I am not suprised Congress rejected the Bush package. It was always a long shot. The President thought he could buy confidence in the banks with a bumper injection of $750 billion from taxpayers, without understanding the politics of it, let alone the economics. He then spent the next week inadvertently undermining confidence in the financial world to try to make the case that the package was needed – the last thing we wanted the most powerful man in the world to be doing.
Meanwhile US citizens fearing for their own jobs and under great pressure in their budgets rose up against the idea of big bail outs which might leach into Wall Street bonuses or other rewards for the very institutions that helped get us into this mess.
What we need is an alternative strategy which restores confidence in deposits and normal financial transactions but give no cent of taxpayers dollars to once rich and powerful institutions and people.We need Central Banks to lend money – not give it – to institutions needing cash, and we need what money is spent to be spent on insuring the small savers and depositors where the private sector has not done this. Better still is to agree schemes which do give proper support to depositors within the private sector. In the UK we need to improve the deposit protection system urgently. We need the Bank of England to lend against proper security where cash is needed, and we need orderly mergers and take overs where some institutions are too weak.
Many banks worldwide need to raise new capital. The sooner the better, as markets are not keen on financing banks in these conditions, and it is getting more difficult each day. Banks just have to swallow hard and sell shares at prices lower than they are used to, to get the shareholder money they need.
The US authorities should announce Plan B as quickly as possible. Presumably they have a contingency plan for failure to win the first vote. Can they win a vote after some amendment? Can they use executive powers to take some other action without needing a vote? The Fed clearly has wide ranging delegated powers, as its provision of money to markets illustrates.