A vote for a Depression ...

The rejection of the TARP by the House is a turning point not only in this financial crisis, or even in the global economic downturn, but in the life of the Aging Empire itself. Ideological dogma has trumped common sense and if this plan isn't sucessfully revived, the calamity will go down in history with the same infamy as the Smoot-Hawley Tariff Act of 1930, which put up international trade barriers and helped turn a US recession into the worldwide Great Depression. 

Following the debate over the last few days had depressed me. Not because I thought they'd actually be brave/stupid enough block it (how embarassingly naive), but because I though Paulson's TARP plan might not be enough. If the bill that wasn't a bank recapitalisation and that would have made the taxpayer money was so difficult to pass, what chance passage of the future one which would be needed to recapitalise the banks and at a very real cost to the taxpayer? Not for the first time during this bailout episode, I was jumping the gun ... 

The House of Reps voted down the bill because their constituents were apoplectic about a bail out of Wall Street, about the prudent saver paying for the reckless speculator, about something worse even than socialism - socialism for the rich. And so this is democracy in action. As the stock market market falls by 9%, oil by 10%, as Gold trades 3% higher and the Ted Spread widens to a never-seen-before and deeply distressed 359bps, a crash followed by an economic depression is now likely. The American taxpayer has just voted for it. 

What happens next? There is still a chance that after realising what they've done, the Republicans fall into line for a revote. Paulson said he was working on a new proposal last night. That's the only hope. That the economy is going into recession is a given. With no second proposal this continued and intensified freezing of credit markets will make it deeper still. As recent events at Fortis, Glitner and Bradford & Bingley have shown, the financial implosion is now global and rates will be cut very aggressively around the world. That will help liquidity, but it won't solve the bank's solvency problem. The Europeans will organise their own financial system bailouts and, unencumbered by ideological qualms that any form of state involvement amounts to socialism, they are likely to come up with something which works, as the Swedes did in the early 1990s.

In the US the problems of failure to deal with the banking crisis will be more acute though, as will the political ramifications. Soon when the economy is on its knees the finger pointing will begin.  Some will blame the Republican's for not voting this bill through. That may be the point at which they pass a proper bailout package. Others will blame the rich bankers, who will be punitively taxed. But if nothing is done, sooner or later they will start blaming foreigners and the Aging Empire will begin a long disengagement from the outside world to a more comfortable place within.