House (1978):

D-Day: Hey, quit your blubberin'. When I get through with this baby you won't even recognize it.
Otter: Flounder, you can't spend your whole life worrying about your mistakes! You fucked up - you trusted us! Hey, make the best of it! Maybe we can help.
Flounder: [crying] That's easy for you to say! What am I going to tell Fred?
Otter: I'll tell you what. We'll tell Fred you were doing a great job taking care of his car, but you parked it out back last night and in the morning, it was gone. We report it to the police, D-Day takes care of the wreck, the insurance company buys your brother a new car.
Flounder: Will that work?
Otter: Hey, it's gotta work better than the truth.
Bluto: [thrusting six-pack into Flounder's hands] My advice to you is to start drinking heavily.
Otter: Better listen to him, Flounder, he's in pre-med.
D-Day: [firing up blow-torch] There you go now, just leave everything to me.

The analogy writes itself.

[Mandos]

No, the house is not on fire. This is a stickup. If we're left vulnerable to having to PAY the people who BENEFITED from bringing this about, then that's what it is.

[Shander]

Stop using credit expansion as a means for full employment.

That idea of mainstream ecomomists got us into this mess and vastly favored people making money as agents of other peoples money rather than principals who were moderate in their borrowing and unwilling to profit off of other peoples money without being 100% at risk on the margin.

[Jon H]

How about giving consumers an incentive to put money into savings accounts by subsidizing high (~8%) interest rates?

$1 trillion would go a long way in that approach, as it would cover interest on $12.5 trillion in deposits.

And the money wouldn't be funneled right to the big banks, but would trickle up.

[pgl]

Shanda? Where you one of President Hoover's economic advisors - as it seems he took your council back in the early 1930's?

[Jon H]

Er, I mean subsidizing high interest rates specifically on new special savings accounts, with no minimum balance, so poor folks could take part without having $10k to save.

[Solon in CA]

Before you scream too much about Democratic "defections" on the vote...if I were playing in Nancy's shoes I would have required enough dems to vote nay, so that the headlines read "republican majority supports bail out bill" otherwise you are just begging for the republicans to play populist and anti-gov't. Now we have no bill, and so we'll see just how much more dire things can turn before action becomes popular/needed/too late. -S

[Mitchell Young]

How about the British model? Nationalize the bank, send the malefactors packing (or perhaps give them a loaded revolve and usher them into a closet), examine their books. Sell off the good assets, use the proceeds to help sort the bad assets, get the thing back in private hands. If you must intervene, this seems much more reasonable that playing this cat and mouse BS or reverse mortgage Kubuki with the taxpayer eventually buying all the crap debt the institutions have accumulated, leaving them fancy free with pristine balance sheets.

[jackson]

Nancy Pelosi played this just right. The Republicans needed to come on board to have this bill pass. It would have been insane for the Democrats to pass this bill without a majority of Republicans.

[MaryLou]

Re: all those incensed that Dems also voted against this bill - for the past week, many lefty blog commenters have been railing about the Republican 'trap' whereby the Democrat adults in the room rally around and save the economy. Republicans, meanwhile, stick to their highly principled and biblical stand to vote their consciences, meanwhile letting the free market economy implode as necessary to punish sinners and innocent alike. After the Dems save the day by authorizing government intervention, the Republicans then flog them with it, pinning the hugely unpopular bailout squarely on them. You can't prove a negative, right? How are we to know that the economy would have entered another Great Depression absent the 'Democrat' bailout? And welcome to the White House, President McCain.
To avoid that trap specifically is why Pelosi allowed so many Dems to vote against the bill. She had to have bipartisan support such that Republican fingerprints were all over the bill. They obviously pulled the football away at the last minute, thinking perhaps (hoping?) that Pelosi would twist a few more Dem arms.

[Colin Danby]

Mandos, 12% unemployment won't do a good job of punishing the wicked and rewarding the virtuous either. Your sense of outrage is appropriate, but it's not a useful guide to policy in a moment when none of the alternatives is good.

[macquechoux]

Professor, what do you think of the article in today's Journal by By Mary Anastasia O'Grady?

http://online.wsj.com/article/SB122265260912184329.html

I feel the current plan is very dead and something else has to replace it, right? Wrong?

The Democrats have enough votes to pass anything they want; frankly, if they can't get their own party on board the plan was doomed from the get go. Time to move on.

[jackson]

Nancy Pelosi did this exactly right. She took the Bush/Paulson bill, made it better, then took it to a vote on the House floor. There was no way that the Democrats were going to pass this without very significant Republican support.

[Shane harris]

Note that when describing other country's bank bailouts over the weekend, the word choice was always 'nationalized.' Apparently such a thing is unpossible in Amerika.

[Jon H]

"Mandos, 12% unemployment won't do a good job of punishing the wicked and rewarding the virtuous either."

Heh, I can think of a few employment sectors where 12% would be a good start.

[David A. Spitzley]

I really don't understand the response of a lot of people to this. The real economy could collapse in the blink of an eye if the financial industry gets any more skittish about lending money. Most of the people commenting in favor of the No vote seem to have missed that this bill added equity swaps, CEO pay caps, and two different oversight bodies to the original Paulson plan; this was a better bill, and was far less of an unregulated giveaway than the original (egregious) proposal. Is punishing the shareholders really worth the risk of pushing unemployment into Depression territory?

I'll note that I've got very little money in the stock market, but would prefer not to see the economy go completely down the toilet.

[Bill]

The recent IHT article about the Swedish experience is here:

http://www.iht.com/articles/2008/09/22/business/krona.php?page=1

I'm hoping folks will think about this history seriously. As Johannsen notes in the #3 comment above, we might look at the experience as saving the market system, rather than ending it. The model brought the conservative government and a center-left opposition together and led to taking the institutions back to the market once the regained their health.

The no exceptions equity stake policy kept the public in support.

Some parallels are quite on-point: http://billsrants.typepad.com/my_weblog/2008/09/swedish-experience-outlined.html

[Tom R.]

Only tangentially related to the post, but, now Republicans are trying to lay the blame for this crisis on the Democrats and the policies of past Democratic administrations. See http://www.americanthinker.com/2008/09/barack_obama_and_the_strategy.html.

[lemuel pitkin]

"I really don't understand the response of a lot of people to this. The real economy could collapse in the blink of an eye if the financial industry gets any more skittish about lending money. "

What you don't understand is that many people *don't beleive that the real economy is going to collapse without the bailout.* Given the lack of any clear evidence for this, or concrete explanation of how it would happen, plus the very strong incentive for people with a financial stake in the bailout to play chicken little, I'm skeptical. How does the real economy collapse, exactly?

And if trade credit is cut off, or mortgages are no longer being offered at all, why not have the federal government step in and provide thosee services directly?

Dean Baker -- one of the few economists as smart as Brad DeLong -- has been saying exactly this over at Talking Points Memo.

[Jacob Davies]

My Congressman Pete Stark (CA-13) voted against. He said, "The banks of the Bay Area are in good shape, and they're bailing out Wall Street for $700 billion. It's irresponsible and reckless." I think I agree. I know that the real cost won't be $700 billion, but it's still too much money to be throwing at the screwed-up Wall Street banks. Nationalize them and be done with it. Run them like real banks for a change, then sell them off when they've recovered.

We need a better deal, and what this vote did was demonstrate that the Republicans are going to defect en masse even from a semi-sucky compromise bill. We can't count on them for any significant number of votes to pass this. So, we might as well pass something that satisfies most of the Democrats and shut out what the Republicans want, since they just told us they won't play ball. We already know Bush will sign whatever comes across his desk as long as it looks like it will head off a total collapse.

I don't love the idea of nationalized banks. I just like it a lot more than the idea of handing billions of dollars free and clear to banks that gambled and lost. Sorry, but overleverage, gamble, and lose ought to be a death sentence for a bank - at least in terms of shareholder equity. It would be for any other business. We can preserve the lending functions of the bank when we grab it, and we can strengthen those banks that did not gamble and lose so that they can take some of that lending business. We ought to be able to keep things rolling without just saying "here's the cash for a do-over".

I think we'll be fine. Throw in some Keynesian spending, a Democratic President and Congress that can pass a national healthcare scheme, get us out of Iraq and (dare I dream) cut military spending, it'll work out.

[Michael N. Escobar]

Amen, professor. (Man, it's been too long since I last read this blog.)

[Buy Houses Now!]

Explain to me how buying Wall Street banks' trash at above market prices will cause them to start lending again, rather than parking the windfall in Treasuries or overseas to weather the storm. Are you going to start buying sausage again just because the government bought up all of the poisoned inventory without any sort of regulatory changes to give confidence again? There should be emergency regulatory changes enacted to address the derivative bomb, not a refinance of trash to Treasuries to give Goldman Sachs some extra fat to tide them over for the winter.

[Unsympathetic]

Tom, Republicans such as Limbaugh have been trying to lay the blame for every crisis on the Democrats.. while taking credit for the economic successes of past Democratic administrations.

Go read Angry Bear for a while - it makes me feel good to find meaty charts and graphs with data from whitehouse.gov showing why every Dem is always more effective than the latest puppet named to front the Old and the Useless.

The Paulson plan was a non-starter from the beginning, although it's no surprise that the Bush administration whiffs yet again.

[lemuel pitkin]

"Sorry, but overleverage, gamble, and lose ought to be a death sentence for a bank - at least in terms of shareholder equity."

Why should bondholders be off the hook?

[Greg]

Andrew Mellon on letting the system right itself without government help after the stock crash of 1929: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” Sounds just like what The Voters and the House Republicans are saying now. How well did that work last time? There's a difference between satisfying your sense of outrage about where we've ended up and figuring out what will work the best going forward.

[Peter K.]

And this will be very good for the economy in the long run. Now the system will collapse and we can begin to rebuild on a rational basis.

Or, like in Germany during the 1930s, the economy's collapse leads to the rise of the nationalist Right.

The German Communists' slogan, was "the worse, the better." Didn't turn out well for them.

[lemuel pitkin]

Perhaps those predicting imminent financial mass destruction can answer a few questions:

How many families have lost their savings in bank failues so far?

How many small businesses have had their lines of credit cut off?

How many people with money in their accounts are finding their checks not honored, or their debit cards not working?

How many businesses are being forced to do transactions in cost because they no longer access to trade credit?

[dilbert dogbert]

limuel,
the answer maybe "soon" and/or "lots". timing and number is a bitch as usual. make your bet.
enjoy

[Colin Danby]

LP: The problem is not on the liability side of bank balance sheets: central banks are keeping them liquid enough to pay customers, albeit via unprecedented measures. So that's items 1 and 3.

On the asset side of bank balance sheets, a moment of googling turns up: http://www.usatoday.com/money/smallbusiness/2008-09-28-small-business-credit-crunch_N.htm

And remember that this kind of crunch takes a little while to work through. In the short run a firm can do a lot things to generate cash.

[PSP]

How does the real economy collapse, exactly? This is almost too easy.

Desperate Lender writes off a portion of its mortgage portfolio and must raise its cash reserves. To do so, Desperate Lender’s Commercial Factoring Division reduces your employer’s line of credit. Receivables get deposited and are applied to the line of credit. However, until the outstanding debt is reduced to the new lower line of credit, no money can be withdrawn. Acme Payroll Service tries to make its automatic deduction from your employer’s account at Desperate Lender, but no money is transferred. Acme Payroll Service doesn’t cut you a check and you don’t get paid.

Voila, the real economy is in a depression.

[Ahab]

I think Solon is onto something. Rumor was the dems had a "circuit breaker" in place on the vote.

"Before you scream too much about Democratic "defections" on the vote...if I were playing in Nancy's shoes I would have required enough dems to vote nay,"

I'm guessing
tThose votes were in place and I'd estimate they were hand-picked; which is why................for example

"Blue Dog Democrats like my Representative, Heath Shuler, also opposed this bill.

And maybe Heath was selected to the "no" team based on the fact that a number of his constituents; God love 'em, bear more than a passing resemblance (in worldly experience and political acumen ), to that red-haired fella they found frozen in the next district over in Georgia last month or so. (cue dueling banjos......

[plaw]

This may not be the best plan one can come up with. But how much time do we have exactly to come up with a better alternative? And what would the extra time cost the global economy? In the past 8 months, 2 independent investment banks, Fannie, Freddie, and a few other commercial banks have failed or have been taken over despite the fact that they had access to the Fed's lending facilities. Even AIG was in trouble at one point, and this is a company that has been rated AAA. The short-term funding market has nearly shut down. Banks have stopped lending to each other in the inter-bank market. Libor-Fed Funds spread is in all time high. If this is not an extraordinary economic crisis, I don't know what is. How can we sit there and do nothing? What has been happening in the past year has gotten the attention of ordinary Americans and the rest of the world. It is clearly an economic crisis augmented by a collapse in confidence which is the tenet of our economic system. For people don't believe that the real economy is going to collapse without the bailout, you and your family would have lived in a world where Bear Stearn, Lehman, Fannie, Freddie, Wachovia, WaMu, Indy Mac, and AIG have all gone bankrupt. If you need translation, it means your ATM card stops working, your insurance policy goes down the toilet, you won't be able to use your credit card because no one trusts you or your credit card company, you won't be able to get credit however stellar your credit score maybe so that you'd have to buy your house in cash, and you may also lose your job because your company cannot get short-term financing from distrustful creditors. I am sure there are a lot of blame to go around but now is not the time for that. Do we have to wait until we see people lining up outside banks to withdraw their money on TV before we decide it's time to do something? The Great Depression has happened. It doesn't have to happen again, didn't we see how bad it went last time? I guess not... If my neighbors' house is on fire, I tend to help put out the fire first before yelling at them. I certainly do not have the best plan of action, but at least the fire is contained. If I just sit there and my house gets burnt to the ground, I have no one but myself to blame.

[Temporarily Anonymous]

"reduces your employer’s line of credit...you don’t get paid"

Maybe *your* employer is making payroll out of a line of credit, but mine isn't. We have money in the bank.

I'm not saying that the cutoff of business credit would not be bad. I am saying that I would want to see figures before I believed that a significant number of companies were making payroll on their credit card (figuratively).

[lemuel pitkin]

dilbert-

Maybe. But I'd like to have some actual evidence -- even maybe one actual example -- before handing out $700 billion. I'm funny that way.

[lemuel pitkin]

"Acme Payroll Service doesn’t cut you a check and you don’t get paid."

So let's set up a UI-type program by which the government can pay the wages of people who find themselves in that situation.

If we don't give $700 billion to Wall Street now now now! there probably won't be a crisis for the real economy, just a normal cyclical tightening of credit, as Colin Danby describes. But if there is a crisis, guess what? We have $700 billion to protect households and families from the consequences of bank collapses.

If the private financial system really cannot provide the intermeidation services needed by the real economy, then the federal government should let the financial system fail and provide those services directly itself.

Are you going to say that's socialism? Well, we're getting that anyway. Or are you going to say that the government can't replace the private financial system because it can't assess risk as well? Yeah, right.

[Adam Johnson]

The most interesting number I've seen so far is Nate Silver's breakdown of the vote from fivethirtyeight.com by how vulnerable the Representatives were:

Reps in Competitive Districts: Yea 8 Nay 30
Reps in uncompetitive dists: Yea 197 Nay 198
Retiring Reps: Yea 23 Nay 2 Abstain 1

A few random thoughts: Anything with the word 'nationalize' in it is likely to scare off Republican votes. Unless you can pick up a greater number of Dem votes (and avoid a Senate filibuster) this is a nonstarter.

Something will eventually be passed; I agree with the perception that a lot of congressmen who would normally vote for this bill aren't willing to take the risk five weeks before election day. Mix this in with general Republican opposition to anything like govt intervention and the bill goes down. On Nov 5th though you'll be able to get something through--how much worse things will be in a month though I don't care to think about.

I do hope the cynical cowards who voted against this thing both lose their seats and are taking a sizeable hit towards their portfolios.

[lemuel pitkin]

"On Nov 5th though you'll be able to get something through--how much worse things will be in a month though I don't care to think about."

On November 5th, you'll be able to get a *much better* bill through, because it will be possible to pass it on a straight party-line vote without giving the Rs a campaign issue.

"I do hope the cynical cowards who voted against this thing both lose their seats and are taking a sizeable hit towards their portfolios."

Seems to me that left-leaning Dems who voted against this thing (30 Nays in the Congressional Progressive Caucus) against their leadership were taking a brave and principled stand, whether or not you agree with it. And I sincerely hope thhat no one was thinking of their portfolios. And the assumption that what happens to people's "portfolios" (most Americans have none) should guide public policy, is another reason I'm very glad this bill went down.

[PSP]

Temporarily Anonymous,

If your employer doesn't require a line of credit, you may only have a recession. As Harry Truman is supposed to have said, "It's a recession when your neighbor loses his job; it's a depression when you lose your own."

The effects will be hardest at the margins. So, the bank initially loans less to marginal borrowers, who are liened to the hilt and already have crappy loans. That is why I used a factor in my example. And there are lots of them out there. My example could just as easily used somebody needing a rollover, but doesn’t get one, despite being profitable.

But, if a whole bunch of businesses at the margin fail, it is going to effect your employer's receivables, unemployment insurance payments, the demand for your products, etc etc. Everything has a multiplier effect.

[lemuel pitkin]

"But, if a whole bunch of businesses at the margin fail, it is going to effect your employer's receivables, unemployment insurance payments, the demand for your products, etc etc."

So why don't we protect the businesses, rather than the banks?

100 years ago, we set up the Fed to take banking functions that had been private and bring them into the public sector. Maybe it's time to take the next step, and let Federal Reserve banks lend directly to businesses. If the private financial system can't perform the most basic functions without huge subsidies, what do we need it for?

[J Thomas]

"The real economy could collapse in the blink of an eye if the financial industry gets any more skittish about lending money."

The real economy could collapse in an instant if foreign lenders stop giving us money hoping they'll somehow get more back later.

A long time ago they invested in our internet businesses. But that turned out to be a bubble.

For awhile there, they trusted our home mortgages. But that was a bubble too.

They bought sophisticated financial instruments. No longer.

Well, they could invest in 0% T-bonds knowing the dollar will be devalued.

If for some reason they stop giving us money, we will find it progressively harder to import stuff including oil. That's the real economy there, collapsing. We can export lots of stuff. Wheat. Pine. Giant redwood planks. Cement. Oil. If foreigners stop giving us money we could turn into a net oil-exporting nation.

I claim that a lot of the US instituations with the toxic waste were busy selling the toxic waste to foreigners, and they got caught with it when the foreigners stopped buying. (How do I know this? It came to me in a dream. You want evidence, go to a professional economist. I'm only a prophet.) They have no use for that stuff themselves any more than Ford had any use for a hundred thousand cars it couldn't sell. Waiting for financial instruments to mature and pay off is for buyers, not for salesmen. They can't sell it to anybody except at a big loss, and if they bought more they couldn't sell that either -- their careers are over.

What good does it do to bail out those sales teams? We need something new for foreigners to buy, something that will bring lots of money into the USA to pay for our imports. Unless we can come up with something foreigners will buy or some collateral they'll trust for loans, then one way or another our imports are going to get reduced to match our exports. And the more the dollar gets devalued the more exports it takes to pay for those imports.

[Colin Danby]

LP by the time there's the level of real-sector distress you want visible, a lot of irreversible damage has been done.

More generally you are applying the wrong models:

(1) As the TED spread et al. show, what is going on now is *NOT* a normal cyclical tightening of credit! Investment banking does not go poof in a normal cyclical tightening of credit, commercial paper does not seize up, the biggest insurer does not go under. We are in unmapped territory. Please don't mischaracterize my statements so completely.

(2) This is not the 1930s. Deposits are safe, at least in nominal terms. The problem is not what banks owe consumers, but what consumers owe banks.

There *is* a long history of state banking, and it's not unimaginable, but let's just say it would not be easy for government to replicate the lending services of private banks and commercial paper markets.

Remember that new construction and purchases of capital goods need credit, and a lot of working capital is financed. We can protect the nominal value of people's bank deposits; keeping them employed is less easy.

[J Thomas]

"This may not be the best plan one can come up with. But how much time do we have exactly to come up with a better alternative?"

Where have I heard that before? The iraq war. The Patriot act. Bush's Social Security raid right after the 2004 elections. Every time, Bush says we don't have time to do it right, we have to do it fast. And every time we try to do it fast we get a bad result.

He's inside Congress's OODA loop. Bush demands an immediate response. Congress gives him something half-baked and he rearranges it to suit himself.

Congress cannot respond quickly. They don't know how. It follows that any crisis that can't wait for Congress to respond on their own schedule is a crisis that Congress can't respond to. They might as well respond to the aftermath. If they try to respond to the crisis they'll do something random which has at least a 50% chance of making it worse. Maybe a lot more than 50%.

[mistah charley, ph.d.]

I know our host favored this bill, but other economists who also seem very smart to me (a non-economist) did not. My Representative, a liberal Democrat, voted against the bill, which pleased me. This was the message I'd sent her:

_____________________

To put it bluntly: NO CASH FOR TRASH!

I'm against giving money to bankers for their toxic waste. This plan was devised by, and is for the benefit of, the same people who got us into this situation.

There are other alternatives. Congress needs to hold hearings and listen to economists who saw this coming – for example, Nouriel Roubini, Robert Kuttner, and Dean Baker. It may take a couple of weeks longer, but this is a time to do what is NECESSARY, not what is convenient.

The fear-based stampede that the Bush Gang is trying to provoke is a giant rip-off. Although it is merely robbery, instead of mass murder (wars of choice against nations that never harmed us), it is yet another crime. I hope to live long enough to see fair trials for the lot of them.

[Colin Danby]

There's a crying-wolf lesson here to be learned by future presidents. But remember how that story ends. And Dodd, Frank, Bernanke, and Paulson are, whatever you think of their politics, well-informed and responsible grownups who do not deserve conflation with the current administration's national security team.

[PeeDee]

I'm pleased that the repugs didn't get one last 'blue-light special' through the treasury; but the Dems got whupped on the politics.

The Republicans have screwed the Democrats yet again. By having Bush/Paulson propose the worse imaginable 'plan' and then getting the Democrats to bend over and agree to it using a WMD-like scare campaign, and THEN definitively rejecting it themselves they can go to the elections as having prevented a Wall Street bailout. "Vote for a Republican Congress, or the Democrats will give your money to Wall Street." The Democrats are now seen as being tools of the Bush administration, and by implication all of its baggage (which, to be fair, they have been).

If the Dems were any good they'd have been nailing down a workable plan for the last six months instead of listening to the "nothing to see here" crowd at the Fed and Treasury. They left themselves open to being railroaded by believing the hype - both the rosy and disaster versions. Idiots.

[jackson]

Hard to see how the Democrats get blamed for this. They voted for it. It was the Republicans that killed it. Plus, it shows McCain has no clout with his own team mates. All in all, the Democrats stayed out of the Gingrich trap. Now it's time for a good rescue plan. The Democrats should scrap the Paulson plan and bring in a real plan for all this.

[J Thomas]

I can't tell how the short-run political blame will go.

One way, Bush suckered the Democrats into letting him steal another huge sum. Then the Republicans suckered them again, promising to vote for it and then breaking their word at the last minute. The GOP gets the credit for stopping Bush's scam.

Another way, McCain publicly promised he could deliver GOP votes and then he failed. He looks weak and useless.

A third way, McCain takes the credit for lying to the Democrats and making them look stupid. Only what kind of people would approve of that? Break your word before the election to people you're going to have to work with for four years?

But then, he wanted to skip the debate because the issue was so important. And then he didn't even bother to vote on it himself. He looks weak and indecisive.

Still, Bush did sucker the Democrats into supporting the scam. Obama supported it without taking a leadership role. He voted for it himself. Is that somebody we want for President? Could the Democrats say they saw through the scam all along but they pretended to go along with it for devious political reasons? But what kind of people would approve of that?

I don't see how to predict it. Maybe before we find out what people think some bigger issue will come up that trumps this one.

[Colin Danby]

JT do you realize this was a House vote and not a Senate vote? And that both McCain and Obama are Senators?

[J Thomas]

Colin, you're right! Somebody said that Obama voted for it, somebody said that McCain didn't, and I didn't think!

Thank you. I slipped up there, I didn't notice the implications of what they said.

[John Smith]

You sir, IS AN ASSHOLE!

[shander]

It really started to go wrong when the fed stepped in during the Long term capital fiasco.

Had the banks been forced to capitalize based on outlyer events we never would have had the dot com boom and never would have needed the resultant drastic monetary expansion to "save us from deflation"

People wouldn't have been been baboozled into paying prices for homes resulting from unusally easy credit..home prices would have ebbed and flowed with interest rates that were based on maintaing the purchasing value of the dollar per capita, not based upon a productivity lowered basket of goods.

We wouldn't have been facing a hoover redux because the excesses wouldn't have happend if we had let the non extended economy of 98 drift into a slight recession based upon some manageable bank losses then.

[gex]

"Can anyone figure out another word to use besides 'nationalize.'"

Pwned, of course.

[J Thomas]

Pawned. Good. Except, do we give the owners a ticket to buy it back later, or just put it up for auction?

[PatD]

Pwned = owned it's leet(elite) speak not a typo...

Also, I completely agree about the GOP's need to dissolve and reform itself as a party w/o the religious crazies. Sooner or later the real world pragmatists on the right will realize how deadly their coalition with the faith based community has been for the Republican party.
Liberal as I am it would be a welcome development to see an opposition party connected with the reality based community.