What's Next on the Bailout

On a 228 to 205 no vote, the House of Representatives rejected Paulsen's bailout plan. The vote was 133 no to 65 yes among Republicans and 140 yes to 95 no among Democrats.  Among those Democrats voting no were some real surprises -- 5 Committee chairs and several very close friends of Pelosi from other districts in California. 

In any event, what are the options?  Option One:  Present the same bill with minor modifications to get 12 votes needed to pass.  If the modifications attract 12 Democrats, they will provide some limited foreclosure protections for middle class families.  If the modifications attract 12 Republicans, they will levy a fee on all banks to pay for the fund or will use more required purchases of insurance to protect against defaults.  either or both are possible.  This option will come with a new public relations campaign (furious efforts to spin) to convince taxpayers more convincingly that 1) it is not a taxpayer funded bailout (it will be paid back) and 2) it is for the benefit taxpayers and citizens not Wall Street or even Main Street.  A bad bill would be made worse; we would have to live with it.

Option Two:  Go back to the drawing board.  Paulsen needs to be left out of the planning; he has spent his political capital on the failed plan.  Those who favor systematic asset purchases will focus on giving the government power and funds to purchase 1) Homes, lots, and un finished construction ["This is the real 'core' of the problem, no MBSs"], 2) Bank equity across the board  ["Banks need capital to be able to have time to work out their balance sheet problems."], or 3) Commercial Paper ["Main Street needs cash to operate while banks work out their problems.]

Option Three: Liquidate or reorganize Banks as they topple.  The FDIC watches banks, and when they are close to insolvency, seizes them and sells them [Wachovia], liquidates them [Lehman], or reorganizes them -cancels equity and turns debt into equity until the balance sheet is healthy.  The FDIC has the power to pursue the third option but rarely does.    This option also has the Fed injecting funds into the market in traditional ways to maintain liquidity in the credit markets.

Count me in as in favor of Option Three or, in an extreme jam, the commerical paper purchase option of Option Two.