A trader on the floor of the New York Stock Exchange looks up at the numbers on the board.

Treasury Secretary Henry Paulson warned US lawmakers they had to act fast after the House rejected his $700-billion bank bailout, triggering panic selling as the global financial crisis deepened.

Stock markets around the world plunged after US House members, wary an angry public will punish them on Election Day five weeks from now, voted 228 to 205 Monday to shoot down what would be the biggest government bailout in history.

US stocks lost $1 trillion in value in one day for the first time ever. Markets across Asia and Europe also fell steeply, as the House defied warnings that the entire world was waiting for the United States to act.

“Markets around the world are under stress,” said Paulson, the architect of the audacious proposal to buy up the mountains of bad mortgage-related debt behind a wave of home foreclosures and spectacular bank failures.

“We need to get something done,” Paulson said. “This is much too important to simply let fail.”

Despite fears the stability of the global financial system is at stake, House lawmakers appeared to heed widespread public sentiment that the US taxpayer should not suffer for the mistakes and greed of Wall Street’s bankers.

But Australian Prime Minister Kevin Rudd said the fallout was being felt around the world, and that he and other US allies would press Washington to take action after what he called the “bad development” of the House vote.

“This is necessary for the stabilisation of US financial markets and necessary for stabilisation of global financial markets,” Rudd said.

“We intend to be arguing this case strongly — robustly — in the days ahead.”

On Wall Street, the Dow shed almost 778 points or nearly seven percent. The carnage was repeated in Asia on Tuesday morning, with Tokyo and Hong Kong both down around five percent.

The continuing financial woes “will likely greatly affect the world economy,” said Kaoru Yosano, Japan’s minister for economic and fiscal policy. “We hope that the US will reach an appropriate conclusion on the solution.”

The crisis has its roots in a wave of loans to would-be US homebuyers with spotty credit histories. Once people began to default on these so-called subprime mortgages, a chain reaction of chaos ensued.

Housing foreclosures sent home values plunging, and the US housing market fell apart. Meanwhile the loans themselves had been re-packaged as complicated investment products and resold.

As bank after bank realised the extent of its investment in these bad debts, they saw they had less money available to make new loans while their own share prices began to collapse — and the global meltdown began.

Under the Paulson plan, the US government would buy up to 700 billion dollars of bad mortgage-related assets from banks, wiping the dodgy debts from their balance sheets and freeing them up to start lending robustly again.

But with the election five weeks away, the House of Representatives — whose members must be re-elected every two years — voted down the plan, despite a reported informal agreement on Capitol Hill that it would pass.

David Obey, a Democrat from the state of Wisconsin, said: “Evidently some of those guys would rather lose an economy than lose an election.”

With the Jewish New Year holiday of Rosh Hashanah coming on Tuesday, it was believed unlikely there would be any action in Congress until later in the week, raising fears the crisis would continue to deepen.

Many Americans, feeling the pinch from a weak economy and high oil prices, oppose footing the bill. In particular, many free-market conservatives see the rescue as “socialist” and destined to cause more trouble ahead.

Source: AFP