The stunning defeat of the Hank Paulson’s socialism-for-Wall Street bailout on Monday has just made planks of a pro-free market alternative much more viable. As Open Market has noted before, The Republican Study Comittee, a caucus of pro-market members of the GOP Congress, has presented such a plan that would be much more effective at stopping the contagion than the Paulson bailout, and many of its provisions would not cost taxpayers a dime.

The RSC plan is chock-full of measures to remove barriers to economic growth and market-distorting subsidies. It would suspend capital gains taxes to put trillions of dollars of capital in the economy, and set Fannie Mae and Freddie Mac, which as CEI has documented were at the root of this crisis, on the road to full privatization.

Most importantly for the crisis at hand, the RSC plan would make regulatory agencies suspend the mark-to-market accounting rules that a range of experts agree are spreading the contagion by forcing solvent banks’ to “write down” their assets, based on the last fire sale of a highly leveraged bank. As Gary Gorton, finance professor at Yale and member of the National Bureau of Economic Research has written, “With no liquidity and no market prices, the accounting practice of ‘marking-to-market’ became highly problematic and resulted in massive write-downs based on fire-sale prices and estimates.”

You can read more about mark-to-market regulations in my op-ed in the Wall Street Journal last weekend. My Open Market post early last week, as well as CEI’s new podcast, explains how the Paulson bailout may make things worse by forcing more paper losses that threaten healthy banks with “regulatory insolvency.”

The problem with the Paulson buy-up plan or some new variant of it is if the government pays pennies on the dollar, mark-to-market rules would make every other bank take this paper loss on its books. So there will be a tension between getting the best deal for the taxpayer and not spreading further systemic risk from massive writedown the government purchase could force. Even Ben Bernanke acknowledged this tension in his Congressional testimony last Tuesday.

All the more reason to go with the RSC plan instead of a reformulated Paulson plan, which would throw $700 billion and the free market out the window and still not solve the crisis at hand.

Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don’t stick the rest of us with their losses.

It’s not hyperbole to say the Republican and Democratic backbenchers who defied both parties’ leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.

Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee — such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul — spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn’t jibe with members, and certainly not with the American people.

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Those of us (and CEI is among the “us”!) who oppose Treasury Secretary Henry Paulson’s $700 billion bailout of Wall Street have been challenged to come up with an alternative to stop the credit contagion. The Republican Study Comittee, a caucus of pro-market members of the GOP Congress, has just answered this challenge. They have presented such an alternative that would be much more effective at stopping the contagion than the Paulson bailout, and it would not cost taxpayers a dime.

The RSC plan is chock-full of measures to remove barriers to economic growth and market-distorting subsidies. It would suspend capital gains taxes to put trillions of dollars of capital in the economy, and set Fannie Mae and Freddie Mac, which as CEI has documented were at the root of this crisis, on the road to full privatization.

Most importantly for the crisis at hand, the RSC plan would make regulatory agencies suspend the mark-to-market accounting rules that a range of experts agree are spreading the contagion by forcing solvent banks’ to “write down” their assets, based on the last fire sale of a highly leveraged bank. As Gary Gorton, finance professor at Yale and member of the National Bureau of Economic Research has written, “With no liquidity and no market prices, the accounting practice of ‘marking-to-market’ became highly problematic and resulted in massive write-downs based on fire-sale prices and estimates.”

You can read more about mark-to-market regulations in my op-ed in the Wall Street Journal this weekend. My Open Market post early this week, as well as CEI’s new podcast, explains how the Paulson bailout may make things worse by forcing more paper losses that threaten healthy banks with “regulatory insolvency.” The problem is if the government pays pennies on the dollar, mark-to-market rules would make every other bank take this paper loss on its books. So there will be a tension between getting the best deal for the taxpayer and not spreading further systemic risk from massive writedown the government purchase could force. Even Ben Bernanke acknowledged this tension in his Congressional testimony Tuesday.

All the more reason to go with the RSC plan instead of the Paulson plan, which would throw $700 billion and the free market out the window and still not solve the crisis at hand.