Bailout bill passes, financial crisis continues

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So this time it passed, and it wasn’t even all that close (263-171). After turning down a $700 billion financial bailout plan on Monday, the House turned around and this afternoon approved an even more expensive one–loaded with tax cuts, an expansion of federal deposit insurance, and a now infamous tax exemption for certain toy wooden arrows.

What happens now? Financial consultant Howard Glaser says Treasury hopes to conduct its first reverse auctions for mortgage securities in a few weeks, and will start buying whole loans from troubled regional banks and thrifts soon as well.

But the financial crisis has now gone so global, and the economic situation at home is worsening so quickly, that it has become pretty clear that the TARP, as Treasury calls its plan (for troubled asset relief plan), is just part of the solution. The leaders of Britain, France, Germany and Italy are meeting in Paris Saturday to see if they can come up with a joint plan of attack to deal with the crisis. And here in the U.S., it’s hard to imagine that we won’t still be struggling with tight credit, bank failures, and a worsening economy two or three or four months from now.

The upside is that TARP gives Treasury Secretary Hank Paulson more resources with which to battle the meltdown. Of course, that’s also the downside if you either (a) don’t trust Paulson with that kind of power or (b) think buying mortgage securities is the wrong approach. I’m okay on (a), but I don’t think even Paulson is absolutely sure he’s right on (b).

I’ll leave you with a cheery forecast from Paul Kedrosky:

Some time after the U.S. presidential election, with credit markets still a mess, banks failing all over the landscape, and no real end in sight, we will likely see the new president pull together some sort of TARP II commission. What should we do, post-Paulson, to prevent this crisis from further deepening and continuing? Top of the agenda will be further fiscal stimulus, and, in all likelihood, an explicit recapitalization of the banking system, with government picking favorites.

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