And so the House of Representatives approved today the federal bailout/rescue package initially designed by Federal Reserve Chair Ben Bernanke and Treasury Secretary Hank Paulson. The package contained expensive additions from the Senate version of the bill — which would not have been added had the House passed the original version Monday, Sept. 29.
Perversely, the Dow Jones Industrial average promptly fell.
It was surprising to find Sen. Maria Cantwell and Reps. Jay Inslee, D-Bainbridge Island, and Dave Reichert, R-Auburn, voting against the package. (Reichert's Democratic challenger, Darcy Burner, said she, too, would have voted "no.") It was even more surprising to find Rep. Jim McDermott, D-Seattle, reversing himself and voting against the Friday version after supporting the original version Monday.
A local journalist — one supporting the package — told me Tuesday, Oct. 1, that Cantwell had called him with relevant questions about the bailout before casting her vote. Perhaps her earlier foray against alleged oil speculators gave us a foretaste of a populist streak that at other times has been hidden. Any Puget Sound-area federal legislator, you would think, would have sufficient concern about global financial/economic linkages that he or she would have cast a "yes" vote. McDermott, the ultimate safe-seat congressman, explained his vote on the basis that he was reflecting opinion in his district. Well, OK.
Credit will continue to be tight. Banks, having been frightened, will once again return to their old policy that "loans can only be given to people who do not need loans." Yes, the rescue package will bolster financial institutions and, theoretically, make them more greatly able to lend. But lending standards will be tightened. Borrowers will have to meet new criteria. The institutions involved will, first, move to strengthen their own balance sheets.
We are headed into recession by any definition. The real economy already is feeling the effects of a near-death escape from panic. Layoffs, contractions, deferred expansions, and canceled projects will be the order of the day in the months ahead. Housing prices will continue their correction. Here in Seattle, they still have a downward way to go until they approach rationality.
Government resources at all levels will shrink. A President Obama or McCain, a Gov. Gregoire or Rossi, will face an upcoming term which must be characterized by pared-back agendas. Obama, McCain, and their running mates all have refused in televised debates to name specific proposals they would be prepared to abandon in this new context. Sen. Joe Biden, in Thursday's vice presidential debate, finally came up with one by saying it might be necessary to cut foreign aid in half. (Foreign aid is a notoriously unpopular program with voters and Biden thus was making no concession at all.) This will be unpleasant news, in particular, to industries, unions, and interest groups that have regarded public budgets as entitlement programs.
With luck, we will escape the crash that could have come had the bailout not been enacted. But we are in for recession and/or stagflation (a combination of stagnation and inflation) in the months ahead. Make modest, practical plans.