Bailout Defeat: Blessing in Disguise?

Over the next days, with a show of guts, House Democrats could turn today's stunning defeat into victory by working on a revised version of the rescue bill, not to bring on board dissident Republicans, but members of their own caucus who felt it did not go far enough to protect homeowners and taxpayers.

Such a revamping might ease pressure on incumbents from both parties who fear voter retribution next month if they are perceived as bailing out Wall Street.

The possible permutations are many, but start with the negative take by Larry Kudlow on the National Review blog that "Democrats will come back with a new bill that includes all the left-wing stuff that was scrubbed from the bill that was defeated today in the House.

"As this scenario goes, the House Democrats need 218 votes, and they have to pick up a number of black and Hispanic House members who jumped ship because the Wall Street provisions, in their view, were too benign. So things like the bankruptcy judges setting mortgage terms and rates, the ACORN slush-fund spending, the union proxy for corporate boards, stricter limits on executive compensation, and much larger equity ownership of selling banks through warrants will all find itself back in the new bill.

"Of course, this scenario will lose more Republican votes. But insiders tell me President Bush will take Secretary Paulson’s advice and sign that kind of legislation."

On the more liberal end of the spectrum, economists like Paul Krugman see a plan "centered on purchases of preferred stock and takeovers of failing firms-- basically, a plan clearly focused on recapitalizing the financial sector, with nationalization where necessary."

Yesterday the Federal Reserve started pumping $630 billion into the global financial system, flooding banks with cash to add liquidity and help alleviate the credit crisis.

So, one way or another, for better or worse, the US government will have to act to avert disaster, and today's defeat by diehard Republicans may eventually open the way for measures that are better rather than worse.