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Paulson's proposal, meant to unburden banks of the groaning weight of their own reckless lending and energize an economy slumping from a credit crisis, was rejected by legislators Monday.
The representatives are expected to gather again tomorrow to reconsider the bailout measures, and in the interim, politicians and economists offered suggestions for making Paulson's formula acceptable to some uncertain Democrats and a majority of Republicans, many of them ideologically repulsed at the notion of government's running commerce.
Plans such as recapitalizing banks to free up credit were met by concerns of socialism.
The only agreement seemed to be that something must be done.
Sen. Bob Casey said he believed the Senate would pass the financial-sector bailout legislation that the House rejected.
Republicans in the House, meanwhile, appeared firm in their opposition to the bailout, saying it was government intervention in private industry.
In a briefing with reporters, Casey warned that unemployment was rising quickly in Pennsylvania.
"The worst thing we could do is nothing," said Casey, who is a member of the Senate Banking Committee. "Every day or couple of days, this credit problem becomes more significant," he said. "Doing nothing and hoping things will get better is very hazardous."
He said that phone calls ran 10-1 against the bailout and that many Pennsylvania families feel as if they are in a recession already. Casey expects the nation to report 100,000 job losses for September.
Casey said he hoped the House would vote a second time on the bailout package, which failed in a 228-205 vote, in the next several days. He expects few changes in the bill.
Mark Zandi, chief economist with Economy.com, warned that companies could begin laying off employees within weeks without some financial-sector rescue to unfreeze credit. "The market has failed. When markets fail, the government has to step in," Zandi said.
But Republicans overwhelmingly voted against the package for exactly that reason. In Pennsylvania, six Republicans rejected the Paulson proposal, and one, Rep. John E. Peterson, voted yes. Three Pennsylvania Democrats rejected the bailout, and eight voted for it.
Rep. Bill Shuster, a Republican from Hollidaysburg, Pa., said in a statement that the bailout package could "very well set our nation down the slippery slope toward socialism."
Andrew Cole, spokesman for Rep. Joseph Pitts, a Republican whose district includes Lancaster and Chester Counties, said the legislator opposed the bailout. But Pitts "knows something has to be done, and he is pushing the leadership to do something," Cole said.
Pitts has proposed accounting changes in how rotten securities are valued by financial institutions, boosting FDIC insurance caps for individuals, and creating an insurance system for mortgage-backed securities.
Economists yesterday considered alternatives to Paulson's bailout formula. One problem, they say, is that it does not help fix the nation's housing crisis -- the root cause of the U.S. financial disaster that is now locking up the global economy.
Some say they believe that a housing fix will be done in separate legislation in 2009.
The current bailout has the government buying and pooling rotten mortgage-backed securities. The government also could infuse cash into financial institutions in exchange for warrants or special stock. This infusion would recapitalize banks and financial institutions, giving them time to repair their balance sheets.
A cash infusion, though, would likely raise Republican political concerns over government intervention in private financial institutions.
Robert Dye, senior economist with PNC Financial Services Group, of Pittsburgh, said the recapitalization would "buy time" for financial institutions.
It could work, although he did not necessarily favor it. He said he was not sure why Paulson proposed the bailout as he did -- with the government buying and pooling the securities.
"There was some sense of urgency, if not desperation, to get something done, and this was the plan that Paulson came up with and the one that he thought he could sell," Dye said.
Contact staff writer Bob Fernandez at 215-854-5897 or bob.fernandez@phillynews.com.
To see more of The Philadelphia Inquirer, or to subscribe to the newspaper, go to http://www.philly.com. Copyright (c) 2008, The Philadelphia Inquirer Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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