Published reports have it that Congress couldn’t get a deal done on the Paulson bailout plan. Sketchy reports at mid-day said that Congressional leaders had the outlines of a plan in place, with a raft of what appeared to be largely extraneous changes to the structure of the deal.

Evidently those modifications were intended to give Congress a way to second-guess the progress and implementation of the bailout. Financial markets figured that half a loaf was better than nothing, and they finished the trading day with moderate gains.

But tonight, the news is that there’s no deal after all.

Reliable information from Capitol Hill seems to have been blacked out for most of the day. The tenor of the published stories is that a small handful of Republicans in the House of Representatives are torpedoing progress.

My guess is that the Democrats, who are in total control of the proceedings, are well aware of both the critical need for this bailout, and also of the politically-inconvenient fact that the American people are disgusted and want no part of it whatsoever.

Consequently, it would make no political sense at all for the Democrats to pass the legislation on their own. They badly need a way to blame Republicans for it.

One supposes that the Democrats want the bailout to pass with just enough Republican support so they can call it a Republican bill that they were dragged into, kicking, screaming (and pork-barrelling) all the way.

That’s regardless of the facts that the bailout is needed to stabilize financial markets in the near term, and also that expert opinion is steadily moving in support of the idea that the bailout actually will improve conditions in the real economy.

It’s also regardless of the fact that the Democrats control both houses of Congress.

We’re not talking about a filibustered vote in the US Senate here. Nancy Pelosi, Harry Reid, and Barney Frank are the key players in this saga. They can do anything they damned well please with this legislation, and they need approval from not a single Congressional Republican to do it.

For the Democrats to blame a few Republicans for the failure to act is a craven lack of leadership. The country gave these people control of Congress in 2006 expecting they would do a better job than the Republicans.

And this is what we get, instead.

At this hour, markets are open in the Far East, but the critical credit-markets in London are not yet open for Friday trade.

Hours ago, when New York trading ended, it appeared that money markets were under extreme stress but not at the edge of panic.

The Fed funds rate centered around 1.5% for much of the week, averaged below 1.2% last night. The Fed’s target for this rate is 2%. There’s a distinct possibility of an emergency cut in policy interest rates, as early as the wee hours of this morning.

I would also look for additional emergency measures such as expanded currency swap-lines with foreign central banks, before New York opens for trading, a mere ten hours from now.

This is a hurricane warning. There is heavy weather ahead in financial markets. We’ve made an awful lot of history in the past ten days. We may be about to make some more.

-Francis Cianfrocca