another good op ed in the WSJ

The Beltway Crash
Congress lives up to its 10% approval rating.

America has survived a feckless political class in the past, and it will again after this week. But Monday's crash and burn of the Paulson plan on Capitol Hill reveals a Washington elite that has earned every bit of the disdain that Americans have for it. This crowd can't even make sausage.
AP
House Speaker Nancy Pelosi ( D-Calif.) with Rep. Rahm Emanuel (D-Ill.) Monday, Sept. 29, 2008.
The 228-205 defeat reflects badly on all concerned, starting with the Democrats who run the House. The majority party is responsible for assembling a majority vote, and Speaker Nancy Pelosi failed in that fundamental task.
Her highly partisan speech on the floor -- blaming "right-wing ideology of anything goes, no supervision, no discipline, no regulation" for the financial distress -- is no excuse for Republicans to vote no. But it is indicative of the way she has governed for the past two years -- like Tom DeLay without the charm. The cynics are saying Ms. Pelosi deliberately tanked the bill by giving 95 Democrats a pass, knowing failure would hurt John McCain, and given her track record we can see why people would believe it.
House Republicans share the blame, and not only because they opposed the bill by about two-to-one, 133-65. Their immediate response was to say that many of their Members turned against the bill at the last minute because Ms. Pelosi gave her nasty speech. So they are saying that Republicans chose to oppose something they think is in the national interest merely because of a partisan slight. Thank heaven these guys weren't at Valley Forge.
The vote is also a rebuke for Treasury Secretary Hank Paulson, who could barely explain how his securities auctions would work even as he showed disdain for House Republicans. President Bush did his best to provide cover for the Members, but he is a spent political force. One GOP Member who supported the bill told us that before Mr. Paulson spoke to House Republicans last week, the whip count in favor was about 70; afterwards, it was closer to 20. You can't ask Congress for $700 billion without more modesty and a better explanation for how it would be used.
Given this historic abdication, we're surprised financial markets didn't melt down more than they did yesterday. Equities nonetheless took the worst bath in percentage terms since the aftermath of 9/11, with the Nasdaq falling more than 9%. But that was a sideshow compared to the credit markets, which staged another flight from all risk. The three-month Treasury yield had sunk to 0.132% the last we checked, which means investors will accept essentially no return as long as they can avoid further financial losses.
Safe in their think-tanks, some of our friends have claimed that talk of a financial crash is merely a political invention. Perhaps we'll now test their theory. A financial panic isn't an academic seminar, and a flight from all risk isn't something any free-marketeer should want. A recession now seems certain, as falling commodity prices are telling us, but the point is to prevent systemic financial collapse. Maybe the Members who voted "no" figure at least they'd still have jobs.
What next? One option is that Democrats will tell Mr. Paulson that they can pass his plan with more liberal votes, but that their price has gone up. This would mean more of the tax, spend and regulate provisions that House GOP leaders stripped out before their rank-and-file headed for the exits. These would only raise the price for taxpayers of the Treasury rescue and, if the equity provisions were too onerous, make the Paulson plan far less workable.
If Mr. Paulson wants to be a statesman, he could offer a Plan B that avoids giving Treasury such a big blank check. Instead, he could propose more public capital for the Federal Deposit Insurance Corp., which would do more of the creative financial plumbing it has done over the last week. (See here.) This will have to happen next year anyway, and the FDIC has long experience protecting taxpayers for public capital injections through preferred stock and warrants.
At the same time, the Secretary could salvage his own proposal by promising that while Treasury would start the purchase of toxic securities from banks, he would quickly (within weeks) turn the process over to a new and separate resolution agency. Congress could make this part of the legislation. This would remove Mr. Paulson as the political lightning rod he has become, and also give the rescue process the political insulation it needs. Such an agency could also work closely with the FDIC to protect taxpayers.
Members may not believe Hank Paulson, but they ought to pay attention to markets. The financial system has a huge capital hole due to losses on mortgage securities and other assets, and private capital won't begin to fill it without the life preserver of public capital. Before it leaves town to campaign, Congress needs to act to defend and restabilize the financial system. After the last two weeks, and especially after yesterday, the Members also need to act to redeem their own reputations, to the extent they are still worth redeeming.
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Crash Course
A Main Street Rescue 09/29/08 -- Congress passed this 'bailout' a long time ago.
The Washington Panic 09/27/08 -- The Paulson plan is a tool to avoid a deeper downturn.
The Paulson Sale 09/24/08 -- Taxpayers are going to put up capital one way or another.
A Mortgage Fable 09/22/08 -- Beltway trilogy: the Fed, Fannie Mae, and Bear Stearns.
Stopping the Panic 09/20/08 – Now the task is to protect taxpayers and restore markets.
Be It Resolved 09/19/08 – Paulson and Bernanke ask Congress for a resolution agency.
The Fed and AIG 09/18/08 – Nationalizations aren't stopping the financial panic.
McCain and the Markets 09/17/08 – Denouncing 'greed' and Wall Street isn't a growth agenda.
The Fed's Epic Day 09/17/08 – It's only fair to praise the central bank when it does the right thing.
Surviving the Panic 09/16/08 – A resolution agency, steady monetary policy, and a big tax cut.
Wall Street Reckoning 09/15/08 – Treasury Secretary Hank Paulson's refusal to blink won't get any second guessing from us.