The vote failed on the bailout plan and markets fell, setting new records. Although I can see why some smart people supported the plan, ultimately I think it would have been a mistake from a political and moral perspective to pass it. However, that doesn’t mean the 700 billion can’t be put to good use and ultimately help soften the blow to the credit crunch. If nothing is done, the credit crunch will start to really squeeze financial institutions, its already happening. Price of loans goes up due to risk and Mr. & Mrs. Smith will not be able to finance their economic ambitions. Is there another solution? Well, I think these two economist are on to something. Instead of buying up bad debt at an artificial price and therefore unfairly rewarding those who are responsible for the crisis, inject more capital by buying up newly issued long-term stock and bonds at market value. That will provide additional capital to soften the credit crunch. Its a solution proposed on the The Becker-Posner Blog, two professors at the University of Chicago. Basically, the government should consider doing what Warren Buffett did when he invested 5 billion in Goldman Sachs: 

A more palatable approach would be for the government to drive a Warren Buffett style hard bargain, in which, rather than buying anything from banks, the government would invest in them in a form, such as purchase of newly issued preferred stock, or bonds with a long maturity, that would augment the banks’ capital and thus enable banks to make more loans. That would avoid conferring a windfall on the banks by overpaying them for their bad securities; no one thinks Buffett is conferring a windfall on Goldman Sachs. After the industry was back on its feet, the government could sell the bank stocks or bonds that it had acquired. - READ MORE HERE and PART II

This solution doesn’t come without other undesirable economic results but I think it should be seriously considered. 

While that solution has the potential to help financial institutions, what about everyone else? Well, I think mortgages should be renegotiated at rates that keep people in their homes and start to rebuild value. Companies receiving help from governments should be forced to do that with significant oversight. Healthcare needs to be universal, historically more people filed for bankruptcy then for other reasons. Fairness in the tax system should be restored. Ending the war in Iraq would save 10 billion a month. Basically, everything Obama wants to do for the economy would go a long way. 

Hopefully, as emotions settle down in Washington after today’s vote, sober minds will start working on a new solution that considers other alternatives.

What do you think should or should not be done?