Yesterday’s somewhat anticlimactic news from Capitol Hill was that the Senate passed a new (and disgustingly pork-laden) version of the Paulson rescue proposal. Asian stock markets fell on the news, although overnight-dollar interest rates also fell somewhat.

The action moves back to the House of Representatives, which is expected to vote on the new draft on Friday.

In failing to pass the previous version the other day, Speaker Pelosi laid just about the biggest egg one can imagine. She made herself look stupid and incompetent, which is bad enough. She also made a big contribution to a growing perception that Congress just doesn’t know how to do what’s right for this country.

And worst of all, she managed to delay action yet again on an emergency rescue plan that should have been passed ten days ago.

The stock markets rise and fall with the expectations for Congressional action. Significant sectoral rotation is now occurring in the stock market. Financial stocks are rising sharply with the prospect of additional capitalization from governments here and overseas. But industrial stocks are falling as evidence appears that the global economy just slammed on the brakes.

And in the meantime, the credit and money markets, where businesses go for near-term funding, are in a state of near-catatonia. And they’re getting worse with each passing day that Congress spends trying to play politics and cover their backsides at the same time.

The question which is now being asked in a few quarters is: ”Has Congress waited too long? Even if they enact the Paulson plan now, is it too late?”

Let me give you a brief description of how the credit freeze is playing out, and how it affects you.

The vast floods of liquidity that central banks have been creating over the last few days are bringing down overnight-lending rates. The overnight markets don’t appear to be in terrible shape. But term lending (for longer periods than one day) is nearly non-existent, and this affects the availability of funds for businesses.

The market for so-called commercial paper (borrowings by creditworthy businesses for periods of 270 days or less) has become severely strained by high interest rates, even for the strongest businesses.

This tells you that people with money to lend (such as corporate treasuries and various kinds of investors) are not making those funds available to private borrowers.

So businesses are choosing to borrow less, which means they’re also working to conserve cash. This has an immediate impact on economic activity, as companies slow down their projects and their spending, freeze hiring, and do other things that are more characteristic of deep recessionary periods than of the slow-growth period we’re in.

The sudden unavailability of payments then trickles down to the smaller and less well-capitalized companies that do business with the big ones.

For the most part, large companies in capital-intensive businesses have enough balance-sheet reserves to weather the storm, even if it should continue for some time to come. But as they pull in their horns, the question is whether their smaller partners can do the same.

The consumer also plays a big role in this. Polling data shows that most consumers are quite frightened about the sudden crisis. I can tell you firsthand that many people ask me if their money is safe in the bank. (It is, and if you pull your money out of the bank, you’ll make the problem worse. So don’t do that, and tell all your friends not to do it either.)

And as consumers get scared, they pull in their horns too. The rate of new-car sales just dropped by about a third, across the board. We knew that GM, Ford Motor and Chrysler were hemorrhaging sales, but this hit the Japanese automakers just as hard. That’s a bad surprise.

So what happens if the acute credit shortage continues for significantly longer? If it leads to isolated business failures and unemployment in certain regions and certain industries, the damage is containable. If that happens and it begins to spread, the situation would become… interesting.

All of this is irrespective of whether Congress passes their $100 billion pork-barrel and incumbent-protection legislation, that includes as a footnote the Paulson rescue plan. Members of Congress, who worry first about keeping their jobs, and second about doing what America needs, may have fiddled long enough to let the fire go out of control.

What kind of emergency measures are likely to be needed in order to contain a credit-driven spiral of business failures and sudden unemployment?

By all accounts (I’m not expert in the subject), there appears to be a significant amount of lending capacity in the local and regional banking sector. This can take up the slack now that Wall Street is temporarily out of action, but it may require emergency changes to banking regulations.

We may need to allow banks above a certain capital position to temporarily increase their leverage ratios and decrease their required reserves. These actions could serve to increase the availability of short-term funds, provided that bankers themselves decide they want to shoulder the additional risk. More creative measures by regulators may be required to ensure the latter.

Should emergency regulatory relief become necessary in the banking system, the people on point will include FDIC head Sheila Bair, who has done an outstanding job in handling the crisis to this point. And of course officials of the twelve Federal Reserve Banks, whose charter includes banking oversight, will be heavily involved too.

But there is something I want to say to Members of Congress, in both parties.

Through cravenness and indecision, you people are the reason this crisis got worse. You should have passed the Paulson plan, without embellishments, ten days ago.

If the Fed, the Treasury, or the FDIC now come to you with requests to authorize emergency regulatory forbearance, your job will be to lead, follow, or get out of the way.

BUT NOT TO SIT ON YOUR BLOODY HANDS FOR TEN DAYS, ASKING YOURSELVES HOW BEST TO SHIFT THE BLAME TO THE OTHER PARTY.

-Francis Cianfrocca