Friday's dramatic 263-171 House vote to pass the "Emergency Economic Stabilization Act of 2008" and President Bush's signature a few hours later raises a question:  Will it work?

I think it will, but a lot depends upon how well Treasury's reverse auctions go over the next year or so, how quickly our housing market revives, and how quickly confidence is restored in our financial institutions.

For those reverse auctions to succeed, Treasury will have to set high enough prices for "troubled assets" so the financial institutions that hold them will be willing to sell them, but not so high that the taxpayers lose money in two or three years when Treasury starts selling those assets.  This won't be an easy task.

For the housing market to revive, banks are going to have to start creating mortgages and investors around the world will have to be willing to buy mortgage backed securities (MBS) again.  Even quite credit worthy homebuyers have not been able to get mortgages recently.

For confidence to be restored in financial institutions, their depositors and customers and other financial institutions have to regain faith that they are solvent and are no longer burdened by hidden "troubled assets."

This is quite circular, and that's why the government has to step in.  No other institution can make it happen. 

It has nothing to do with fairness or economic justice. The taxpayers may suffer even with government intervention.  The only certainty is that the taxpayers would suffer a lot more without it.

Last Monday, the House voted down the initial version of H.R.1424 by 205-228 because it was deluged with irate phone calls and emails from people back home objecting to 'bailing out Wall Street."  That afternoon, the Dow dropped 778 points, and suddenly the calls starting coming in favor of the bill as retirees saw their investments get hit and as businesses and small banks and even the State of California faced complete shutdowns from lack of credit.  That's what really turned the vote around on Friday, the fear of another market collapse.

H.R.1424 was sweetened with $250,000 of FDIC deposit insurance, authority for the SEC to suspend "fair value mark to market accounting,' and with $110 b. of 'tax extenders' and Alternative Minimum Tax relief.  The deposit insurance increase will help restore confidence now, but it could create riskier banks down the road.  Similarly, confidence may be restored if banks don't have to mark down assets that haven't traded in months, but auditors warn that we should tighten accounting standards, not relax them.  The tax relief is almost entirely extending existing tax provisions that were due to expire, so it's not a new tax cut, just the extension of old ones.

The Congressional Budget Office was unable to 'score' H.R.1424's budgetary effects because there are just too many unknowns.  It's analysis is well worth reading.  It concludes that it is entirely possible the taxpayers may have a net loss, but it will probably be substantially less than $700 b. because it will realize some value from its sale of "troubled assets."

Like a lot of member of Congress last week, I would rather face future economic uncertainties having done everything possible to revive the economy than to refuse to accept the costs imposed by unseen financial malfactors and risk far worse economic carnage.