Hurray for the House!

The House did the right thing by voting down the bailout plan today. The hasty, ill-conceived plan (has Bush ever met a hasty, ill-conceived plan he didn't love?) was built around two bad ideas:

First, that we can mitigate the effect this credit crisis will have on "Main Street" Americans by having the government borrow an amount of money, in one mind-blowing orgy of spending, equal to the on-the-books cost of the Iraq War. (The actual cost of the Iraq War is a few hundred billion more than the figures Republicans like to quote.) This is money on credit that will have to be repaid, with interest, either through inflation or higher taxes -- either way, "Main Street" Americans would suffer.

The plan has been sold with a bit of intentional misinformation: a claim that the mortgage-backed securities would be bought up at a deep discount. Not necessarily so. Paulson's original write-up proposed to buy up the assets at their maturity price. Furthermore, one of the factors making this mess such a huge mess is that nobody knows what the securities are worth. They are very difficult to value.

Second, the misconception that the $700 billion asking price is based on some kind of in-depth analysis of the economy. The truth is that the $700 billion figure is arbitrary. Paulson took the value of all mortgages held by U.S. banks, then multiplied by 0.05. Why 5%? No particular reason. Paulson has never claimed otherwise, and has never claimed by the way, that he knows whether the plan will work or not.

It's unlikely that he came up with just the right plan or the right amount. You can make a pretty good case that the economy will bounce back after its own after a downturn, in which case the bailout isn't really needed. At least not a bailout of this size. You can also make a pretty good case that we're heading towards another depression, in which case the bailout isn't going to prevent it.

So what can the government do? Just a few ideas better than what has been proposed:

1. Cut spending. A good place to start would be bringing the troops home from Iraq. Cutting spending is the only way our heavily indebted government can put real money back into the economy.

2. Require banks to hold larger reserves. A lot of the current short-term stock market crisis is driven by lack of confidence. Reform of the weak regulation that allowed the financial sector to get into this mess in the first place will help restore confidence.

3. If we must spend money, be prepared to spend it on a possible failure of FDIC guarantees. Or to help folks who are at risk of defaulting on their payments.

The best thing about today's vote-down may be that it has damaged John McCain's credibility. In this tough economic situation, the last thing we need is a war-loving President.