Bailout Plan, Redux

A revised bailout plan has been announced, and President Bush has thrown his weight behind it. To my eye, the rewriting of Paulson‘s plan this past week has been worthwhile; and the final plan, while imperfect, is a useful step forward, and a clear improvement on the original plan in terms of likely effectiveness, cost to the taxpayers, accountability, fairness, and political viability.

I gave a longer summary this morning on Bloomberg TV, here.

Paul Krugman notes that markets are not reassured; although this may simply reflect ongoing developments with Wachovia. I don’t think that the problem is the revised plan, but rather fear that political posturing means that we are still some distance from the bill being passed in its current form.

The leadership on getting this done is coming from the Republican White House and the Democratic Congress, and neither presidential candidate is standing in the way. But the biggest risk appears to be populist Republicans in Congress, who may either knock the plan off course or try to include a variety of strange add-ons. We will learn more later today.

There is also still a lot of work to be done on the regulatory front; but hopefully the new administration will have the time to study the issues carefully, rather than redesign our financial architecture in a panic-stricken and politically-charged environment.

Further reading: Larry Summers; Robert Shiller; C.B.O. analysis; The Economist; and a radio interview I did on Friday.

Addendum: The House failed to pass the bailout bill, 205 to 228. Democrats voted 141 to 94 in favor of the plan, while Republicans voted 65 to 133.

I fear that individual political careers are being prized above getting our collective financial future together. Stocks have fallen sharply on this very disappointing news, and the TED spread is looking even more unhealthy. It’s the perfect storm: a financial mess meets unpopular politicians, with election season brewing. Where next?