Bail-out collapses under pressure from voters

America's financial system sank further into chaos last night, and stock markets in the Far East fell sharply this morning, after Congress rejected the $700bn bail-out plan supported by President Bush. Facing overwhelming hostility from voters, the House of Representatives balked at providing the money for which Wall Street is begging.

If the bill fails to pass in another vote, likely to occur on Thursday, the US government will have to scramble for other means to save the credit markets. Roughly one-third of Democratic Congressmen and two-thirds of Republicans voted against the emergency bill which would have allowed the US Treasury to buy much of the bad debt clogging America's financial plumbing. The final vote was a decisive 228 to 205.

It came after a day of banking turmoil. Wachovia, America's fourth largest bank, was bought by Citigroup. In Britain, Bradford & Bingley was nationalised. And in Europe, Fortis had to be rescued with the injection of €11.2bn of taxpayers' money. Banking shares have plunged as a result.

With every member of the House of Representatives facing re-election in November, it was a rotten time to be calling for bi-partisanship and political courage. On the right, voters feel government has no business intervening in free markets, however bad the situation. And on both the left and right, people are furious at what appears to be a golden lifeboat for overpaid Wall Street bankers.

The failure of the bill to pass prompted the largest one-day point drop, 778, in the history of the Dow Jones index. Early today, the global fall-out began, with indexes from Tokyo to Mumbai falling sharply. In London, the City is braced for a heavy drop in the FTSE following yesterday's fall of 5.3 per cent.

Investors fear that the breakdown of the credit markets will have a devastating effect on the economy, hindering business growth and forcing consumers to stop spending. John McCain emerged especially bloodied from this, having urged his own party to pass the bill. In the event, not even the Republicans from Arizona, McCain's home state, voted for it.

Republican leaders blamed the Democrats' Congressional leader, Nancy Pelosi, for delivering a speech attacking Republicans shortly before the vote."They claim to be free market advocates, when it's really an anything goes mentality," she said. "No supervision. No discipline. And if you fail, you will have a golden parachute and the taxpayer will bail you out."

Several Republicans who had promised to support the bill flinched at the idea of being Pelosi's poodles. The Republican Rep Paul Broun of Georgia explained his objection to the bill: "This is a huge cow patty with a piece of marshmallow stuck in the middle of it and I am not going to eat that cow patty."

What now? President Bush issued a terse statement expressing "disappointment". Treasury Secretary Hank Paulson said he would work on an alternative plan, saying: "This is much too important to simply let fail." In London, Vince Cable, Lib Dem Treasury spokesman, and one of those expecting the FTSE to take a big hit today, said: "When people calm down they will realise that the US Congress will have a fresh go at this and produce a better package."

In America, the optimists take a similar line, saying the failure of the bill presents an opportunity to start again and construct a plan that appears less of blank cheque to financiers. Among conservative economists, there are still those who believe the markets will resolve the crisis more efficiently than Government intervention.

If markets stabilise after what is bound to be a turbulent 24 hours, they will have proved their point. But if markets continue to collapse, as seems more likely, the pressure on Congress to vote in a new rescue package will be considerable. There were reports emerging last night that American bank customers are getting the jitters following the takeover of Wachovia, withdrawing savings from banks they consider at risk. If this translates into a run on the banks, that pressure will only mount. ·