Today In The Greatest Transfer Of Wealth In World History

I guess the House and Senate are still negotiating over the bailout.

Some on the left are thanking their lucky stars for the nutjob House Republicans for torpedoing this deal. As their deal reflects the worst of their ideology, it's certainly something for challengers to run on. The House GOP actually wants more deregulation at a time when it's becoming perfectly clear that deregulation destroyed this economy. Furthermore, putting the brakes on this thing rather than hammering it through is positive.

I see both sides of this. I do see the virtue in getting something done. Put me pretty close to Krugman, although not as far along as Steven Pearlstein (suck it up, you idiots, and give Wall Street unlimited money!). But I'm also seeing the widsom of someone like Dean Baker:

This leaves the question of whether the Democrats can responsibly walk away from the bailout. This involves a tough call. The financial system was really shaken by the events of last week when Lehman Brothers went under and AIG was about to follow suit. However, Ben Bernanke and Henry Paulson were able to duct tape things together with the cooperation of the other major central banks.

The financial markets remain extremely unsettled and more bad news is a virtual certainty, but Bernanke and Paulson have lots of duct tape at their disposal. The sort of financial breakdown that we all fear remains a possibility, but my bet is that they will be able to deal with whatever crises develop.

Of course it would be better to have a more settled financial market, but this should not come at any cost. Furthermore, there is no guarantee that this package will fix the problem. As many economists have noted, the more obvious way to address the current situation is to directly inject capital into the banking system, something this proposal does not do.

There is one other point worth considering in assessing the responsibility of a walk-away strategy. Suppose the Paulson plan goes through. It is virtually certain that the economy will weaken further and the number of foreclosures and people without jobs will continue to rise.

This is the fallout from a collapsing housing bubble. Families that have seen most of their home equity disappear will feel the need to cut back their consumption and increase their savings. We have a huge cohort of baby boomers at the edge of retirement, most of whom who have accumulated almost no wealth during their working lifetime. When these families respond to their loss of home equity by cutting back their consumption it will deepen the recession.

I agree with Richard Shelby and those 200 economists he keeps talking about that a bad bailout bill would be worse than no bill at all. In addition, as I suspected, the liquidity "crisis" is being exacerbated by the full knowledge of the lending institutions that a bailout deal is imminent which will offer them a better chance to make money.

So I go back and forth on it. Ultimately, no deal should be able to last through Inauguration Day. The people have to weigh in on this and decide what vision of the world they would rather have: a Republican free-market fundamentalism with socialism for the rich when they fail on their big bets, or an economy that respects the middle class and understands that its rise is linked to overall prosperity.

Walk away from the table and put a band-aid on it, guys.