Now that readers can enjoy their panic, here are two opposite, and not exclusive, arguments, why rejecting the Paulson plan was both a sound political and economic decision. Firstly, there will be no crisis.

President Bush and supporters of the recent massive Wall Street bailout plan still believe Wall Street to be the center of the entire economy. Economic research over the last couple of decades rejects this belief. It has shown that the financial and non-financial sectors experience quite independent changes, especially over the short and medium term. Take for example the promised yield on the best commercial paper. Fluctuations in this yield are critically important to persons in the financial sector (such as money market traders), but have hardly anything to do with activity outside of that sector. Since World War II, the correlation between the inflation-adjusted commercial paper yield and subsequent inflation-adjusted growth of GDP per capita is zero. That is, GDP growth has been high following high yields just as often as it has been low. It is equally hard to detect a correlation between stock returns, long term bond returns, or commodity returns and subsequent GDP growth. Quite simply, history has shown that the non-financial sector can do well when the financial sector does poorly, and vice versa.

Secondly, prudence dictates, that if depression does ensue, the US government needs its $700 billion dollars to get the economy out of its funk.

People on 'main street' are even more concerned about the economy than economists and think a total financial meltdown is inevitable. Therefore, they think a 'bail out' will have no or very limited impact in the long run. They have already seen considerable govt interventions, while markets have just kept falling and firms continued going under. Hence they are afraid of spending another 700 bn on something that they don't think will fix the problem. Maybe also Congress think a total meltdown is inevitable, and that is why it did not pass. On the one hand representatives would like to see something pass (to show action). On the other hand, representatives are afraid that when they stand for reelection there will have been a total financial collapse anyway, and the 700 bn bailout will be seen as 'wasted'. Hence, the majority of representatives would like to see a bill passed, but at the same time, they would like to show their vote record as having voted against it (in case the economy collapsed). It is unlikely that this bill will be known as the bill that 'saved the economy'. It is more likely to been known as the 700 bn bill with no or only temporary effect. Therefore, representatives may want to be on record as having voted against it.

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