Rescue Defeated: Now What?

What a sad spectacle. The financial crisis deepened today as the rescue effort was voted down. Another major pillar, Wachovia, crashed and was sold at bargain basement prices. A trillion, with a "t," dollars in market equity vanished as the Dow took its biggest single day loss. Ever. The crisis spread globally, with Australian and Asian markets plummeting on news from Washington and New York. We have been here before. This is what it felt like in 1929.

The no vote this morning was the 2008 equivalent of the Smoot-Hawley Tariff response to the Crash of '29, a cut off your nose to spite your face middle finger to the infernal fates. And just as effective.

This morning the Congress, led by 2/3 of the Republicans but also including 40% of the Democrats, voted not to commit the $700 billion. It immediately cost the economy a trillion. In case they didn't notice, that is $300 billion more than they saved. It will continue to cost like that every day until they do something or until it's too late, whichever comes first. That is because the lenders cannot move money until they clear the bad loans out of their systems. Without loans no cars sell. No homes are bought. Construction projects shut down. Expansion plans are shelved. Then workers get laid off and it's 1932 again.

Most of the money won't be lost, anyway. Most of the loans are good. The treasury will buy large blocks of them. After they identify and dispose of the bad ones, they will eventually sell the good ones back to the banks, probably at a profit. At least 70% of the funds will be returned to the federal treasury. That's about $500 billion out of the total. So the real long-term cost is more like $200 billion at a maximum. Lay that against the market loss of $1 trillion in a day and you get an idea of what is at stake here. And that is before employment totally crashes and brings economic Armageddon. But hey, I'm sure it felt good to give 'em the old what for, right?

John McCain's take on all this was to blame Barack Obama. He was "mailing it in," we were told. This is the fellow who has had a remarkable series of revelations over the past week or two. First he said the economy was strong. Then he said it was in a crisis. Next he said he would stop campaigning, but didn't. Then he said he would not debate, but did. He said he would go to Washington to get both sides together but never went to Capitol Hill. Minutes before the vote this morning he was taking credit for bringing the Republicans along to support the deal. Then when two-thirds of them voted it down he said it was all Obama's fault. Really now. Is this the kind of leadership we need?

For his part, Obama complimented the congressional leadership for working hard to try to get something in place. He said he believes a deal will be forthcoming because it is essential; we have to have one. He said the legislative process can be slow, but must continue now with greater urgency until the economy is saved.

It is not difficult to see which approach is more likely to bring the results we have to have. And make no mistake, there is no sufferable alternative. If it makes them feel better, they can string up the CEOs and CFOs while they're at it, but one way or the other the sand must be washed out of the gears. Otherwise the
whole lumbering machine will grind to a halt. And at that point, the only thing in plentiful supply will be the one commodity Washington is never short of: blame.