The impasse shows how blunt fiscal policy is and how inept politicians are in managing the economy. The current set of problems did not arise overnight--they festered in the form of government favoritism toward housing finance companies which overextended their operations and ultimately toppled over. Now, those policies have come full circle to rest at Congress's doorstep. Problem is, they will soon visit our doorsteps too in the form of a weaker economy.

Now that the bailout proposal has failed, Congress may seek a new approach. More likely, the existing plan will be tweaked to enable passage in a re-vote. But delay and political drama will further sap public confidence in Congress and weaken consumer confidence in the economy.

That may mean a deeper recession and trigger calls for still larger bailouts to salvage the financial sector in the future. But a larger bailout package will also be more dangerous. Larger short-term increases in federal borrowing may destabilize international capital inflows are reduce confidence in the dollar.

Overall, it's not a pretty picture--but score one for supporters of the free market who insist on allowing market reorganization of the financial sector to continue unimpeded...albeit at high risk to the economy over the next few months.

"One silver lining on the horizon, however, is that oil price increases are reversing. That means one of the two compounding shocks to economic growth is abating and the economic slowdown may not turn out to be as long-lasting as predicted earlier. If the general economy improves soon after the end of this year, we may see housing and financial sectors stabilize--perhaps even reverse course and begin growing again. Thereafter, promoting robust economic growth will require congressional intervention to maintain low taxes by making the growth-promoting Bush tax cuts permanent.