Quotes of the Day

A month ago, when the U.S. financial system was melting down, the urgency of the crisis compressed the political and ideological distances between America's top economic players, allowing Congress to pass a massive rescue bill in a matter of days. Now that the most acute phase of the crisis appears to have passed, those natural divisions are once again opening.

Congress returns to Washington this week for a five-day lame-duck session, and Republicans and Democrats are gearing up for the first skirmishes in what promises to be a war to remake the U.S. economy. Fights are breaking out within the parties too. Liberal and centrist Democrats are arguing over how fast to push their agenda. Republicans in the Bush Administration and Congress are split over whether to continue deep intervention in the markets. (Read "10 Things to Do with Your Money Right Now.")

The battle lines were drawn up while Congress was away over the past month.

Democrats are emboldened by their election victory but don't yet enjoy the broad margins they will have in the new session that begins in January. Yet there are high-stakes issues that can't wait. This week Congress will try to approve a bridge loan for the auto industry and a stimulus package that includes unemployment benefits, Medicaid help for the states and some assistance for small businesses. House Banking Committee chairman Barney Frank will call on Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson for a roasting on how the $700 billion bailout — passed at the height of the crisis — has been spent so far.

Within the Administration, territorial divisions are emerging. The FDIC chief, Sheila Bair, has tried to get the Administration to use some of the Treasury's emergency-bailout money to get banks to adjust failing mortgages. The White House strongly opposes her plan, and there have been recriminations between several of the players. More broadly, Republicans who think their electoral drubbing necessitates a return to fiscal restraint are turning against those in both parties who want to continue the aggressive, costly measures that Paulson has embraced.

In his first visit to the White House, President-elect Barack Obama asked President George W. Bush to support giving some aid to the tanking auto industry but was rebuffed. A month ago, the proposal might have received serious consideration, but the atmosphere inside the Administration has changed now that the most dangerous part of the crisis appears to have passed. "There wasn't much of a debate" among Bush's top economic advisers about using part of the bailout money to help automakers, says a senior Treasury Department official. Of the first $350 billion released by Congress last month under the emergency bill — called the Troubled Asset Relief Program (TARP) — only $60 billion remains. "Everyone felt the same way: the TARP is for the financial industry," says the senior Treasury official.

The proposed auto-industry bailout was discussed, however. Paulson met with General Motors chief Rick Wagoner in October, and he held conversations with Keith Hennessey, the head of Bush's National Economic Council (NEC), Commerce Secretary Carlos Gutierrez and others over the phone in the days after the election. Yet there was not sufficient disagreement between the men to warrant a full meeting of the NEC.

The main argument within the Administration against using TARP money for an auto-industry loan is that the automakers' problems are viewed as systemic, not short-term. "No one in this building or in this Administration has a plan for the long-term viability of the auto industry," says the senior Treasury official. "It's just not on the shelf." Without such a plan, the Administration has decided that any short-term loan should come from existing money from Congress for the auto industry's modernization.

Democrats in Congress who want new money for the bridge loan consider the proposal unlikely to pass in the face of an expected Republican filibuster. Some in the party would not mind if one or two of the auto companies go under, reasoning that it would be easier to force them to restructure along strict environmentally correct lines. But there's concern that bankruptcy could lead to a broader economic fallout. "Because of the condition of the credit market, there's some concern the car companies would have to liquidate," says one senior Democratic aide.

Democrats face internal divisions on other economy-related issues too. Liberals are eager to tackle a big agenda, including a tax hike on the wealthy and a bigger public-works stimulus package. But reality may bring the party's leadership back down to earth. The senior Democratic aide expects no upper-income tax hikes or big infrastructure investments, and says the stimulus package rolled out this week will be restrained. "It'll be unemployment-benefits extension, a federal Medicaid matching program and allowing small businesses to write off immediately more of the expenses," the aide says. Even so, the package may not make it through the Senate.

More important than the battles between parties or among Democrats, though, are the disputes within the Republican Party. The nastiest fight has been over the program to restructure mortgages nationwide. On Oct. 30, staff from the Treasury Department met with staff from the FDIC to discuss a $50 billion plan to get banks to rewrite troubled loans to make them affordable for distressed homeowners. The FDIC side saw the Treasury's interest as a sign that the plan would be approved.

There are two versions of what happened next. One camp says Treasury Secretary Paulson then decided not to back the plan after all. Other sources on the Hill and elsewhere familiar with the debate say Paulson supported the plan, but the White House killed it. Democrats contend that the White House is clamping down on Paulson's previous willingness to do big, expensive interventions. The Treasury Department declined to comment, but the senior official dismissed the talk of White House–Treasury battles as "stupid." Paulson may get grilled on the fight over the FDIC mortgage plan during his appearance before the House Banking Committee and chairman Frank.

If there are to be any fights over the financial rescue plans between the incoming and outgoing Presidents' economic teams, they haven't started in earnest yet. Paulson has spoken twice thus far with a representative of Obama's transition team, once in person and once on the phone. The face-to-face meeting took place in Paulson's office for an hour on Nov. 10, with Paulson bringing Obama's team up to speed on details of pending decisions. This week Obama's transition team is expected to establish offices in the building and to begin digging more deeply into the handoff.

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• Massimo Calabresi
• Washington's brief display of unified crisis management quickly yields to ideological infighting and turf battles