In the end, the system worked, in its own halting, imperfect way. Now, we can only hope that the $700 billion package passed by the House of Representatives and signed into law by the president yesterday performs the hoped-for trick of unlocking the credit markets and averting economic disaster.
The measure, as finally approved, was a dramatic improvement over the three-page, just-sign-here proposal that Treasury Secretary Henry M. Paulson Jr. initially submitted. It still gives the administration huge leeway and will need skillful Treasury administration, but it includes increased oversight and greater protections for taxpayers. After Monday's stunning rejection by the House and the resulting plunge in the stock market, both presidential candidates pitched in to salvage the deal; the Senate acted to revive the measure; and enough -- more than enough -- House lawmakers in both parties rethought their original positions, in part as callers from home districts who were fearful of economic disaster began to outpace the callers who were indignant at the idea of a bailout. House leaders, including Democrat Steny H. Hoyer (Md.) and Republican Roy Blunt (Mo.), worked together. Juvenile partisanship gave way, at least for the moment, to productive cooperation.
But not, however, without a price. One of the changes the Senate made to the package made sense: a temporary increase in federal insurance of bank accounts from $100,000 to $250,000 to deter potential bank runs. It is sadly ironic, however, that the Senate felt the need -- or seized the opportunity -- to add unnecessarily to the deficit. A moment of economic peril became powerful leverage for fiscal irresponsibility in the form of another $100 billion-plus in deficit-financed tax cuts.
We refer to the Senate's move to tack on to the package an unrelated measure that had been the subject of congressional intramural football: the extension of expiring tax provisions that business eagerly sought and a temporary patch in the alternative minimum tax. The House and Senate agreed on the merits of the tax measure but differed about whether any of it should be paid for by closing tax loopholes. The House, prodded by the Democrats' Blue Dogs, had been insisting on paying for everything but the AMT patch; the Senate balked. The take-it-or-leave-it, end-of-the-session Senate move to combine the rescue measure with the tax package was unnecessary -- there were preferable legislative paths to a House majority -- and put the House in a difficult position. House leaders made the wiser choice of poison later over poison now.
Yesterday's action by no means ensures that the problem has been solved. The bad economic news continued to mount, with a drop in orders for manufactured goods and a seven-year high in claims for unemployment benefits. The credit markets have become so dysfunctional that California Gov. Arnold Schwarzenegger (R) sent Mr. Paulson a letter warning that the state might need a $7 billion loan because it has not been able to borrow the money elsewhere. Meantime, the global nature of the metastasizing crisis adds to the nervousness. Maybe the only sure thing is that without the congressional action, prospects would be far bleaker.