If this were a textbook recession, policy prescriptions would recommend a healthy dose of interest-rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months.

This clearly isn’t our grandfather’s recession. 

Unlike previous ‘bubble’ collapses - the stock market, last summer, and the tech market, a few years ago, this recession has its basis in poorly regulated mortgage debt.  When the housing bubble collapsed under the weight of unsustainable housing prices, people who couldn’t afford standard fixed 30-year loans were left holding the bag of substandard loan products which now couldn’t be refinanced as the credit market contracted.  Homeowners started defaulting; lenders started foreclosing; and housing prices continued to decline, which affected all homeowners.

But the housing bubble collapse affected more than homeowners, as it turned out, because banks had sold those risky loans to institutional investors ... insurance companies, mutual funds, and pension funds.  Therefore, regardless of one’s own situation, the foreclosure crisis affects almost every American in some way, and a good percentage of the world’s citizens as well.

The House will reconsider the bill later this week.  If it passes, what the deal will do will be to purchase mortgage-backed securities in danger of failing, or which cannot be sold in today’s climate, and hold them until things improve.  Then, the government will attempt to sell them back to the markets. 

This plan was always going to be a difficult sell in an election year, a month before the general election.  Maine’s delegation agreed in principle that some kind of intervention was necessary, although they all expressed concern for the first plan that Secretary Paulson floated.

 "Congress is making significant progress in correcting the flaws in the administration's plan by strengthening protections for taxpayers, restricting excessive executive compensation, and improving oversight and accountability," Sen. Susan Collins said in a prepared statement.

Rep. Tom Allen said: "People in Maine and across the country are expecting us to do all we can to protect their job security, their retirement accounts, and their children's future. I share their justifiable outrage at an administration and its allies in Congress who were negligent in their responsibility to ensure that greed and market speculation not undermine America's economic stability."

Sen. Olympia Snowe said there is too much at stake for American taxpayers to drag out deliberations.

"It is imperative that any proposal presented to Congress ensures transparency and accountability in our financial markets, assists American taxpayers facing foreclosure, and imposes limitations on executive compensation," Snowe said.

Tom Allen voted for the bailout plan; Mike Michaud voted against.  The Senate has not yet taken up the bill.

By the end of trading on Monday, the Dow was off almost 700 points, and the NASDAQ was off almost 200 points.  Also affected were the bond markets, and some commodities.

The Wall Street troubles have already affected the state.  The state of Maine could not float a $50 million transportation bond last week because traders told officials there was "no market" at all for large financial transactions such as this one.  This was surprising, because typically, municipal bonds are among the most stable assets available.

"In 34 years I have never had a trader say, 'I can't give you a sale price. There is no market,' " said Maine Municipal Bond Bank Executive Director Robert Lenna, describing his efforts to sell the bond on Wall Street.

"If there is any place the crisis is affecting the citizens of Maine, it is here," Maine Treasurer David Lemoine said.

Lemoine said the jobs associated with the 10 transportation projects covered by the $50 million bond could be jeopardized if the markets don't recover. As a rule of thumb, about 34 jobs are created for every $1 million in transportation funds, meaning that up to 1,700 jobs could be affected.

"If this problem is not fixed, then you can look at the list of projects and the jobs that they would have created and say that is not going to happen," Lemoine said.  While the treasurer and municipal bond bank have decided to hold tight and wait for things to improve, not everyone has that luxury.

The real problem is the credit market, as the failure to sell the transportation bond shows.  When banks stop lending to one another on Wall Street, credit for ordinary human beings on Main Street dries up, too.  Already, Mainers are reporting inability to get car loans, mortgages, and student loans.  Credit card interest rates are higher than normal.  Small businesses, which often use lines of credit to float day-to-day business costs, such as payroll and inventory purchases, are finding that those lines of credit are being decreased, threatening their entire business.

In addition to the funding, the proposed bailout plan contains provisions for the taxpayers to have an equity stake in the banks they are rescuing, helps homeowners stave off foreclosure, and ends excessive compensation to corporate CEOs under whose watch the industry began to fail in the first place.  Banks will be forced to purchase insurance policies to protect the assets.

Most of the banks that are failing or are in danger of failing are national banks, which are regulated more loosely by the federal government, not those regulated by the state.  So far, Maine banks have been above the fray, and none is in danger of failure. 

In the short term, what is hoped for is that the credit markets will thaw, allowing people to access their lines of credit, obtain home and car and student loans, and obtain a rational rate on credit card debt.  In the long term, the government hopes to be able to sell these troubled assets at a higher price than it paid for them.  If the governement buys a mortgaged-backed security at 50 cents on the dollar, for instance, and five years from now, the economy has stabilized to the point at which it can sell the same security for $1.50, it is even possible that the taxpayers will make money, rather than lose money in the deal.

However, it will be a hard few years, while the money is not available.  Despite the best wishes of the candidates, chances are high that some of the campaign promises both are making - from steep tax cuts and decreasing the deficit, to funding alternative energy and universal health insurance - will be impossible to fund until the assets begin to be sold. 

For Maine, it will be an era of belt-tightening and fiscal discipline.  But because Maine’s housing prices were never wildly out of line with the actual value of the properties, Maine will ultimately fare better in the wake of the crisis than many other states.

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