Steven Pearlstein - Gut Check

Steven Pearlstein - Gut Check: "[T]his isn't primarily a bailout for Wall Street -- it's an attempt to jump-start certain credit markets that have broken to the point that nobody is buying, driving down prices to the point where they are well below any reasonable estimate of their long-term economic value.

The basic idea is to use special auctions to recreate a market for these securities with many competing sellers and one buyer (the Treasury), so that a credible 'market' price can be established. If that price turns out to be below what those securities are now valued at on the banks' balance sheets, then banks will have to take the loss. If the price turns out to be higher, then banks may be able to record gains. The point isn't to bail out institutions that have made bad bets and suffered credit losses, but to provide a buyer of last resort so the market can begin pricing again."
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This is a short and persuasive take on the Paulson proposal. Worth reading for sure.

Pearlstein doesn't talk about the politics, just the policy. Politically, we now have the spectacle of the Democrats blaming the congressional Republicans for the breakdown in negotiations over the bailout. Last time I checked the Democrats had majorities in both houses of Congress and they can surely count on some Republican votes, and the President won't veto it because it's his administration's proposal. So why don't the Democrats just negotiate with the administration, come up with a Bush/Democrats bill, pass it, and take credit for saving the economy? Pelosi told Paulson that the Republicans are the problem, so in fact there is no problem, right?

Except that the Democrats don't want the responsibility of making the decision. They want some sort of bipartisan bailout so they don't take the heat for the current unpopularity of "bailing out Wall Street," and for the possibility that it will be a failure anyway. And they want Republican support on Democrat terms, apparently with all sorts of additional spending for other things and new powers for bankruptcy judges to remake the terms of mortgages. Some of these things may be good ideas. But it comes down to power. They don't want to do this without some sort of Republican leadership on board. Yet, it seems to me that there is so much vehement conservative opposition to this entire bailout concept (listen to talk radio on this) that the Republican leadership will continue to balk. Maybe McCain can twist their arms, maybe not. If he succeeds in getting the Republicans in line (and that's why he went to Washington), we have a bailout and the usual bipartisan blame-and-credit-game afterword. If he fails, the Democrats will have to choose between a) taking responsibility for a huge, complex, and untested policy that may not work, or b) letting the financial sector melt down entirely and trying to blame the resulting depression on Bush, McCain, and the Republican minority in Congress.