Fed Bailout Rejected, Now What's Going To Happen?

The ultimate fate of the proposed $700 billion economic bailout is up in the air, but one thing is certain: Never underestimate the anger of the American people.

The bailout, which failed to pass the House of Representatives today, is deeply unpopular with many taxpayers. Even after including a number of last-minute provisions aimed at protecting  them and assisting home owners facing foreclosure, the majority of lawmakers in the lower chamber rejected the plan.

The political risk is especially great for House members, all of whom are up for re-election this year.

Having failed to pass this time, it appears that the plan’s backers — primarily the Bush Administration – are running out of options. Initially, they will try to get those who voted against the measure to change their votes.

Barring that, the bill may have to be seriously reworked. One of the main obstacles is the enormous $700 billion price tag that U.S. Treasury Secretary Hank Paulson has asked Congress to approve.

That money is earmarked to buy bad mortgage credits from lending institutions.  In theory, cleaner balance sheets will allow those lenders to start providing credit again to commercial and retail customers, giving the economy a lift.

President Bush, Paulson and Federal Reserve Chairman Ben Bernanke have said the credit crunch is dire and that without a bailout the country’s economy will plummet into a deep recession or worse.

The majority of House members are willing to take that chance. Some may be looking for greater taxpayer and consumer protections, while others may just not believe the doomsday scenario being presented. Experts have noted that the present bailout will not ease the housing crunch, nor stabilize the declining value of home prices.

Right now, Wall Street is scared.

It remains to be seen if previously-announced bank mergers and other investments, including the infusion of capital into ailing investment banks Goldman Sachs and Morgan Stanley are in danger of falling apart because of the bailout law failed to pass.