The Week in Review: The House Bails on the Bailout But the Senate Revives the Rescue

by Heather Chapman (New York City)

Labeled the ‘Hail Mary’ of bills, Congress’ revised $700 billion bailout plan was expected to be passed by the House of Representatives on Monday. Yet, despite all expectations, the House rejected the plan by a vote of 228 to 205—a mere 13 vote margin. Investors had been relying on the proposed bill to buoy the sagging markets; however, with the House’s repudiation of the bill, the Dow Jones Industrial plummeted, dropping more than 700 points, while the Standard & Poor’s 500-stock index fell by more than 8%, making Monday the worst single day in trading history for the United States in at least twenty years.

The failure to pass the bill—a crushing defeat for President Bush, who had spent the weekend making calls to on-the-fence Republicans—had people on both sides of the political aisle pointing fingers. Some Democrats were laying the blame at the feet of the Republican Party, saying that they didn’t come up with enough support for the bill, while Republicans faulted House Speaker Nancy Pelosi, citing her pre-vote speech which framed the crisis as a consequence of recklessness by the Bush administration.

Members of both political parties claimed that only by passing the bill could the U.S. economy begin to recover. Democratic majority leader Representative Steny Hoyer said that Monday was a “day of consequence for America” while Republican minority leader Representative John Boehner was urging members of the House to think about what a defeat of the bill could mean “’to your friends, your neighbors, your constituents’ as they were forced to watch their ‘savings shrivel up to zero.’”

Many supporters of the bill saw it as a necessary evil, supporting it only to avoid what some pundits called “financial Armageddon” in the United States and the likely concomitant crisis in the global economy.

So far, it appears the feared effect on the global economy is materializing. The markets in Asia and Europe started to slide downward even before the House rejected the vote on Monday. Then, some banks abroad began to flounder, requiring the governments of Belgium, the Netherlands, and Luxembourg to take over partial control of struggling bank Fortis NV and England to take over mortgage lender Bradford & Bingley. The German also government underwrote a $50 billion bailout of Hypo Real Estate, while the Icelandic government took control of Glitner, the country’s third-largest bank.

To ease the credit crunch, the European Central Bank (ECB) and the U.S. Federal Reserve have doubled the credit swap line—what makes dollars accessible to banks in need—from $120 million to $240 million. The Bank of England (BOE) has done the same, raising its dollar availability to $80 billion.

On Tuesday, things looked a wee bit better. The Dow Jones Industrial opened up ahead of the previous day’s number and closed 485 points higher. It’s the third-biggest one-day point advance in history, likely due to the news that the Federal Deposit Insurance Corporation (FDIC) wanted to raise the limit on the amount of money that it would insure.

Meanwhile, congressional leaders were doing a rush job of reselling the bailout plan. The first thing they did was start calling it a “rescue”, since it appeared that too many people were seeing it as a bailout for Wall Street leaders instead of a way to help the U.S. economy as a whole.

“The hurdle is overcoming the word ‘bailout,’” said U.S. Chamber of Commerce’s R. Bruce Josten, as quoted in the New York Times. “It has continued to be used by members of Congress. You see it in the press today all over the place. This is not a bailout; this is Treasury buying toxic assets that they will dispose of over a period of time and resell.”

But Peter Wehner, a former Bush White House aide, was quoted as saying that he doubts that the terminology used will make any real difference in how the proposed plan was received by the public. “I think the public viewed this from the beginning as a bailout of Wall Street and I don’t think moving around the deck chairs would have changed that.”

Still, Tuesday saw some more upheaval in Europe. Governments in Europe have been forced to bailout or seize five banks so far, and the Irish government has had to offer a two-year blanket guarantee on all deposits to stop rumors of panicky withdrawals from collapsing its stock market. In Russia, officials went so far as to halt trading on the Moscow exchange for two hours on Tuesday morning for fear of what could happen to their economy. Markets in Asia managed to remain fairly steady, although what’s happening now in the U.S. is bringing back dark memories of June 1997, when speculation against the Thai baht brought about an Asian crisis that spread as far as Russia and Brazil.

Finally, late on Wednesday, after much speculation and debate, the Senate passed the legislation in a vote of 74 to 25. Presidential candidates Obama and McCain both voted in favor of the bill.

The new provisions added to the House bill include:

• a temporary increase in the FDIC’s limit to $250,000 from $100,000;
• $18 billion in incentives for clean energy, including credits for production of wind, solar, biofuels and fuel-cell power as well as for “clean coal” and electric cars;
• an increase in the income threshold at which people are affected by the Alternative Minimum Tax; and
• a research and development tax credit to be extended for businesses.

Members of the Senate are hoping that these additional provisions will help make the new plan more appealing to House Representatives, as the bill will go back to the House for a vote, most likely this Friday.