The Constitution provides that financial bills must originate in the House, but the leaders have agreed that this time the Senate will go first because the Senate seems to have the votes for the Paulson-Pelosi bailout plus a few new bells and whistles. The House can concur later. This prospect of a rescue of the rescue was enough to lift stock markets Tuesday, recouping about two-thirds of Monday's losses.
Meanwhile, the credit freeze deepened, as the rate that banks charged to lend to each other rose to unprecedented heights, and European and Asian banks came under deeper attack. Hedge funds could well be next.
Will this have a happy ending, as Congress finds a tactical expedient to move forward and as members grasps the stakes? Will the new measures, such as additional tax breaks and an increase in the FDIC insurance limit to $250,000 per bank give wavering Republican House members a fig leaf to support the bill?
It depends on what you mean by a happy ending. At least 100 House Democrats are very unhappy about this package. That's nearly half the Democratic caucus. Progressive critics have generally converged on three key points:
First, the rescue would be much more effective if government pumped in equity, and took an equity position, rather than just sopped up debt. See George Soros's brilliant persuasive piece in today's Financial Times. Soros is in regular touch with key Democrats.
Soros writes:
Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalize the banking system. ... The result would be more economic recovery and the chance for taxpayers to profit from the recovery. The Treasury secretary would rely on bank examiners rather than delegate implementation... Wall Street firms. The bank examiners would establish how much additional equity capital each bank needs in order to be properly capitalized according to existing capital requirements.
Second, a direct government refinancing of troubled mortgages would be far more effective than bailing out bondholders and hoping that some of the relief eventually trickled down to homeowners. It would also be far better politics.
Third, with the real economy now suffering real damage, the Wall Street rescue should be linked to a big stimulus package to pump money into the rest of the economy -- infrastructure spending, help to state and local governments, and extended unemployment benefits.
The cast of characters promoting something along these lines includes most of the economic thinkers to whom progressive Democrats usually look: the folks at the Economic Policy Institute and the unions, Campaign for America's Future, some at the Center for American Progress, Joseph Stiglitz, Dean Baker, Jamie Galbraith, Rob Johnston, William Greider, and yours truly.
At this writing, my sources say Pelosi is sticking to the Paulson script, as amended. If the Senate passes a bill, and financial markets "price in" the expectation that the House will have to approve, skeptical rank-and-file House members will be under immense pressure to go along.
But, until the next Congress, presumably under a Democratic president, Democrats will never have as much leverage as they do this week to get this package right. And lots of bad things could happen to this economy, even with the Paulson plan, between now and Jan. 20. Democrats can and should do better, out of concern for the country and the crisis that the next president -- quite possibly theirs -- will face.
