Bailout Rejection Sends out Financial Shockwaves, But It's Also Good for Democracy

All of the political leaders blessed the deal, but the House of Representatives spit it out anyway. The Wall Street bailout is so odious to public opinion, the "people's house" rejected it today, 228-205. The fever chart in Wall Street -- better known as the stock market -- swooned instantly, with the Dow falling 700 points. The political bedlam in Washington is as real as it gets.

The party leaders will probably try again. I doubt they have the energy or courage to renegotiate the terms in any serious way. A majority of Democrats voted for the measure, but most Republicans took a walk. They will be scolded -- and pounded by captains of industry and finance -- for being "irresponsible." But I doubt the public will agree.

In all of elected Washington, representatives are closest to the people and they know a vote for this outrageous measure is going to end the careers of some colleagues -- maybe many of them. This time, the dissenters can claim principle and say they are voting with the folks, while also voting to save their own hides.

It adds another deep shock to the system, both in politics and economics, but what an invigorating moment for democracy.

The financial bloodbath will continue, but unless the deal on the table changes significantly, Henry Paulson gets to decide who lives and who dies. The former investment banker from Goldman Sachs would be empowered as treasury secretary to play savior or grim reaper, the liquidator who essentially pulls the plug on some banks and financial firms or the man who rescues them from ruin. Of course, Paulson would consult with other government officials. But you can be sure that, behind closed doors, he will ask former brethren in Wall Street to help decide which club members are worthy of saving. This power to pick winners and losers would remain in Paulson's hands until a new president arrives in January.

This the essence of "the deal" Congress worked out over the weekend and was stymied today. Some bells and whistles were added to make the transaction less obnoxious to public opinion, voters and taxpayers. They are not meaningless, but both parties lacked the nerve to tamper with Paulson's basic proposal. This is still a massive bailout of imploding Wall Street, financed with the public's money. And it is still a massive crap shoot for the American people.

If the billions from Washington somehow restore temporary calm and balance to global financial institutions and markets, then the usual cheerleaders will proclaim the "system" has worked. Most Americans, I predict, will not join the cheering. Too much destruction lies ahead, both in the financial system and in the real economy where people live and work. Too much bitterness and rage will be attached to the White Knight at Treasury when he dooms one pension fund or bank, but rescues others. Too much deceptive sleight-of-hand is already embedded in Paulson's approach for ordinary mortals to even recognize what Paulson intends to accomplish.

The essential political failure, in my view, is that Congress did not step up and assert the full emergency powers of government in this epic crisis, that is, take temporary control of the entire financial and banking system so regulators and policy makers can steer the US economy to safer ground, compelling the private institutions to follow their lead. This rescue plan remains essentially voluntary. Yes, the Treasury Secretary would be awarded gargantuan personal powers, but there is not much in writing to compel the banking behavior of private interests he chooses to rescue them. One assumes Paulson will demand some private deals and use his enormous leverage to squeeze anyone who resists. But there is nothing to guarantee this path is taken. The bailout will belong to the club and the club will manage it.