Earlier today, the House of Representatives balked at the Paulson bailout plan, prompting the Dow to drop 777 points. Writing on his New York Times blog, Floyd Norris observes:

"The risk of a big bailout always was that it would make investors think the banks were in even worse trouble than they appeared to be. Henry M. Paulson Jr., the Treasury secretary, tried to structure this bailout as a purchase of assets, so that banks taking the money would not be tarnished by doing so. But the decision to force those banks to turn over equity may have killed that move, and the changes to be made in the bill now could well make it more punitive. That could be good for a sense of justice, but bad for containing the crisis."

He also notes that, unlike the S&L crisis or even the Great Depression, this crisis in confidence reflects the so-called Ownership Society in which we now live. The common man did not lose his savings; the common shareholder lost his investment.

"Absent the defeated bailout, the government is picking off weak banks one by one, arranging takeovers (takeunders might be a better term) when they can," Norris writes. "In both the Washington Mutual and Wachovia deals, the depositors are doing fine, while shareholders suffer. That discourages bank runs by depositors, which is good, but encourages what we will call 'stock market runs' by shareholders of any bank that might be in the same league as those banks. (If your bank ever bragged about its mortgage lending, look out.)"

The "stock-market run" theme echoes James Surowiecki's recent New Yorker column, which asserted that the big investment banks were more vulnerable to this crisis because they had all chosen to go public.

"[B]eing publicly traded makes it harder to take the long view and survive market storms," he writes. "It's possible that a year or two from now many of the toxic assets that financial firms have written off will turn out to have considerable value... However, public companies, in order to satisfy ratings agencies and convince shareholders that they were cleaning up the mess they'd made, had little choice but to dump those assets."