In a shock to Wall Street, by a vote of 228 against and 205 for, the House just failed to approve the latest version of the $700 billion bailout bill. Why? Not enough Republicans backed it -- only 65 Republicans ended up voting for; they were running 2-to-1 against Democrats. Why not? Angry communications from their constituents saying they did not like it and a philosophical bent against bailouts. With the election weeks away, is this the Republicans last stand?

Who knows? But the outcome of the vote means that it's back to the drawing board for the bailout bill. Count me among those who believe that a better bill is possible -- that is, a bill that actually defines the problem(s) we face and offers a truly workable solution. I've posted about such a plan here.

Meanwhile, the Fed has injected $630 billion into global markets in the wake of the cratering of three financial institutions (FIs) in Europe. These include Belgian/Dutch insurer Fortis which received a $16 billion government capital injection; the nationalization of British mortgage lender Bradford & Bingley and $50 billion worth of guarantees for Hypo Real Estate Holding. And the Fed is adding $330 billion to its $290 billion currency swap program with global banks and $300 billion to its $150 billion Term Auction Facility (TAF) emergency loan program.

Bloomberg News reports that the Fed is increasing its so-called Term Auction Facility (TAF) by 50% to $75 billion. The reason? The program, which makes emergency loans to banks saddled with asset-backed securities (ABS) such as collateralized debt obligations (CDOs), is busted. That's because the TAF is designed to lower borrowing costs but it has accomplished the opposite.

This comes in response to criticism from a Stanford University economist, John Taylor, who wrote in a study last month that there is "no empirical evidence" the TAF has reduced the premium that banks charge each other to lend cash for three months. In fact, last month's TAF auctions were 2.82% and 2.87% -- above the then-2.5% rate on direct loans through the Fed's discount window. This "seeming anomaly" of the higher rate may have resulted from banks' willingness to pay a premium to avoid the stigma of borrowing from the Fed's discount-window.

This means that despite all the happy talk on Wall Street, we are not out of the woods by any stretch of the imagination. As I pointed out here, investment banks and hedge funds borrow $32 for every dollar of capital. If they owned just those dodgy securities, a mere 6% drop in the $6.1 trillion market for CDOs would wipe out their $340 billion worth of capital.

The U.S. Federal Reserve said that despite inflation concerns, "relatively low" interest rates may be needed "for some time," the central bank announced Wednesday in the minutes from its most-recent meeting. At the same time, however, the Fed raised its inflation projections for 2008.

"Several participants noted that the risks of a downturn in the economy were significant,'' the Fed said in minutes of the January 9 and 21 conference calls and the January 29-30 policy meeting last month. "Many participants were concerned that the drop in equity prices, coupled with the ongoing decline in house prices, implied reductions in household wealth that would likely damp consumer spending.''

Last week, in Congressional testimony U.S. Federal Reserve Chairman Ben Bernanke indicated that the Fed will lower rates further if financial conditions and the availability of credit deteriorate.

Also in the minutes, the Fed termed the inflation statistics since the end of the year, "disappointing." The Fed now expects 2008 core inflation of 2.0-2.2%, up from the previous 1.7-1.9% estimate.

Further, the Fed lowered its 2008 U.S. GDP outlook to 1.3-2.0% from the earlier 1.8-2.5%.