The House has rejected the bailout bill:

In a moment of historic drama in the Capitol and on Wall Street, the House of Representatives voted on Monday to reject a $700 billion rescue of the financial industry.  The vote against the measure was 228 to 205. Supporters vowed to try to bring the rescue package up for consideration against as soon as possible.

Stock markets plunged sharply at midday as it appeared that the measure would go down.

House leaders pushing for the package kept the voting period open for some 40 minutes past the allotted time, trying to convert “no” votes by pointing to damage being done to the markets, but to no avail.

We’re about to find out whether Bernanke and Paulson’s “sky is falling” approach was more than scare tactics.

Almost from the beginning, I have felt that this was a crisis of confidence, not liquidity, and that Paulson and Bernanke’s panic only exacerbated a difficult situation.  As a result, the immediate response is, of course, panic.  The Dow Industrials, as of this writing, is down 530 points (6.5 percent), and NASDAQ is down nearly 130 (5.9 percent).  The TED spread is 3.37, up from 2.92 at the start of the day.

One of the big questions I have about this is whither the two Presidential candidates?  Both had backed this iteration, but this throws the door open again for one of them (most likely McCain) to seize the growing populist backlash against any bailout.  That could be dangerous for the country and the economy, especially since a McCain Administration is highly unlikely to implement the kinds of regulations needed or utilize the government’s resources to help Main Street.

I haven’t had a chance to look at a breakdown of how the House voted, but I’m guessing progressives and ultra-conservatives united to block the bill.  Given their different agendas, the House leadership has to decide which it wants to satisfy.  I can only hope it’s the latter, and that, despite some rough waters in the short run, the end result of today’s vote will be a much better bill.

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