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Safe in their think-tanks, some of our friends have claimed that talk of a financial crash is merely a political invention. Perhaps we’ll now test their theory. A financial panic isn’t an academic seminar, and a flight from all risk isn’t something any free-marketeer should want. A recession now seems certain, as falling commodity prices are telling us, but the point is to prevent systemic financial collapse. Maybe the Members who voted “no” figure at least they’d still have jobs.

What next? One option is that Democrats will tell Mr. Paulson that they can pass his plan with more liberal votes, but that their price has gone up. This would mean more of the tax, spend and regulate provisions that House GOP leaders stripped out before their rank-and-file headed for the exits. These would only raise the price for taxpayers of the Treasury rescue and, if the equity provisions were too onerous, make the Paulson plan far less workable.

If Mr. Paulson wants to be a statesman, he could offer a Plan B that avoids giving Treasury such a big blank check. Instead, he could propose more public capital for the Federal Deposit Insurance Corp., which would do more of the creative financial plumbing it has done over the last week. (See here.) This will have to happen next year anyway, and the FDIC has long experience protecting taxpayers for public capital injections through preferred stock and warrants.

At the same time, the Secretary could salvage his own proposal by promising that while Treasury would start the purchase of toxic securities from banks, he would quickly (within weeks) turn the process over to a new and separate resolution agency. Congress could make this part of the legislation. This would remove Mr. Paulson as the political lightning rod he has become, and also give the rescue process the political insulation it needs. Such an agency could also work closely with the FDIC to protect taxpayers.

Members may not believe Hank Paulson, but they ought to pay attention to markets. The financial system has a huge capital hole due to losses on mortgage securities and other assets, and private capital won’t begin to fill it without the life preserver of public capital. Before it leaves town to campaign, Congress needs to act to defend and restabilize the financial system. After the last two weeks, and especially after yesterday, the Members also need to act to redeem their own reputations, to the extent they are still worth redeeming.

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