Bailout defeat hits home

The consequences of the bailout failure are being felt across the country. This is painful medicine. Hopefully, it will convince people that more is needed than just the assumption of toxic debts.

Amonst many other pundits, Open House argues that now is not the time for punishment of bankers, and that we need to focus on reviving confidence in the banking system. This plays into a widespread assumption amongst the political classes that the hostility from below is being driven by economically-illiterate anger.

But let's be clear: measures must be taken to ensure this situation doesn't happen again. It is unacceptable to revive the banking system as it operated since the 1980s. And let's also be clear that once the crisis is averted, the political opportunity for reform will also be much reduced. In this sense, attaching conditionality to the Paulson bill is essential to any recovery package, not an afterthought to be worried about later.

FDR's New Deal remains the model. It was built upon the three Rs: recovery, relief, and reform. Indeed, many historians argue that its recovery efforts were its least effective part (since they were trapped within old assumptions about good fiscal and monetary policy). Almost all of the really lasting reforms introduced by the New Deal came during its first administration, when the gravity of the political crisis gave an opportunity for government to change the way the system worked. Roosevelt then built his reforms in such a way that they would be hard for subsequent generations to remove. But by the beginning of Roosevelt's second term of office, when people tentatively began to feel that the recovery was happening, the president started getting real resistance to his reform ambitions.

When people look back on this crisis, there's a strong likelihood we will still consider ourselves to be in the Hoover stage of the crisis - before it's really started to hurt the public, and before people have accepted that we can't just try and return to business as usual. That irrational hope is fuelling the supporters of the first bill just as much as irrational punitive anger is fuelling its opponents.