'Americans Will Not Tolerate Those Who Stood By and Let This Calamity Happen'

A shock vote by the US House of Representatives to throw out Henry Paulson's $700bn mortgage bail-out prompted a bitter political postmortem and raised speculation of a cut in interest rates to shore up confidence in the system.

As Republicans and Democrats began to assign blame, business groups reacted with anger and frustration.

The US Chamber of Commerce said the vote had caused "uncertainty and turmoil" in the markets, destroying billions of dollars of household wealth. "Make no mistake - when the aftermath of congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen," it said.

Economists said central banks would have to act if global markets continued to slide today. Nick Parsons, head of markets strategy at NAB Capital in London, said rejection of the bill meant that central bankers would fall back on more traditional means of oiling the markets. "The apparent failure of this package significantly enhances the chances of bringing forward interest rate cuts", he said.

Outside the New York stock exchange yesterday, leftwing protesters from Jesse Jackson's Rainbow-Push coalition greeted the failure of the bail-out with enthusiasm, waving banners declaring "no money for Wall Street".

But analysts said ordinary people would feel the impact. "You couldn't make this stuff up if you tried," said Paul Ashworth, senior US economist at Capital Economics.

"They [Congress] forgot the first rule of policy making in a crisis: above all, do no harm."

In dramatic trading after the Republicans rejected the bail-out investors raced to safe haven assets. Gold jumped 3% to more than $915 an ounce while 30-year treasury bonds rose sharply, as did European government debt as investors failed to be reassured by a move earlier in the day by the world's central banks to pour billions of pounds into the markets.

The bail-out - the greatest intervention in the financial markets since the Great Depression - was regarded as a way to draw a line under the financial crisis and mark the end of the uncertainty about the toxic assets.

The Dow Jones industrial index, the key barometer of Wall Street, collapsed after the Republicans refused to endorse the plan at about 7pm last night London time. As horse trading began to try to convince the Republican members of the Senate to support the bail-out, Wall Street endured a roller coaster ride.

The Dow Jones industrial average slumped by 777 points while the technology-dominated Nasdaq index suffered its biggest one-day percentage loss since 2000.

TJ Marta, fixed-income strategist with RBC Capital Markets in New York, said: "Last week we wrote that 'failure was not an option', as failure to pass it would precipitate a renewed meltdown in financial markets. Congress apparently doesn't understand the stakes.The only ray of light is that the horse trading is not over and some of the no-voters could switch."

London markets were closed when the rejection came through. But futures contracts indicated that the FTSE 100 index of leading shares would open more than 250 points lower. The drop would come on top of the eighth largest fall in London, recorded yesterday after a turbulent day of trading following the nationalization of Bradford & Bingley and a wave of banking collapses across Europe and the US. The FTSE 100 lost 5% of its value to close at 4818 before the drama in the US.

Stephen Berte, of Standard Life in Boston, was stunned. "I can't believe they [Congress] weren't able to come together to come up with a solution. Complete disaster was predicted if it didn't pass. I can't see what the upside is right now."