Despite warnings of disastrous consequences, the House of Representatives failed to pass the $700 billion Wall Street bailout Monday. But on Tuesday, the sun came up; people still got up and went to work; they could still go to the ATM and get money. The economic world hasn't ended, at least not yet.
Congress is still considering some form of government intervention in the troubled financial system. Dissenting experts think the economy just might be OK without a bailout at all.
That's hardly the view on Capitol Hill. After the House voted down the bill, lawmakers emerged looking shell-shocked. Rep. Barney Frank stood before the cameras and tried to make sense of it all. Frank said he had been convinced by everyone he'd talked to, including the heads of the U.S. Treasury and the Federal Reserve, that the nation faced a shutdown of its credit system.
"Maybe that's wrong," Frank told reporters. "Clearly a large number of members of the House don't believe that. Some said there was no great crisis. If in fact that turns out to be the case, I very cheerfully will admit error and take the rest of the year off."
Since the Bush administration proposed the bailout this month, more than 200 economists have signed a petition opposing it.
Narayana Kocherlakota, of the University of Minnesota, calls the White House's case an unconvincing one. "I think one of the reasons why so many people were signing that is the administration has not brought forward the information that would be compelling, that yes, we are facing economic Armageddon," Kocherlakota says.
The argument that economic Armageddon could happen goes like this: With billions of bad assets on Wall Street, so many banks could go under that lending actually stops. Meanwhile, solvent bankers could become so frightened that they either lend only a limited basis at steep rates — or stop lending altogether.
John Cochrane, a University of Chicago professor who helped organize the petition drive, says it's true that credit is harder to get. If you want a loan, you'll face higher interest rates. Cochrane says the economy is sick, but the patient is up and walking around.
"We have an unprecedented seizing up for credit markets and, as yet, no depression," he argues. "No recession." Cochrane points to the relatively steady gross domestic product figures and astronomical rates of unemployment during the Great Depression. The United States is nowhere near having 1 in 4 adults out of work, he says. Instead, the gloom and doom he's hearing sound more like a typical recession.
Look at the failure last week of Washington Mutual, Cochrane says. That was the largest federal bank failure in history. JPMorgan Chase bought the bank, and business continued.
"I still don't see what is coming over the horizon that is so absolutely awful," he says. He acknowledges suffering among ordinary consumers and Wall Street financiers alike, but he says some of it is unavoidable.
Meanwhile, the credit market is growing even tighter. Ira Jersey, of Credit Suisse, studies interest rates all day. He cites the Caterpillar manufacturing company as one example. Until a few weeks ago, Caterpillar was able to borrow money through issuing bonds with an interest rate of about 5.5 percent. Last week, the company issued more bonds — for a full point higher.
"I would argue that spigot is slowly being turned off," Jersey says, "and has been over the last year."
The question now may be how much the credit markets will dry up, and how long they'll stay that way.
The skeptics aren't advocating that Congress do nothing. Cochrane says the government should help, by taking steps like making it easier for banks to borrow money from the Federal Reserve. But he calls the bailout bill the "nuclear option."
It's like we have a boating outing," he says, "and some of the boats are sinking. So somebody says, 'I got an idea. Let's blow up the dam and drain the lake.' OK, that will keep all the boats from sinking — not just the three that are in trouble." In other words, Cochrane says the bailout is a broad fix for a narrow problem.
The problem for ordinary Americans is that they have no way of knowing for sure who's right.