The bailout failed. How do we pick up the pieces? Or do we?

So there are two options from here on:

Pander to Republicans

The core of the Republicans’ alternative proposal was a private-insurance plan that would ask banks to pay a premium to have the government guarantee further losses. It’s a plan that could save taxpayers’ money, but it probably won’t work—the premium will be so high that banks would rather withstand losses on mortgage-backed securities. The private-insurance plan was in the bailout bill that was voted on today, but it was one of two tactics for Paulson to utilize. The other was a bailout fund that he could use to buy toxic assets. From the beginning, Paulson was explicitly on record as saying he preferred the latter to the former. Think about it: If you were a bank and had a choice between being insured or having the government take toxic, immovable objects off your hands, which would you choose? Presumably, House Republicans realized an insurance program was never going to be Paulson or the banks’ endgame, so they balked.

This suggests more genuflecting is necessary from Bush and the Democrats toward House Republicans. (I never thought Bush and the Democrats would be paired in a sentence like that.) A new bill may appetize Republicans if two things happen. First, the insurance program would need to be given a more serious role. It’s unclear how to do this since banks won’t want anything to do with it, but presumably this is a deal-breaker for some Republicans. Second, the $700 billion needs to be scaled back a bit. After all, the Treasury admitted they picked $700 billion because they “just wanted to choose a really large number.”

Working on the margins of the Republican Party goes against the Democrats’ initial goal, though. Pelosi and pals wanted to have enough Republicans behind the legislation so Democrats weren’t the only ones taking flak if the bailout failed.

Pander to Democrats