The Times says today that because of the failure of the Bailout Bill, Treasury and the Fed will have to dig deeper into their toolkits, which really means just lending more and more money to distressed firms.
"We have a lot of money to play with," said Kenneth Rogoff, an international economist at Harvard. "As long as foreigners have a lot of confidence in our ability to solve our problems, we can borrow the $1 trillion to $2 trillion [!] we need to solve it."
Wait, don't they need a statute from Congress? Apparently not: they just borrow more and more money from whoever is willing to provide it, namely, foreigners. Which makes one wonder what exactly the Bailout Bill was supposed to accomplish. It may be that technically, Treasury and the Fed cannot purchase mortgage-related assets (actually, I think the Fed can); but they can, as we saw in the case of AIG, lend money to firms and take security interests in their assets, including mortgage-related assets, and then take over those firms when they default, as many of them will. Perhaps, existing statutory authorities to lend to distressed firms don't give them as much flexibility as the plan gave them (maybe the difference is that everything has to take place through the Fed, rather than through Treasury, but they appear to cooperate closely with each other anyway), but they also needn't worry about oversight, limiting executive compensation, and the rest of the constraints that the Bill contained.
The Times article suggests that the main risk from this arrangement is that foreign lenders will stop lending to Treasury because they fear that our government will never pay them back. I suppose that this is the true significance of the failure of the Bailout Bill. If Congress won't support the lending program ex ante by enacting that bill, then foreign lenders might infer that Congress won't support the lending program ex post by raising taxes to pay off government debt, and the entire house of cards collapses. However, I suspect that the United States remains a pretty good credit risk. If I am right, then the failure of the bill means that the resolution of the crisis will be more costly and cumbersome than it would otherwise be, and will take place with less oversight, but not that the government will sit around and wait for the "correction" to take place. If I am wrong, then we are headed for dark times. The libertarian option is simply not on the table.
More from David Zaring, with links to others on this topic.