Republicans are building a new house when the hurricane hits

"WaMu becomes biggest bank to fail in US history". That is just one of the headlines flashing from news tabloids. House Republicans under the influence of their aspiring presidential candidate John McCain are retreating from a $700 billion rescue package for troubled financial institutions, proposed by their own Bush administration. By many this is conceived as nothing but political posturing by the Republicans and McCain, counting on a broad based public resistance to the administration's plan.

After years of agreeing to the bail-outs on Wall Street perfected under ex Fed-chairman Alan Greenspan, the Republicans seem all so sudden to become moralists and want to rely on the free market to solve the situation. In their opinion the free market approach is working and they point to JPMorgan's takeover of Wahington Mutual, the beleaguered mortgage lender, as an example.

The bank eventually failed in what has become the biggest bank failure in US history. A common thought is that JPMorgan Chase made a killing in this deal after all they had only to pay $1.9 billion for the thrift's banking assets. Other bidders for WaMu did not seemed to be that enthused. In the open bidding process there were evidently no bids for the troubled bank. JPMorgan is also expected to write down $31 billion of WaMu's loan portfolio. Another troubling aspect is the secret bidding process that obviously led to the final sell, and the way how it rushed through in an obvious attempt to avoid a general run on the bank that could have spread to other financial institutions. One can't help but ask is it really the free market that is working here or more likely panic that has befallen Wall Street and Washington alike?

Yet some Republicans under John McCain seem to suggest that the free market is working, contrary to all the indicators that point towards a banking system that is in a nuclear freeze. Diverse money market indicators, like the TED spread or LIBOR, have blown out, and corporate default swaps to insure debt obligations from Goldman Sachs and Morgan Stanley seemed to suggest imminent failure. Either the Republican aspirant for the Office of President is delusional about the current state of the financial markets or he is gambling the world's economic potential for political posturing.
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Clearly there is a sense of despair in Washington and Wall Street that is not unlike the one that ushered in the Great Depression in the 1930s. Then Secretary of the Treasury Andrew Mellon advised President Hoover to resort to a shock treatment. This famous quote ushered in the Great Depression: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system....". Purging it did but it also contracted GDP by almost 30 percent from 1929 to 1933.
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Jack Burman, a Republic Strategist, walks with Mellon's shoes when he opposes the bail-out plan and asks the question why are recessions important? "You need to sweep away the crooks, the bums, the inefficient..." He has also an answer to the possibility of a deep recession. "Its not the government's job to worry how deep the recession gets."

This sounds awfully lot like shock treatment and it does not resemble anything the followers of Keynes have stood for in the last 30 years. While I could certainly see a need to debate this issues I think this is not the time to do it. You don't change your strategy during a crisis. You do it either before or after.
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source: Great Depression
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Great_Depression

source: Wachovia Credit-Default Swaps Soar to Record After WaMu Failure
Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRTfhWFopT0E

source: The Bailout's Benefactors
CNBC
http://www.cnbc.com/id/15840232?video=868700977