Yesterday’s astonishing rejection by Republican Congressmen of what was presented as a bipartisan agreement on the $700 billion bank rescue package, will surely not be the last word on the issue.

In one form or another, the package will surely be passed in the next few days, since the alternative would be the failure of every leading bank in America, the inability of the US Government to honour its guarantees to retail savers and the bankruptcy of many large US corporations, probably including General Motors and Ford. For the rest of the world, particularly for Britain, a definitive collapse of the US bailout would mean nationalisation of all leading banks, insurance companies and other financial institutions – and that unthinkable international impact is another reason why we can be fairly certain that a bailout of some kind will be passed quite soon.

The interesting questions raised by last night’s fiasco are: how did the US Government get into such an appalling mess; and what will be the consequences of this disaster for US politics? The answers to both these questions come back to Hank Paulson, the former Wall Street banker and incompetent US Treasury Secretary. Had it not been for Mr Paulson the bailout would probably never have been needed. What made it necessary was a three-stage sequence of blunders. The first began when Mr Paulson decided, for largely political reasons, to wipe out the private shareholders in Fannie Mae and Freddie Mac, two businesses which he and many Republican politicians regarded as crypto-socialist incubi in the American body politic. The enormous – and unnecessary – losses suffered by shareholders of Fannie Mae triggered the first stage of the financial crisis, starting on September 8. He then aggravated the crisis by deliberately bankrupting Lehman and then seizing the assets of AIG.

These unnecessary decisions spread the crisis to every other financial institution. Even worse was Mr Paulson’s second set of political blunders, starting with his sudden announcement last week of a $700 billion bailout on which he had consulted no one. The arrogance of his assumption that the Congress would write him a cheque was matched by his failure to come up with any coherent description of how he planned to use this money to help the banks. Under these circumstances, it was hardly surprising that he faced congressional opposition, which led to his third blunder. Mr Paulson’s only hope of getting his money was to give unequivocal support to the Democratic Party leaders in Congress who were willing to write a plan themselves. But just as this was nearing completion, Mr Paulson allowed John McCain to parachute himself into the negotiations and attempt to take credit for saving the economy. Had Mr Paulson warned Mr McCain away, the package would probably have been passed already. But by bowing to party-political demands for a Republican say in the package, Mr Paulson opened himself to last night’s sabotage.

Now there seems to be only one option: for Mr Paulson and Mr Bush to plead for the Democrats to pass the bailout. In exchange, the Democrats could demand that Mr Paulson and Mr Bush denounce their Republican colleagues and Mr McCain for irresponsibly trying to sabotage the US economy. If the Democrats play their cards well, Mr Paulson may have no choice.

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