WASHINGTON — If the House vote against the $700-billion financial rescue proposal stands, Americans may be in for a test of free-market economics the likes of which the country hasn't seen since the early 1930s.
With the Treasury Department hobbled by the rejection of its plan, the Federal Reserve and Federal Deposit Insurance Corp. are the chief government institutions standing between the nation and the brutally Darwinian process that could unfold if the panicky financial markets are left to sort their problems out alone.
It's an open question whether those two institutions acting alone have the resources and power to avert such a debacle -- the cascading failure of hundreds, perhaps thousands, of financial institutions and paralysis spreading across the whole economy.
"We're entering a new phase of the crisis," said Chris Rupkey, chief financial economist with the Bank of Tokyo-Mitsubishi in New York. "If you don't stop the domino effect, you're going to see one institution after another after another going down," he predicted.
That's something the United States last experienced in the early 1930s, when Herbert Hoover was in the White House. Some conservatives believe that's still the best long-term solution to the problem, though none has gone so far as Hoover's Treasury secretary, Andrew Mellon, who said: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rottenness out of the system."
But House members and their supporters who insisted Monday that the government had no business staging a massive intervention in the financial marketplace were essentially making a modern-day argument for the laissez-faire economic policies of the Mellon era.
For now, the Fed and FDIC are doing what they can.
Early Monday, the Fed pumped an extra $630 billion into banks around the world. Its goal: to keep money flowing through the financial plumbing that's hidden from view but is crucial to the global economy's operation.
Meanwhile, the FDIC, for the second time in a week, orchestrated the safe demise of a major bank, this time helping engineer the sale of Wachovia Corp., the nation's fourth-largest bank by assets, to Citigroup Inc.
The deal puts Washington on the hook if losses in Wachovia's $312-billion loan portfolio top $42 billion.
But the two government agencies are severely limited in what they can do to keep the crisis from affecting ordinary Americans.
