So, what happened? This piece in The Washington Post explains it all. Americans don't trust their leaders.

The leaders of the country said: Trust us.

The people said: Not this time.

The Emergency Economic Stabilization Act of 2008 in the end was a $700 billion piece of legislation that few people could truly love, and it offered citizens from across the ideological spectrum a little something to hate. Conservatives said they could not abide the government intrusion on the free market. Liberals recoiled at government checks rescuing Gucci-wearing Masters of the Universe. There were those who sniped that this was a "No Banker Left Behind" program.

A political establishment held in higher regard might have been able to hold together some kind of coalition of the willing. But distrust of the nation's leaders, from the leaders of Congress to the president of the United States, foreclosed that possibility.

Members of Congress in both liberal and conservative districts were inundated with e-mails and phone calls from angry voters opposing the bailout. With Election Day a little more than a month away, many lawmakers appeared to pay greater heed to their constituents than to their party leaders.

In interviews across the Washington area and in several locations nationwide, Americans reacted to the congressional vote and the market plunge with opinions that carried a common denominator of consternation.

Here's Peter Kane, 60, an entertainment lawyer, getting a shave at Albert's Haircutting & Style in Santa Monica, Calif., the towel on his face puffing as he talked:

"There's got to be some kind of bailout, but the bottom line is that I just don't trust these guys." Look at the Iraq war, he said. "Everything this administration has touched has gone to hell."

Read the whole thing. Americans don't trust their leaders. Not political leaders, religious leaders, financial leaders. About the only group of leaders who have achieved some level of public approval (and this is ironic since the opposite was the case when I was a kid) are our military leaders, despite the mistakes in Iraq. This lack of trust is driving the anger which led to all those phone calls and e-mails to Congressmen and women opposing the plan. One commentator on CNBC hit the nail on the head this morning when he said that it is understandable why the public no longer trusts the financial folks, since as a reporter he has spent many hours arguing with P.R. people at major firms whenever he reported that they were in trouble. They, of course, would deny any such thing, as did their CEOs. The the firm would fail. We have been so inundated with spin in the last couple of decades that we no longer trust anything anyone says. We've just stopped listening. This bodes very ill for the continuation of our system of democratic government and free market economics.

Richard Cohen writes about the ugliness that erupted due to the Great Depression, and finds some lessons for today.

Rich Lowry explains why the bailout failed.

David Brooks says the failure was due to the revolt of the nihilists.

The editors of The Wall Street Journal say Congress deserves it's low approval rating.

Pat Buchanan says a day of reckoning will follow.

How Congress will react from here depends greatly on how the markets react, and whether or not the credit crunch begins to create problems more readily visible to average voters. At the moment, I think the fact that members have gone back to their own districts may persuade more of them to oppose a bailout, rather than the other way around, unless public opinion itself begins to shift.

UPDATE...The House failed to pass the bailout bill. Poll numbers have consistently shown that average Americans oppose using taxpayer money to bail out Wall Street. Democrats and Republicans opposed the plan. Now, the Democratic leadership is going to be even more reluctant to come up with some plan. I suspect that if more time is taken to negotiate the package (especially if the markets fall dramatically and more big institutions fail), make some changes, then they will get the votes to pass something.

Over the weekend House, Senate and Administration negotiators finally came up with a Wall Street bailout plan. Here is a sketch of the plan. Basically, the bill would initially authorize $250 billion, with the President given the authority to spend another $100 billion. Another $350 billion could be obtained, but Congress would have to vote their approval. Assets would then be purchased by the Treasury Department (who would have the authority to hire experts to manage the process) and the taxpayers would hold ownership stakes in those companies from whom the assets were purchased. The bill has oversight elements, limits on executive pay packages (but not on already existing employment contracts), an insurance element (companies would have the option of buying insurance on their troubled assets, rather than selling them outright), and it allows the Federal Reserve to pay interest on bank reserves, which would help ease the credit crunch. The bill also mandates a study of so-called mark-to-market accounting standards, which are blamed by some for the current fiasco, and would allow the Federal Government to forestall foreclosure proceedings against homeowners whose loans are covered under the program.

Now comes the tricky part. First, Congress must pass the bill, which is already generating some opposition. My guess is that it will get done, now that it includes a little something for each faction (which, of course, is the way legislating works...thus, the old Bismarck line, "Those who like good laws and good sausages should watch neither being made"). Second, once it is passed, it needs cooperation from Wall Street. It isn't enough to just restore short term confidence in the markets, it also needs to actually help ailing companies, thus restoring long term confidence to the markets. Only time will tell.

Of course, our current economic model could be broken, according to Robert J. Samuelson.

Some investors are wondering why they can't get into the action of buying these assets.

There is, of course, other news out there. The New York Times has some good stuff this morning, including this story about resistance to Obama by union members. On their editorial page, three good ones. Bill Kristol has some advice for McCain on how he can win the election. Is Iran on the verge of a nuclear weapon? Is Gordon Brown about to go down to defeat in the next election in Great Britain?

David Gelernter has some thoughts on Barack Obama's fuzzy view of history in this piece in The Weekly Standard.

Obama continues to gain ground, as indicated by the RealClearPolitics Electoral Map. Obama has now taken the lead in Colorado, Virginia and North Carolina.

Some inside the Obama camp now believe they can win in a landslide.

Their optimism, which is said to be shared by the Democratic candidate himself, is based on information from private polling and on faith in the powerful political organisation he has built in the key swing states.

Insiders say that Mr Obama's apparent calm through an unusually turbulent election season is because he believes that his strength among first time voters in several key states has been underestimated, both by the media and by the Republican Party.

Apparently, the Obama people believe they can win states like Virginia, North Carolina, and even Indiana.

"Public polling companies and the media have underestimated the scale of new Democratic voters registration in these states," the campaign official told a friend. "We're much stronger on the ground in Virginia and North Carolina than people realise. If we get out the vote this may not be close at all."

Of course, the $64,000 question is whether or not these newly registered voters turn out, and the game changing question is whether or not a significant percentage of those voters who tell a pollster they will vote for Obama but really won't once they get into the privacy of the voting booth is large enough to swing the contest the other way.

Another milestone in the campaign is reached with last night's debate at Ole Miss.

Peter Canellos of The Boston Globe believes it was a good night for McCain, but a better one for Obama.

Fred Barnes believes it was a win for McCain, but not a knockout.

I watched the entire debate and came away with the impression that both men did what they needed to do, and neither made any major, memorable mistakes (for instance, both McCain and Obama called the Iranian Revolutionary Guard the Republican Guard, a minor, and understandable, mistake). Both men made clear statements that delineated their significant differences in philosophy and approach on both economic and foreign policy. Neither had any sighs, body movements or facial expressions that could be repeated over and over to ridicule them (at one point McCain looked angry, and at other points Obama's face screwed up in annoyance but, again, those things seemed minor to me). Thus, with no game changing moments, the status quo remains. Obama continues to lead the race, but does he lead by enough to ensure a win. It is, of course, entirely possible that by looking intelligent, calm and in control, Obama may have allayed the concerns of some of those who are still on the fence. If we see the numbers move his way over the next week, we might be headed back toward what I, for one, have expected all along, which is a Democratic tsunami.

The RealClearPolitics Electoral Map has shown some movement toward Obama. But, it needs to move even farther along for him to be assured of a victory, because I still do not believe that he can win Virginia or Colorado if he is only up by a point or two in the poll average in those states.

In other news, Larry Kudlow believes a compromise plan with House Republicans and the Treasury Secretary would be a win-win for the American taxpayer.

Michael Barone takes the long view on how the American voter views government intervention in the economy in this piece, which I think is interesting and probably on the mark.

One of the great challenges that will face the new President is what to do about Pakistan, which is reeling from the latest bomb attack and a lack of confidence in the new government. I would not be at all surprised if the Pakistani Army did not take control of the country, as it has on a number of occasions in the past.

As members of Congress continue to flail about trying to come up with a financial rescue plan, much of what is driving the debate is the knowledge that so many Americans are opposed to bailing out Wall Street. It is that simple fact which is preventing the Democrats from just using their majorities in both houses to pass a plan, secure in the knowledge that the President will sign it. Fearing the wrath of the voting public, they want to make sure that the Republicans are also on board, so that it will be seen as a bipartisan plan. Republicans in the House sense the dilemma, and are using it to slow the process down with an eye toward passing a plan more palatable to their members, i.e. one that does not spend $700 billion of taxpayer money. Thus, the talks broke down last night and I, for one, am not sure when they can get started again.

Meanwhile, the credit markets are in lockdown, as lenders simply aren't willing to part with their cash until the issue of all this toxic debt is addressed.

Who can end the deadlock? John McCain. He can move Republicans in Congress toward a solution in a way that the lame-duck, and terribly unpopular, George W. Bush cannot. Bill Kristol examines some of the alternatives McCain should consider.

The McCain people have another problem, as a series of poor interviews has led influential Conservative columnist Kathleen Parker to call for Sarah Palin to remove herself from the ticket. I've seen bits of the interviews in question, and I get the distinct impression that Sarah Palin is clueless on issues of foreign policy and global economics. Of course, as a hockey mom, small-town Mayor, and even as a first-term Governor of Alaska, she has absolutely no reason to be well versed in these subjects. I think the McCain people know this, which is why they have tried to insulate her from these interviews. Of course, on the other side, the Obama people must be tearing their hair out every time Joe Biden opens his mouth. Perhaps we'd all be better of if both V.P. selections suddenly developed "health problems", so the men at the top of the tickets could get a re-do.

Pollster John Zogby says that despite the razor-thin margins in the current polls the election will probably end in a landslide, one way or the other.

After last night's speech, President Bush is set to meet with the two candidates for President today, in an effort to put political muscle behind a Federal bailout of the American financial system.

Opinion on the proposed bailout remains mixed, and I have mixed feelings, as well, as I do not know who to believe.

James K. Galbraith, who is a pretty smart guy, says we don't need the bailout. Anne O. Krueger, who is a pretty smart gal, says we do need it. I'm sure I could surf the net all day and find dozens of pieces from other smart guys and gals with opinions all over the map on this. This is primarily because the mess is so complex. What's the true cost, asks Robert J. Samuelson as he tries to explain the problem. The New York Times asks the same question in this piece.

The bottom line? Well, one of my colleagues at Bloomberg News in New York yesterday summed it up pretty neatly. When there's a fire, you don't ask who was responsible for it. First, you put out the fire, then you ask who caused it, and why. The depressed housing market, combined with unwise (and, perhaps, illegal) financial practices, caused a fire. Hopefully, this bailout package will put the fire out.

On the political side John McCain has temporarily suspended his campaign and has asked to postpone Friday's debate. Bill Kristol believes this bold move may have won the election for McCain. Dick Morris and Eileen McGann also believe it is a bold political step in the face of momentum that had shifted toward Obama. McCain, they believe, looks like a decisive leader, while Obama looks to be dithering around. Once again the old swashbuckling naval aviator has thrown the dice. We shall see over the next week or so whether or not it begins to move the numbers back his way.

As for the numbers, Clarence Page has joined the ranks of those who wonder if Obama will lose the "Bubba" vote, simply because he is Black.

"The Bubba vote is there, and it's very real, and it is everywhere," former House Majority Leader Dick Armey recently said. "There's an awful lot of people in America, bless their heart, who simply are not emotionally prepared to vote for a black man."...

In fact, if he fails to show at least a six-point advantage in the polls by Election Day, I expect John McCain to be our next president.

Where do I get that number? I'm no math whiz, but it did not take numerical genius for me to notice that Obama fared best in caucus states, where the voting happens to be conducted in public. Where votes were cast in the privacy of voting booths, Obama tended to do worse than polls predicted. When Obama showed a lead in the polls that fell within the margin of error, it tended to mean a victory for his principal opponent, Sen. Hillary Clinton.

Now new evidence has emerged to back my six-point theory. A new and unusually comprehensive AP-Yahoo poll that takes a look at racial attitudes offers this unsettling news: "Statistical models derived from the poll suggest that Obama's support would be as much as 6 percentage points higher if there were no white racial prejudice."

Read the whole thing. Page is very fair in that he indicates there are plenty of folks who won't be voting for Obama for other reasons. But I tend to agree with him. Obama was well ahead of Clinton in the New Hampshire polls just before our primary, but when the real votes came in she won. As Page points out, Obama won almost all the caucus states, where people vote in public, but lost many of the primary states, where they vote in private. All voting in the general election, whether by mail, absentee, or in the voting booth, is in private. If the six point model is even close to being right, and we have absolutely no way of knowing for sure, then Obama will not win.

Megan McArdle explains just how close we came to seeing the entire financial system melt down. It makes for sobering reading.

Meanwhile, our political leaders in Washington continue to clash over the parameters of a rescue plan. The sausage making should be particularly gruesome this time.

Some folks see a need for the guilty to be punished.

David Brooks says this crisis has brought the return of The Establishment.

So, how is this impacting the race for President? According to Robert Stacy McCain the momentum has shifted again, this time toward Obama. That makes sense to me. The GOP is the party of Wall Street, and Wall Street appears to be the villain of the piece, at least in the popular narrative.

Of course, if Christopher Hitchens is correct, then Obama will not be able to take advantage of these new circumstances, because he is vapid, hesitant and gutless.

At least he is not like Sarah Palin, the ignorant, fundamentalist nut job from Alaska, at least if you believe this piece from Sam Harris.

As for me, I am torn. I think John McCain would be a better President. I also think the next four years are going to be very difficult. We may still see a recession that is deeper and lasts longer than any since the 1930s. We may end up in a shooting war with Iran, which would cause oil to spike over $200 a barrel, and might end with a mushroom cloud. If things are very bad by the time we get to 2012, we might see a political realignment on the scale of 1932, when the Democrats became the dominant party for generations. If the next four years are overseen by the Democrats, controlling the White House and Congress, then they will be blamed for the mess, and the GOP could sweep back into power in 2012 with a mandate for Conservative change larger than anything we've seen, larger even than 1994 or 1980. But, because I love my country more than my party, I will vote for McCain, and hope that he wins.

Here is the text of the proposed bailout plan for Wall Street. I urge you to read it (it is very brief). Can we please slow this process down before we give the Secretary of the Treasury such sweeping authority to spend so much of our money?

Democrats in Congress are trying to set some terms as the bailout debate gets under way, which is already giving me a sick feeling in my stomach.

Bill Kristol urges John McCain to oppose this plan.

Newt Gingrich wants some answers before we embrace the plan, and urges Republicans in Congress to consider how they would react if this were being proposed by a Democratic Administration...

If this were a Democratic administration the Republicans in the House and Senate would be demanding answers and would be organizing for a “no” vote. If a Democratic administration were proposing this plan, Republicans would realize that having Connecticut Democratic senator Chris Dodd (the largest recipient of political funds from Fannie Mae and Freddie Mac) as chairman of the Banking Committee guarantees that the Obama-Reid-Pelosi-Paulson plan that will emerge will be much worse as legislation than it started out as the Paulson proposal. If this were a Democratic proposal, Republicans would remember that the Democrats wrote a grotesque housing bailout bill this summer that paid off their left-wing allies with taxpayer money, which despite its price tag of $300 billion has apparently failed as of last week, and could expect even more damage in this bill. But because this gigantic power shift to Washington and this avalanche of taxpayer money is being proposed by a Republican administration, the normal conservative voices have been silent or confused.

Read the whole thing, as Gingrich asks important questions and makes some good alternative proposals.

Robert J. Samuelson also gives us some perspective on the crisis, which took another turn yesterday with word that the last two investment banks standing are now grasping for the government safety net.

Meanwhile, Iranian President Ahmadinejad will visit the United Nations in New York tomorrow and there is controversy not only about his visit, but also about a protest to be held today intended to be critical of the Iranian leader. Republican Vice-Presidential nominee Sarah Palin was scheduled to appear at the protest, but organizers asked her not to attend, as they didn't want to "politicize" the event (as if a protest about a political leader is not inherently "politicized" by it's own nature). The New York Sun published Palin's speech in today's issue, which you can read here.

Disgusted by the decision to keep Palin away, Roger Simon publishes this appeal to his fellow Jews.

Meanwhile, some foreign policy experts have formed a group dedicated to opposing Iran's drive for nuclear weapons.

Markets around the world are soaring on the news of a possible U.S. government bailout of the financial system. Treasury Secretary Henry Paulson says the plan will cost billions of dollars...

Paulson announced plans Friday morning for a "bold approach" that will cost hundreds of billions of dollars. At a news conference at Treasury headquarters, he called for a "temporary asset relief program" to take bad mortgages off the books of the nation's financial institutions. Congressional leaders had left Washington on Friday, but Paulson planned to confer with them over the weekend.

"We're talking hundreds of billions," Paulson told reporters. "This needs to be big enough to make a real difference and get to the heart of the problem."

I hate to be the skunk at the garden party, but am I the only one concerned that we will be piling on hundreds of billions of dollars in debt onto the taxpayer, already burdened by hundreds of billions of dollars (perhaps trillions of dollars) of unfunded liabilities? I am as happy as anyone that the stock market is going back up, but at what cost?

I once voted for a man who said that, "government isn't the solution to our problems, government is the problem". His name, of course, was Ronald Reagan. Don't think government played a role in this financial meltdown? Jonah Goldberg has a reminder for us...

The starting line for the parade of falling dominoes doesn't begin on Wall Street. Nor, alas, will the parade end there. But it really begins on the Capitol steps.

The self-proclaimed angels in Washington will tell you they've been working tirelessly to expand the American dream of homeownership by making mortgages available to people unable to plunk down 20 percent on a house. Franklin Raines, the Clinton-appointed head of Fannie Mae from 1998 to 2004, made it his top priority to make mortgages easier to get for people with poor credit, few assets and little money for a down payment.

The fine print to this noble intent was an ill-conceived loosening of standards. For instance, the Clinton administration re- interpreted the Community Reinvestment Act to politicize lending practices. Under the CRA, the feds forced banks to prove they weren't "redlining" (i.e., discriminating against minorities) by approving loans to minorities and various left-wing "community groups," bad risks or not.

Sen. Phil Gramm called it a vast extortion scheme against America's banks. Still, the banks were perfectly happy to pass the risky loans to Raines' Fannie Mae, which was happy to buy them up.

That's because Raines was transforming Fannie from a boring but stable institution dedicated to making homes more affordable into a risky venture that abused its special status as a "government sponsored enterprise." Fannie bought the bad loans and bundled them together with good ones. Wall Street was glad to buy up these mortgage securities because Fannie was deemed a government-insured behemoth "too big to fail." And others followed Fannie's lead.

The current crisis stems in large part from the fact that people who shouldn't have been buying a home, or who bought more home than they could afford, now can't pay their bills. Their bad mortgages are mixed up with the good ones. And thanks in part to new post-Enron accounting rules, the bad mortgages have contaminated the whole pile.

Bingo. Read the whole thing. Beware the man who says, "I am from the government and I am here to help you".

With yet another day of falling stocks, there is much speculation as to the extent of the crisis and how it might impact the Presidential race.

It might be the worst crisis since the '30s, with no end in sight...

The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government's unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.

Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.

Read the whole article. Remember the bottom line is too much debt, and then tremble when you consider all the unfunded liabilities that are piling up at the door of the American taxpayer.

So, how will the financial crisis impact the Presidential race?

David Broder thinks it will help Obama.

Timothy Garton Ash thinks it will help McCain.

I think it is a wash, primarily because while the current Republican President is unpopular, the Democratic Congress is even more unpopular. If anything, I give a slight edge to McCain, as he seems the tougher, more decisive leader.

Todd Domke outlines why he believes Obama is not leading the race, and it is almost entirely due to his own mistakes.

Clifford May examines the foreign policy aspect of the equation, and gives us the questions we ought to ask of ourselves and the candidates before making our decision.

Karl Rove also examines the race, and says Obama's mistake is to attack McCain, rather than provide a positive vision for his own candidacy.

This election is not fundamentally about Mr. McCain. It is much more about people's persistent doubts concerning Mr. Obama. The only way to reassure them is to provide a compelling, forward-looking agenda. That sounds obvious, but the Obama campaign seems to be betting on making Mr. McCain an unacceptable choice by striking at his character. Mr. McCain has absorbed many harder blows than anything the Obama campaign can throw his way.

The folks on the Left will, no doubt, believe that Rove is deliberately trying to mislead them with this, and assume that he really fears an all-out attack on McCain-Palin. They will even more strenuously advise the Obama people to attack and, thus, reveal "the truth" about John McCain and Sarah Palin. Rove knows this, which is why he feels perfectly safe to give an honest assessment of the campaign.

The Fed steps in and rescues insurance giant AIG, which leads to speculation about whether or not it would be wise to create an agency on the Federal level that would be responsible for these kind of bailouts. There are fears, though, that is there are more failures the Fed could run out of rescue cash. Still, perhaps the bailout strategy will be the wrong one in the end, as argued by David Leonhardt in today's New York Times. Leonhardt says we should look back at the bailout of Chrysler, and what that meant in the long run for the American automobile industry...

But if you take a moment to think through the full Chrysler story, you start to realize that it’s setting a really low bar. The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.

Barry Ritholtz — who runs an equity research firm in New York and writes The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

Bingo. Capitalism, at it's best (and worst) is about creative destruction. Businesses fail, new businesses arise. Jobs are lost, new ones are created. America's wealth and power is built on the fact that we are, usually, willing to weather the capitalistic storm confident in the knowledge that we will come out the other side with new, more innovative solutions to problems, selling new products, experimenting with new technologies, and beating our competitors to the punch. Too much government intervention can lead to the stifling of such innovation, with negative consequences for the future health of our economy and our nation.

Robert J. Samuelson explains why Wall Street's business model since 1980 is no longer working, and why it was doomed to fail.

There is good economic news, however, as oil prices continue to fall.

In politics, the red states are getting redder, while the blue states are getting purpler.

This is partly because the Obama people are off their game.

Meanwhile, General David Petraeus hands over command in Iraq to his chief deputy, while Petraeus moves on to command our forces in the entire region. Ralph Peters celebrates Petraeus as victorious leader.

After yesterday's debacle on Wall Street, everyone now wonders where we are headed.

Some say the Federal Government needs to step in, at least to prevent insurance giant AIG from going under...

If A.I.G. collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further. The counterparties around the world to A.I.G.’s credit default swaps may be unable to collect on their trades. As a large hedge-fund investor, A.I.G. would suddenly become a large redeemer from hedge funds, forcing fund managers to sell positions and probably driving down prices in the world’s financial markets. More failures, particularly of hedge funds, could follow.

Regulators knew that if Lehman went down, the world wouldn’t end. But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if A.I.G. collapsed.

But Larry Kudlow says the Treasury Secretary is doing the right thing by allowing the market to work.

Paulson’s view — supported by Bernanke and former Clinton Treasury official Timothy Geithner (now the president of the New York Fed) — is that the private sector has to take responsibility, including a consortium of private bank funds to assist the beleaguered AIG insurance company. We are now in for some Schumpeterian gales of creative destruction. But this is how it must be.

“Moral hazard,” said Paulson, “is something I don’t take lightly.” He’s saying bad financial behavior must be penalized, not rewarded. That’s the essence of the issue. The risk of failure is essential to an efficient economic system, and that includes financial risk.

In our capitalist system there are losers as well as winners. There are failures as well as successes. Harking back to the eminent economist Joseph Schumpeter, the old failures will be replaced by new enterprises.

The alternative, of course, is that the U.S. goes down the old European path of government domination of markets and the economy. But the moment the U.S. becomes bailout nation, that is the moment our economy and country heads irrevocably down the road of decline. However, Paulson set down a marker and said, “No we won’t.” As difficult as the next days may be, the primacy of economic freedom has been given a boost while the economic future of the U.S. looks brighter. Paulson’s decision was both momentous and transformative.

Kenneth Rogoff, who teaches economics at Harvard, agrees...

Letting a big investment bank go, as the Fed and Treasury did this weekend, was a calculated risk in a difficult situation. And the risks are very real. With the immense interconnectivity of the financial system, there really is no telling where the unprecedented failure of a big investment bank might lead. On the other hand, ponying up tens of billions in tax money, as the Federal Reserve did in March when another investment bank, Bear Stearns, collapsed, is no answer, either. With the housing market still weakening, with U.S. exports likely to suffer as the global economy falters and with unemployment rising, it is clear that simply bailing out Lehman Brothers would not stop the rot in the financial system.

I tend to support the view that the Federal Government should let the correction happen, but I haven't a clue as to how far they should let it go. Of course, I am not an economist or any kind of financial expert. My fear is that those who are economists or financial expert are just as clueless as I am.

I know a little more about politics (I even have a degree), and what I know (or think I know) tells me that the Presidential race continues to be tight, and it is all about how John McCain stole the mantle of change from Barack Obama, starting with the Sarah Palin pick. Democratic consultant Joe Trippi has it exactly right...

It's not just Palin.

The brilliance of the McCain strategy and messaging is that it includes a trap for Obama. To push back on the McCain claim of "country first" and "the original mavericks who will shake up Washington" the Obama campaign's attack of "four more years of George Bush" becomes a problem. In a country that yearns for post-partisan change the Obama campaign risks sounding too partisan and like more of the same.

It would not surprise me if in one of the debates Obama or Biden uses the "You voted with George Bush and supported him 93% of the time" and its John McCain that retorts "that's the kind of partisan attack the American people are sick of....".

What worked for Obama is now working for McCain. The important lesson for the Obama campaign is that the Clinton campaign kept looking at its research, kept stressing experience and did not adjust until it was too late. The McCain campaign has not only adjusted to the Obama message, they have changed the terrain.

Now the Obama campaign and its allies need to understand that in arguing that John McCain represents a third term of George Bush and the GOP agenda it is the Obama campaign that risks sounding partisan in a country that yearns for the post-partisanship of "country first" and "shaking things up in Washington".

Bingo.

As rescue workers try to save people in the aftermath of a real hurricane (the kind where people die), investors nervously wonder when we will see the end of the financial hurricane (the kind where some people wish they were dead) currently roaring through the marketplace. In both cases, people were warned. The fact that some did not heed the warnings is a testament to certain qualities within human nature that seem to be immutable.

These qualities are often on display in politics, as a remarkable thing is happening in the race for President of the United States. Barack Obama, who should be a shoe-in, is blowing it, and I think Daily News columnist Michael Goodwin has hit upon the reason...

With top Dems fearing Barack Obama is in a hole, the Obama campaign has made a weird decision. It's going to dig that hole deeper, harder and faster.

No more Mr. Nice Guy, Obama vows. He's going to really start hitting John McCain now. He's going to make voters understand that McCain equals four more years of George Bush.

It's a weird decision because Obama has been doing exactly that for four months. The problem is not that Obama hasn't hit McCain hard enough or linked him to Bush often enough. The problem is that he hasn't done anything else.

How about a new idea? How about putting some meat on the bony promise of "change"?

Bingo. McCain, who should be the more dour, hard-edged candidate, is looking like the optimist with this approach, while Obama looks more mean-spirited and backward-looking. With the choice of Sarah Palin, and a convention that sought to create a new image for the GOP, separate and apart from the Bush-Cheney image, McCain has the Democrats on the defensive, and the polls are beginning to show it.

Look at the RealClearPolitics Electoral Map. It now has McCain with the advantage. Look at the latest polls, and it is hard not to conclude, as Dick Morris and Eileen McGann have done, that McCain and the GOP are gaining ground. John P. Avlon, looking at different numbers, see independents swinging toward McCain.

In the wake of Sarah Palin, John McCain has opened up a 15-point lead among independents, according to a new Gallup Poll — and Barack Obama has a real problem.Since the GOP convention and his selection of the Alaska governor as his running mate, McCain has changed a months-long tie among independents into a 52 to 37 percent advantage. Support for McCain among self-described "conservative Democrats" has jumped 10 points, to 25 percent, signaling the shift among swing voters to McCain. The candidate’s surge tracks the script the campaign had written for the party convention. Joe Lieberman’s sleepy but substantively centrist speech was the preamble to McCain reframing the Republican Party around national security, fiscal conservatism and corruption reform. The result: the elevation of the independent maverick.

Bingo.

Obama, of course, still can win, despite the fact that things right now seem to be moving against him. But he needs to win the debates. Like Reagan in 1980, he must give assurance to voters that he can be trusted with the defense of the nation, and that he is the man to lead us out of the recession we are certainly in or are about to enter. He must hope that McCain looks old and tired. If the opposite happens, if Obama looks too cerebral and academic (and boring), or too uncertain, and McCain looks solid and tough, then it could be curtains for Obama.

Hurricane Ike continues to move toward the Texas coast, and most observers believe it will be a deadly storm. More on Ike here, here and here.

The deadly political storm, at least so far as the Democrats are concerned, is still the Sarah Palin VP pick, which has re-energized the GOP base. More evidence of this can be found in this new Gallup poll which shows the Republicans surging ahead in the race for the House of Representatives. Could it really have turned around so fast? Could this be real? I say yes. Why? Because the polling has consistently shown that it isn't just President Bush who is so unpopular, it is also the Democratic controlled Congress. Once John McCain was nominated, and especially when he chose Sarah Palin, he seemed able to separate himself from the Bush Administration, despite the best efforts by the Democrats to the contrary. With that separation, and no connection to any unpopular GOP leadership in Congress (since they don't hold power there), he is now running on his own, with an attractive partner in Palin. This has drawn the curtain away from the Democrats who run Congress and now, paradoxically, makes the GOP seem like they are the party to shake things up in Washington, with McCain and Palin as their new leaders. All I can say is...wow.

Cathy Young says the Palin nomination is a great moment for women, and Ellen Goodman says Palin, like the Zamboni machine, has cleared the ice, creating smooth skating for the Republicans on the issue of working mothers.

Dick Morris and Eileen McGann explain why the Democrats fear Palin so much...

Why do Democrats feel so threatened? They've even stopped attacking McCain and President Bush to launch a vicious and sexist barrage at her that would normally make a feminist angry and a Democrat blush.

Basically, it's this: John McCain only endangers Democratic chances of victory this November, but Sarah Palin is an existential threat to the Democratic Party.

She threatens a core element of the party's base - women.

When an African-American like Clarence Thomas, Colin Powell or Condi Rice rises to prominence as a Republican, he or she endangers the Democratic coalition. So would a Republican labor leader.

And so, above all, does the woman Republican running for vice president.

Democrats can't stomach seeing the feminist movement's impetus for greater female political participation and empowerment "hijacked" by a pro-life woman who espouses traditional values. They must obliterate her, lest her popularity eat away at their party's core.

Bingo.

Did ABC bungle the Sarah Palin interview? Howard Kurtz has a round-up of reaction to the Palin interview.

Bill Kristol thinks that The Washington Post is trying to smear Palin. Perhaps Michael Gerson is more on the point about why the media is having a hard time covering Palin, especially when it comes to her religious faith...

In general, liberal political and media elites demonstrate a religious diversity that runs the spectrum from secularism to liberal Episcopalianism -- all the varied shades from violet to blue. Yet they assume their high church or Mencken-like disdain for religious enthusiasm is broadly shared. It was the sociologist Peter Berger who observed, "Puerto Ricans, Jews and Episcopalians each form around 2 percent of the American population. Guess which group does not think of itself as a minority."

Bingo.

Finally, Charles Krauthammer explains why Obama has lost his aura.

As we pause to remember the attacks against us on 9/11/01, I would prefer to focus on the future. Our President, and our people, have made some good decisions and some bad ones in the seven years since the attacks. A majority of Americans, I believe, are still of the mind that the Al Qaeda terrorists are at war with us and all that we stand for and, therefore, we need to fight them, rather than take them to court. But this belief is not as universal as it may have been in the immediate aftermath of the attacks, due primarily to the fact that the terrorists have not hit us here since. I believe the reason they have not hit us here is that we took the fight to them, first in Afghanistan, then in Iraq. They cannot concentrate on attacking us here when they are too busy either attempting to regain what they lost in Afghanistan, reconstitute their base in Pakistan, or try to force us into a humiliating retreat from Iraq. Still, this battlefield success doesn't necessarily look like victory to a good portion of the American people, and it causes all sorts of other diplomatic and military problems. Going forward, I hope our leaders and our people make more good decisions than bad ones, because I believe it is truly a matter of the survival of our way of life that is at stake.

We should also be concerned about how our allies are doing in this "long war". Melanie Phillips is alarmed at what is happening in Great Britain.

David French, a Reserve Army officer, believes more Americans should join the fight against our enemies, rather than leaving it to others.

President Bush has, according to this story in The New York Times, given orders that allow our Special Operations people to go into Pakistan to kill Taliban and Al Qaeda fighters. Meanwhile, the Chairman of the Joint Chiefs of Staff tells Congress that we need to change our strategy in Afghanistan, and put more boots on the ground.

Ralph Peters says one explanation for the Left's reaction to the Sarah Palin candidacy is that they fear faith.

Karl Rove has some advice for Barack Obama...don't run against Sarah Palin, because you can't win if you do.

While the selection of Sarah Palin to be the GOP's Vice-Presidential nominee continues to generate positive buzz within the party, the nation's punditocracy continues to debate the merits of the selection:

Tammy Bruce makes a feminist argument for Palin.

Whether we have a D, R or an "i for independent" after our names, women share a different life experience from men, and we bring that difference to the choices we make and the decisions we come to. Having a woman in the White House, and not as The Spouse, is a change whose time has come, despite the fact that some Democratic Party leaders have decided otherwise. But with the Palin nomination, maybe they'll realize it's not up to them any longer.

Clinton voters, in particular, have received a political wake-up call they never expected. Having watched their candidate and their principles betrayed by the very people who are supposed to be the flame-holders for equal rights and fairness, they now look across the aisle and see a woman who represents everything the feminist movement claimed it stood for. Women can have a family and a career. We can be whatever we choose, on our own terms. For some, that might mean shooting a moose. For others, perhaps it's about shooting a movie or shooting for a career as a teacher. However diverse our passions, we will vote for a system that allows us to make the choices that best suit us. It's that simple.

I predict that Bruce will soon find herself erased as a non-person from the ranks of leftist feminists.

Pat Buchanan explains why he thinks Palin has generated a firestorm, both in support and opposition.

Why did the selection of Sarah Palin cause a suspension of all standards and a near riot among a media that has been so in the tank for Barack even "Saturday Night Live" has satirized the infatuation?

Because she is one of us -- and he is one of them.

Barack and Michelle are affirmative action, Princeton, Columbia, Harvard Law. She is public schools and Idaho State. Barack was a Saul Alinsky social worker who rustled up food stamps. Sarah Palin kills her own food.

Some will, no doubt, attribute Pat's explanation, and the way in which it is phrased, to racism. Ironically, though, it is not racism, or even sexism, in my opinion. It's about class, but not in the way that Marxists think of class. Barack Obama represents, in his life experience and his ideology, the intellectual class in America. Sarah Palin represents what used to be called the working class. Neither label really fits, but we know it when we see it. Palin is rural, community college, physical labor, hunt and fish, belief in the Bible, get married young, have more than two kids, Red State America. Obama is urban, Ivy League, professional, wait to get married, have two kids or less, office job, play golf in the Summer, ski in the Winter, fuzzy religious beliefs (if any) Blue State America. The fact that each so clearly represents "the other" is the reason why they generate such antipathy. No analogy is perfect, and this one is problematic. It's also problematic when we consider that Obama is Number One on his ticket, while Palin is Number Two. John McCain isn't entirely in one camp or the other which may, in the end, be the reason he wins.

I've been proud of my country many times in my adult life, and today is just another instance, as I'm proud to read this news that so many Americans are interested in the political process that they tuned in by the millions to the party conventions and the candidate speeches. Both conventions set a record for viewership, and over 40 million people watched Barack Obama, John McCain and Sarah Palin speak. Just another piece of evidence to add to the pile that Americans realize how important this election will be to the future of the country. Does anyone doubt that this November's election will see a record turnout?

Obama hits the trail by visiting places he needs to win, and McCain-Palin do the same. What is interesting about the McCain-Palin story is it's focus on the enthusiasm of the crowd, something that McCain has lacked, at least in comparison to Obama's crowds. Just another advantage accrued by his choice of Palin as his running mate.

Bill Kristol thanks the MSM for their vitriolic attacks on Palin, which only serve to generate more interest in her and sympathy for her. The more they attack her, the more fired up the GOP base (which had been dispirited, remember) and the more folks who identify with her, whether they are Conservatives or not, get fed up with the MSM, and thus pay less attention to them. Meanwhile, here is a theory as to why the Left hates her so much. I guess Oprah's audience won't even get a chance to judge her for themselves.

The New York Times takes a look at Palin's religious beliefs. I suppose if an examination of Barack Obama's church and religious ideology is fair game, so is hers.

In other news, it looks like Fannie Mae and Freddie Mac are going to be taken over by the Federal Government. This is an enormous bail-out, but it is probably necessary.

The jobless rate goes up. Good news for Obama unless, of course, the American people decide that it isn't John McCain or Sarah Palin's fault. If that is the case, they then must decide who would be better able to bring the jobless rate down, Obama-Biden or McCain-Palin.

Ralph Peters says the claims that Americans have killed lots of civilians in Afghanistan are baseless, and he slams the American media that buys those claims and the American ambassador who will not refute them.

Bob Novak writes about his brain tumor. Ted Kennedy recommended surgery for him, and Novak underwent the procedure. Another reason to be proud of my country, and Ted Kennedy, as compassion trumps ideology. I think history will record that these two men, one a journalist, the other a U.S. Senator, were great Americans of their time. I wish them both well.

John McCain's acceptance speech was a hit with the crowd, but not as exciting or transformational as Obama's or Palin's speeches. McCain, of course, is working under the handicap of his age (although, I thought he looked well rested and strong during the speech), and the fact that he is just not naturally as good making a speech as Obama or Palin. I think the best part was at the end, when McCain told of his personal transformation under the less than tender mercies of his North Vietnamese captors, which led well into his call to arms against the ills and challenges facing the nation.

There is still a great deal of buzzing about the Palin speech, which was seen by almost 40 million people. After my comments yesterday equating Palin to Reagan, I began to wonder if I had overstepped by making the comparison. I feel better about it now that I've read this piece by Michael Reagan, making the same comparison. Peggy Noonan also has some cogent thoughts about Palin and her speech. Rush Limbaugh is so excited he now believes the Conservative movement inside the GOP has a future beyond November, win or lose. Over in the UK, Gerard Baker has this analysis.

What should worry the Democrats are polls like this one, which shows the race a dead heat. With unemployment on the rise, fears of a "financial tsunami" on the horizon, a very unpopular Republican Administration in the White House, this should be a slam dunk for the Democrats. But it's not. They are in trouble.

SARAH PALIN WINS BIG

I was fortunate enough last night to get home from New York in time to watch some of the speeches at the Republican National Convention. Here are my impressions:

Mitt Romney - Just call him the biggest loser. His speech was dull and uninspiring, filled with bromides about taxes and spending and Liberals. I have never believed, and still don't, that these are things HE really believes. He is a phony, and I hope Conservatives realize it.

Mike Huckabee - The guy has a folksy speaking style, and he made some good points. I think he has a place at the table going forward, win or lose.

Rudy Giuliani - By the time the former Mayor of New York got done, I was worried his warm-up act was just TOO good, and would take away from Sarah Palin. Rudy knocked 'em dead, using his tough guy image as a former prosecutor, Mayor, and New Yorker to good effect by landing blow after blow on Barack Obama. While he may be wrong on some issues that are dear to the GOP base, he certainly has a place in the party.

Sarah Palin - Just call her the biggest winner...or maybe "Sarah Barracuda"...or how about America's Margaret Thatcher. She may very well have given the most important speech by a Conservative American politician since the last time Ronald Reagan spoke to a crowd. Smart, with a biting wit, beautiful, poised, and backed by an all-American family (foibles and all), she played her part wonderfully. She fired up the crowd and impressed many of the professionals who were watching. You never get a second chance to make a first impression (see Dan Quayle), and her first impression will help her fend off what I believe will be the increasingly frenzied attacks of the Democrats and their fellow travellers in the media. Again, the only comparison that I can make is to Reagan, who always seemed smarter than his enemies could believe, and who exuded sincerity along with his charisma. Assuming she survives the pounding of this campaign and doesn't decide to abandon public service, win or lose she is a new force inside the Republican Party.

New Orleans dodged a bullet, as the Big Easy received only a glancing blow from Hurricane Gustav. My impression is that people at all levels learned some tough lessons from Katrina, and those lessons were put to good use in preparations for this storm. Politically, this may change some attitudes about the Administration and the GOP. The Feds learned from their mistakes, and the heads of FEMA and Homeland Security seemed to have their acts together. Meanwhile, the Republican Governor of Louisiana seemed to do better than his Democratic predecessor although, to be fair, he gained from the benefit of hindsight, as did the Democratic Mayor of New Orleans.

Now, here comes Hanna and her (brothers and) sisters. We could see Hanna smacking into the East Coast followed by Ike hitting Florida, or some other combination, but it appears that we are entering an active phase of the hurricane season. Now we will see if the good performance in preparation and evacuation we saw in Louisiana can be repeated in the Carolinas (or wherever Hanna strikes).

Sarah Palin's 17-year-old daughter Bristol is pregnant. Will this turn off Evangelicals? Byron York doesn't think so, based on talking with some of those folks at the GOP convention. I don't think this will have much of an impact on the public, unless prominent surrogates for the Obama campaign debase themselves the way the lefty bloggers have been doing. I don't think that will happen.

Sunspot activity reduced to zero in August. If some theorists are correct, this could be the start of an extended period of minimal sunspot activity, which they believe could impact climate here on Earth by making things cooler, perhaps much cooler. The irony of this is, as noted Science Fiction writer Jerry Pournelle has pointed out, that our greenhouse gas emissions may keep the Earth from slipping into another Ice Age.

According to this report, Dutch intelligence says the U.S. will attack Iran's nuclear facilities soon. I don't believe it.

Ralph Peters says our soldiers have achieved a victory in Anbar Province, Iraq. Could it be that when voters go to the polls in November, their most recent memories will be of an effective Federal response to natural disasters at home and a change in strategy and tactics that resulted in a victory in Iraq?