Pizzas galore!

In any case, as the financial condition of some banks weakens, their ability to lend, already severely constrained, will be crimped further. In the ultimate nightmare scenario, the seizing-up of the global financial system will drain the lifeblood from the global economy and a world recession much deeper than anything seen in the past 50 years would be inevitable.

But is this view, expressed yesterday in panicky financial markets, really justified? In fairness to the opponents of the bailout, the plan was certainly flawed, even after it had been recast in the past week. Critics say that the financial markets would not have been improved significantly by the Bill even if it had been passed by Congress.

They say that the Administration and Wall Street are responsible for the atmosphere of alarm yesterday because they told the world that this plan was absolutely essential to avoid a disaster. The spectacle of Hank Paulson going down on his knees last week in a semi-jocular plea to Nancy Pelosi, the Speaker of the House, may have been good theatre, but it created the wrong impression, critics say, and raised unreasonable public and market expectations about how crucial this legislation really was.

They insisted that the failure of the Bill yesterday presented an opportunity to start again and construct a less flawed version of an economic support plan that might represent less of a blank cheque for financial institutions that got themselves into this mess.

Times Archive, 1932: US banking reforms to restore confidence

The American Government realized long ago that if a way could be found to stop bank failures, or at any rate to reduce their number, the end of hoarding would be in sight, and possibly the end of the business depression

• New banking laws: Mr Hoover's hopes

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Others were suggesting that the US should steer away from signalling that it would bail out its financial system at all. There is even a view among some conservative economists that, in the end, faith in markets will be justified and that Wall Street, for all its howls of anguish, will find a way to resolve this crisis more efficiently than through Government intervention.

The next day or so will be critical and it will be the financial reaction around the world that will determine what happens. If the worst fears are realised and markets fall into a complete funk, or if signs begin to proliferate of a run on deposits in some of the weaker institutions, the pressure on the dozen or so members of the House needed to pass the Bill will surely mount. Paradoxically, if financial markets around the world stabilise in the next 24 hours, as unlikely as that seems, the mood in Congress might harden against a bailout.

The underlying conditions in financial markets certainly do not suggest that calm is about to return any time soon. Things look decidedly perilous. The plan rejected by Congress yesterday may not have been a perfect measure, but something needs to be done. It is still not too late to save the system. Yesterday, not for the first time, the US Congress took a fateful step towards driving the world over the cliff.

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