The same free market de-regulation ideology that got us into this financial crisis is now blocking the road to a solution.  As the Wall Street Journal explains House Republicans appeared to be those most responsible for the debacle that unfolded at the White House today.

These Republicans naively think the Paulson plan is a “bail out” of Wall Street with government money.  This is wrong.  The Paulson plan is a revolving line of credit extended to the Department of Treasury by the American taxpayer allowing the Treasury to enter the financial markets to buy assets like mortgage backed securities or MBS’s.  

What Paulson is attempting to do is “make a market” for these securities, much like the service provided by the New York Stock Exchange or the Nasdaq.  Since these securities usually trade in the off exchange environment, what some call dark matter, they are not easily priced even in ordinary times.  But in an environment of great uncertainty only an institution with very substantial resources like the federal government can make a market for such complex instruments.

These MBS’s are now priced well below their long term value because of fear and uncertainty in the markets.  Thus there is room for Treasury to purchase billions in those assets at above current prices yet below their fair value and over time to resell those assets at a profit for the taxpayers.

We did the very same thing in the 1930s when the Reconstruction Finance Corporation entered into the market for mortgages and restarted the frozen market for those bonds.  And we did not take preferred share positions in the companies that sold us those bonds, as some mistakenly argue.  Soon other players followed and prices started to rise off the bottom.

The aversion to federal action by the Republicans is certainly repugnant, but it did not help matters today to see Maxine Waters more worried about cutting in women and minority owned businesses on the action in the Treasury plan than actually making sure that the federal government is first allowed to stop the financial bleeding.

The disadvantages of our atomized political culture are coming into full view as the far right and left attempt to weigh down a triage operation proposed by Bernanke and Paulson with all sorts of politically opportunistic amendments.  One particularly disappointing turn of events: left wing economists like Michael Reich and Jamie Galbraith joining with right wing anti-union and anti-regulatory ideologues from the University of Chicago to oppose the plan.

Take one concern: CEO pay.  Most of the CEOs who got us into this mess are already out of a job.  Those who are left will be earning far less than they did before given the very different economic and regulatory landscape they will be operating in.  

And what prevents us from re-visiting this and a host of other issues once the illiquidity issue is addressed?

It is unfortunate that the broader public does not understand how deep the problems we now face really are.  

Perhaps the collapse today of WaMu, the largest bank failure in US history, will wake people up.

But here is one helpful anecdote from the unfolding crisis:

Goodyear Tire & Rubber was forced today to draw down an expensive $600 million reserve line of credit because it was not allowed to withdraw money from its money market mutual fund. That mutual fund is supposed to be composed of what accountants call “cash equivalents” because they are invested in “commercial paper,” the most secure financial instruments we have next to actual dollars.

But the commercial paper market is now itself being deeply impacted by the unfolding crisis.  Industrial grade companies like Goodyear depend on commercial paper – loans for 30 or 45 days – to finance their working capital.  But of late the interest rate on CP is skyrocketing.  IBM is now facing triple its ordinary interest rate on CP in order to finance its operations. IBM thus applied for, and received, protection against short sales.

In other words, the real economy – Main Street in today’s phony parlance – is being directly impacted by the unfolding crisis.

The right solution is to let Paulson do his job.