Stay Frosty

Mon, 29 Sep 2008 21:05:58 +0000

The sky is not falling, but it is hanging a bit lower and a bit grayer this afternoon with the demise of the bailout bill in the House. Don't all of us who insisted that Congress be involved and improve upon the Treasury Secretary's initial proposal look stupid now.

I go back to Bruce Bartlett's op-ed from Saturday -- those seeking a bill failed to make the case as clearly as they needed to that the financial sector by its nature may need special Congressional help of this sort. They were also disserved by leading with "$700 billion" and then only later noting that taxpayers wouldn't necessarily be on the hook for all of it.

But we -- like the stock market today -- can easily overreact. All this means is that the federal government will have to rely on existing mechanisms to dispose of insolvent banks and to provide liquidity to solvent banks. There is a chance that those mechanisms will be overwhelmed if more financial institutions start to fail in rapid succession. But as of today, they have not, and many financial institutions are recapitalizing on their own and with specific federal interventions.

We could come out of this okay even without the bailout, but by holding back we do take a chance that we will not later be able to act quickly enough. In all likelihood, the financial brinkmanship will continue for a number of months.