Yesterday the house rejected Paulson's $700 billion rescue plan 228-205. Today, Congress breaks for Rosh Hashanah. Between the finger pointing (It's Nancy's fault!!!!), and the mavericking, it's hard to get a grasp on what the hell is happening. We here at TPM world headquarters profess no expertise in high-end economics so we've rounded up the reactions of various economists we trust and respect. The verdict: there has got to be a better way. Or, in Adam Levitin's words, "So what did Congressional leadership do with this bailout bill? Put lipstick on a pig. I wonder how many Congressmen who voted for the bill know just how impotent the executive compensation, oversight, and homeowner protection provisions are. There's a reasonable bailout bill that could be passed. But this wasn't it."

Robert Reich, former Secretary Of Labor and UC Berkeley professor

Don't expect easier sailing in the Senate. Fewer than a third of the Senate is up for reelection on November 4, but they're all hearing from angry constituents.

Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street's bad debts with lend no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners. 9/29/08

David Cay Johnston, Pulitzer Prize winning economic journalist

Maybe we will also get answers to some hard questions. Like:

--Why was the CEO of Goldman Sachs in the room when government officials decided to bailout the insurer AIG, especially since Goldman has about $20 billion, half of its shareholder equity, at risk on AIG? Keep in mind that Treasury Secretary Paulson is the immediate former CEO of Goldman.

--Why was Lehman Brothers, a Goldman competitor, the only Wall Street firm in trouble so far left to collapse on its own? The Wall Street Journal reports today that it was the collapse of Lehman (which because of its structure may not have been an attractive firm for purchase) that "triggered cash crunch around the globe."

--Has Treasury obtained from every bank the amount of its illiquid assets, which would tell us if the problems are concentrated at a few banks or are pervasive?

--Would a temporary provision in the bankruptcy code, allowing people with toxic mortgages to get their loans rewritten or pursued to foreclosure, be a cheaper and better alternative?

Disclosure, transparency, options--those should be the issues in the next few days. 9/29/08

Dean Baker, co-director of the Center for Economic and Policy Research

This isn't about begging for a sliver of equity as a concession for a $700 billion bailout, this is about constructing a bank rescue the way that business people would do it. We have an interest in a well-operating financial system. There is zero public interest in giving away taxpayer dollars to the Wall Street banks and their executives. 9/29/08

Jeffrey Miron, Visiting Professor in the Department of Economics at Harvard University

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis...The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents. 9/29/08

Nouriel Roubini, professor of Economics at NYU

It is obvious that the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan it totally flawed). The severe strains in financial markets (money markets, credit markets, stock markets, CDS and derivative markets) are becoming more severe rather than less severe in spite of the nuclear option (after the Fannie and Freddie $200 billion bazooka bailout failed to restore confidence) of a $700 billion package: interbank spreads are widening (TED spread, swap spreads, Libo-OIS spread) and are at level never seen before; credit spreads (such as junk bond yield spreads relative to Treasuries are widening to new peaks; short-term Treasury yields are going back to near zero levels as there is flight to safety; CDS spread for financial institutions are rising to extreme levels (Morgan Stanley ones at 1200 last week) as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package (US market are down about 3% this morning at their opening). 9/29/08

Floyd Norris, chief financial correspondent of The New York Times

The banking industry is in trouble with or without this bailout. Its efforts to change accounting rules to hide its problems are sad and appalling. The defeated bill would have authorized the Securities and Exchange Commission to suspend the mark-to-market rule, which forced the banks to admit how badly they had gambled and lost. The S.E.C. has already yielded to political pressure and barred short-selling in financial stocks, so it is possible it would yield to the accounting pressure as well.

"Truth is the first casualty," is an old line to describe war reporting. It could also apply financial reporting at a time of crisis. 9/29/08

James Galbraith, senior scholar with the Levy Economics Institute and chair of the board of Economists for Peace and Security

In short, as I said at the beginning, the bill is a vast improvement over the original Treasury proposal. Given the choice between approving or defeating the bill as it stands, I would urge supporting the bill. I do so without illusions. There need be no pretense that it will solve our underlying financial and economic problems. It will not. The purpose, in my view, is to get the financial system and the economy through the year, and into the hands of the next administration. That is a limited purpose, but a legitimate purpose. And it may be the most that can be accomplished for the time being. 9/29/08

Paul Krugman, New York Times columnist and professor of Economics and International Affairs at Princeton University

Ten years days ago, I explained that the Paulson plan would actually move money in a circle. No outside financing would be needed.

What if we turn to a different and better plan, one that recapitalizes the financial system. Won't that need outside funds? No.

...

A large-scale recapitalization would probably take the form of a giant swap of debt for equity: the Treasury would issue several hundred billion dollars' worth of bonds, and give them to financial firms in return for preferred stock. The bonds wouldn't have to be sold to outside buyers -- they would simply be credited to firms' balance sheets.

The effect would be that if the financial firms did well, taxpayers would share in their good fortune via those stock holdings; if firms did badly, they could meet their obligations by selling some of those bonds, which would cut into the value of all their stock, including the stuff Uncle Sam owns. So as in the case of Wachovia, what's really happening is that the taxpayers are taking on some of the risk. 9/30/08

Stan Collender, NationalJournal.com contributing editor and managing director at Qorvis Communications in Washington, D.C.

From a communications perspective, this has been done about as wrong as is possible. There have been no credible spokespeople, the messages about the plan have been wrong or incomplete, the plan's supporters failed to understand the different audiences that had to be reached, and few people validated the claim that the plan was needed....

But it's a much larger communications problem than just the president at this moment. No one else in the Bush adminsitration has credibilty on economic issues. Hank Paulson may be the most effectve of the three people who have been Treasury secretary in this administration, but that doesn't say much (Does anyone remember Paul O'Neil and John Snow?). Paulson is obviously smart and tough, and my impression is that he's great in one-to-one conversations. But he's not a good mass communicator and his appearances over the weekend on the Sunday talk shows were not convincing. 9/30/08

Dana Chasin, senior advisor in the Federal Fiscal Policy group at OMB Watch

Efforts to date to impress upon the public the dire economic consequence of inaction under current circumstances have been inadequate. Federal Reserve Chairman Ben Bernanke - an expert on the Great Depression bearing no partisan axe to grind - told Congress last week that without a rescue plan, the number of jobs lost over the next four to six months would rise by about 3.5 million, which would push the unemployment rate to the highest levels since the recession of the early 1980s - or worse. Such prognoses, if concrete, authoritative, and repeated, will help make explicit the grave economic consequences for American workers in their everyday lives, should this package fail again. 9/30/08

Greg Mankiw, professor of economics at Harvard University

The VIX index, shown above, uses options prices to measure expected stock market volatility over the next 30 days. It closed yesterday at an extraordinarily high 46.72. Meanwhile, the TED spread, the difference between the interest rates on inter-bank loans and T-bills, stands at an extraordinarily high 325 basis points, suggesting heightened anxiety about bank defaults.

Warren Buffett has said, "you should get greedy when others are fearful and fearful when others are greedy." If he is right, then this is the time to get greedy. There is no doubt that most everyone else is fearful. 9/30/08

Adam J. Levitin, associate professor of Law at Georgetown University

Let me just illustrate what a fraud the executive compensation limits proposed are. Currently, businesses may deduct all salaries under $1 million from their corporate income. The proposed bailout bill would lower that deduction to $500,000 for certain executives at certain companies. Already, not a real big penalty for excessive executive compensation--the tax deduction gets limited by $500K/executive. But here's the catch: the deduction cap only applies to the top 3 executives at companies that have over $300MM in dealings with the Treasury under the bailout program, excluding direct sales.

In other words, the bailout bill's cap on executive compensation only applies to 3 people at really big financial institutions that enter into guarantee arrangements with Treasury. At worst, this means that an addition $1.5MM is not deductible from some very large financial institutions corporate income. $1.5MM is a rounding error for big institutions. The lost deduction on the salaries between $500,000 and $1MM will just come out of shareholders' dividends which won't be changed by so much as a penny. And for smaller institutions, e.g., hedge funds...probably won't apply to them. Given that these institutions are reporting losses for the current year, this is pretty much a throw away anyhow. But for Congress to pretend that it did anything about executive compensation is laughable. I guess they were hoping that no one would look at the tax provisions (rather than the executive compensation provisions) that were buried on page 101 of a 110 page bill. 9/29/08

Joseph Stiglitz, is an American economist and professor at Columbia University

Is there anything we can do in the short term to mitigate some of the pain? For one, it makes little sense to throw people out of homes. We need bankruptcy reform, as Democrats have demanded; we need assistance to average homeowners. We pay through our tax system nearly half of mortgage interest for the rich, but little if anything to find housing for the poor who don't own homes. Converting our mortgage deduction to a cashable tax credit would not only be fairer, it also would help ordinary Americans to stay in their homes.

Finally, the best way to keep the economy going is spending a fraction of the $700 billion on a stimulus package (rather than through trickle-down measures). The biggest bang for the buck comes from increased unemployment insurance (which the president has threatened to veto), but we also need aid for states and localities (without which they will have to cut back on spending, depressing the economy further) and more investment.

The basic lesson of economics is that resources are scarce, and that there is no such thing as a free lunch, a free war, or a free bailout. Those on Wall Street did very well for themselves in the past few years, garnering more than 30% of corporate profits. But unless a tax is imposed explicitly on the financial industry (which the Republicans refused to do), all of us might have to pick up the tab. 9/30/08

Larry Summers, American economist, former Secretary of the Treasury, and former President of Harvard University

From this perspective the worst possible actions in the current context would be steps that have relatively modest budget impacts in the short run but that cut taxes or increase spending by growing amounts over time. Examples would include new entitlement programmes or exploding tax measures. The best measures would be those that represent short-run investments that will pay back to the government over time or those that are packaged with longer-term actions to improve the budget. Examples would include investments in healthcare restructuring or steps to enable states and localities to accelerate, or at least not slow down, their investments.

A time when confidence is lagging in the household, financial and business sectors is not a time for government to step back. Well-designed policies are essential to support the economy and given the seriousness of healthcare, energy, education and inequality issues, can make a longer-term contribution as well. 9/29/08

Brad DeLong, professor of economics at UC Berkeley

As I said, raze the Republican Party to the ground. Plough it under. Scatter salt in the furrows so it can never grow back.

We need another, very different opposition party to face the Democrats. We need it now. 9/29/08