U.S. considers options as crisis goes global

A day after congressional leaders' compromise rescue plan failed so spectacularly in the House of Representatives, we're no longer talking about a Wall Street crisis. It is now being termed a global credit crisis as Congress and the Bush administration scramble to assess their options.

The Wall Street Journal provides a comprehensive overview of what happened Monday, why, and how leaders in Congress and the Bush administration are responding.

As economist Willem Buiter writes in the Financial Times, "Opposition to the proposal came from two different sources. A few remaining libertarians and believers in unfettered free enterprise voted against.  Even when they recognize the risk that a calamitous collapse in economic activity may result, they view this as a form of creative destruction that is an integral part of a Darwinian market economy.  … Those who genuinely hold these views are mad, but honest and principled.  I wish them a good depression."

The larger body of nay-voters, he writes, "consists of populist rabble-rousers or, worse, politicians who know better but follow the whims, fancies and passions of their constituents, even when this means that before long the real economy risks falling off a cliff.  … The dedicated followers of constituency … put re-election before the economic health of the nation and the interests of their constituents.  Opportunism guides them rather than principle.  I wish them a rather nasty depression."

Buiter follows with a rather scary scenario of what will happen next if Congress doesn't reverse itself soon.

Still, on Wall Street this morning stocks bounced back as investors scooped up deals following the stock market's precipitous decline just after Monday's vote, CNNMoney.com reported. And by early afternoon, the New York Times reported, "The Dow Jones industrials gained about 348 points in early afternoon trading, far from offsetting the 777-point decline on Monday but still a respectable showing, given the uncertainty lingering in the market. The Standard & Poor’s 500-stock index, a broad measure of major companies, rose 4.1 percent."

Ripples abroad
The Washington Post today surveys several ways in which Monday's turmoil generated widespread ripples. In a separate story the Post reported, "As lawmakers in Congress pointed fingers, the collapse of the world's financial markets only built steam. Brazil's main stock index lost more than 9 percent on the news of the U.S. congressional vote, and fears spread that other emerging markets could feel the credit crunch. European bourses fell earlier in the day as a result of the financial struggles of major European banks, and regulators from Belgium, the Netherlands and Luxembourg moved to rescue the European banking and insurance giant Fortis."

What's next? Looking for solutions
Sticking with the current rescue plan as the immediate necessity, President Bush went on television early this morning to plead with dissident lawmakers to reconsider their votes when they return to Washington Wednesday. "Our country is not facing a choice between action and the smooth functioning of the free market. We are facing a choice between action and the real prospect of financial hardship" that will be felt across the board," Bush said.

According to the New York Times, Treasury Secretary Henry Paulson also "said he would continue to work with Congressional leaders 'to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people.' He added, 'This is much too important to simply let fail.' "

Sen. Barack Obama, meanwhile, called for a new element to the rescue package. He wants to increase the amount of bank deposits insured by the federal government from $100,000 to $250,000. Obama said doing so "would boost small businesses, make our banking system more secure, and help restore public confidence in our financial system." His presidential opponent, Sen. John McCain, agreed; both support the rescue plan and renewed calls for its passage.

The Washington Post explored next-step options: "Congressional leaders and the White House faced several options, none of them palatable just weeks before a heavily contested presidential election. Democratic leaders could choose to return with a measure guaranteed to win more Democratic votes, even at the expense of Republican support. Instead of simply purchasing distressed assets from financial institutions, some Democratic economists favor injecting lenders with cash in exchange for stock, letting the institutions figure out what to do with the mortgage-backed securities and other troubled assets weighing down their books.

"A Democratic bill would also include more money for homeowners in or facing foreclosure and would change the bankruptcy law to allow judges to adjust mortgage repayment terms. But Democratic leaders would have to ensure that the measure could survive a filibuster in the Senate and would be signed by the president."

Slight changes could change some GOP votes
The Post said Republicans "were advocating slight changes to the bill that could attract a handful of new votes. Party members might be enticed by a measure that would allow businesses to write off more past losses on this year's taxes or a more robust expansion of mortgage insurance, financed by banks. Democrats could add more assistance to ailing state and local governments without raising too many GOP objections."

And what happens if there is no bailout in the next few days? Ron Scherer writes in today's Christian Science Monitor: "Some economists predict that the credit markets will become so tight that businesses, unable to finance their operations, will have to start to lay off workers in two to three months. Others say the US may be on the road to a nationalization of the banks as yet more financial institutions go under. And some suggest that the Federal Reserve will do everything from massive infusions of liquidity to lowering interest rates to try to prevent a total collapse of the nation's financial fabric. But many economists admit that no one really knows the answer since this is uncharted economic territory.

" 'To say we are in uncharted territory is a huge understatement,' says Joel Naroff of Naroff Economic Advisors in Holland, Pa."

Fed can inject money, but not 'fix the machine'
Without any bailout package from Congress, the Monitor wrote, "the Federal Reserve remains the main player. … 'What they can do is keep injecting money into the system,' says Doug Roberts, director of research at Channel Capital Research in Shrewsbury, N.J. 'That will keep everything moving but not fix the machine.'

"However, some analysts say this will only keep the banking system from going under. It will not convince the banks to become more liberal with their loans. 'Right now, the credit markets remain frozen and business will start to run out of cash soon and layoffs can begin in the next two to three months,' says Mark Zandi of Moody's Economy.com."

Susan Albright, a MinnPost managing editor, writes about national and foreign developments. She can be reached at salbright [at] minnpost [dot] com.