Fears over the possibility of banks collapsing and credit drying up raised the stakes even higher in the fall, just as Congress was preparing to recess for the last month of campaigning. Armed with warnings that the economy was heading into the worst downturn since the Great Depression, Paulson and the administration pleaded with congressional leaders to allow a government bailout of the financial services industry.

The plan would give the Treasury secretary the authority to use as much as $700 billion to buy up troubled mortgage-related securities in an attempt to unclog credit markets and improve the balance sheets of banks and other financial institutions teetering on collapse. It would open the door to unprecedented federal intervention to shore up private entities.

Congressional leaders, shaken by Paulson’s dire description of the state of the economy, went along with the Troubled Asset Relief Program (TARP). But they underestimated constituent anger over what was viewed as a bailout of wealthy financial giants, and a bipartisan coalition in the House defeated it on the floor in a vote that stunned markets globally.

The Senate took over and combined a slightly sweetened bailout package with a multipurpose measure to renew a variety of expiring tax breaks, add a one-year “patch” on the alternative minimum tax, and require insurance companies to offer benefits for treating mental illness and addiction on par with those provided for other health issues.

The Senate passed the new legislation. The House cleared it, with some reluctance still from many members, and the president signed it immediately.

Coming so close to the election, this bailout quickly became a campaign issue. For instance, in Kentucky, Democratic challenger Bruce Lunsford tried to tie Senate Minority Leader Mitch McConnell to the failing financial giants.

The vote had other political repercussions as well. Rep. John Campbell , R-Calif., said he believed he had to vote for the bailout legislation. However, Campbell had been vying for the chairmanship of the conservative Republican Study Committee (RSC), many of whose members had opposed the measure. Campbell dropped his candidacy for the RSC chair after the vote.

After the election, Democrats talked about trying to move another stimulus bill — this one focused on spending for job-creating projects such as infrastructure improvements. But Republican lawmakers and Bush had little interest in such a bill, so Democrats decided to wait until they had control of the White House and larger majorities in January to work on new legislation to address the economy.

And, late in the year, the heads of the Big Three automakers went to Washington twice — first by corporate jet and then again by the more humble means of driving their own products — to plead for federal assistance. Lawmakers, reacting to polls showing Americans leaned away from another bailout of the private sector, acknowledged there was a crisis in the auto industry but were reluctant to dole out more federal funds. Democrats said the administration should use funds from the financial services bailout to shore up the car industry, and the president said lawmakers should repurpose an existing $25 billion Energy Department loan program that was intended to help automakers retool to produce more fuel-efficient cars.

Democratic leaders and President-elect Barack Obama said a broad stimulus bill will be their priority when the 111th Congress convenes in January, so lawmakers plan to have a measure ready for the new president to sign immediately after his inauguration Jan. 20.

The economic crisis overshadowed all others in the closing months of the presidential campaign, with Democrat Obama and Republican John McCain trading charges about which party was responsible. “In the end, the economy worked to a great degree to the Democrats’ favor,” Stenholm said, adding that Republicans had controlled the White House for the past eight years. “You get credit for the things that go right and blame for the things that go wrong.”

GOP Wins on Energy

In dealing with the related issue of energy costs, Republicans were able to take advantage of rising gasoline prices to force Democrats’ hands on a longtime debate: whether the United States should be able to drill for oil and gas off the Atlantic and Pacific coasts. As the cost at the pump climbed, public opinion polls shifted in favor of lifting a 26-year-old moratorium on offshore drilling.

In the Senate, Republicans stalled non-energy legislation, and House Democrats abandoned attempts to take annual spending bills to the floor, fearing GOP drilling amendments. Republicans even held informal sessions on the House floor during the August recess to focus attention on the issue.

By the time lawmakers returned from recess and the two parties’ nominating conventions, Democrats knew they had lost any leverage in this fight. They tried to negotiate a compromise, but Republicans held tight and forced them to allow the offshore drilling moratorium — typically in the annual appropriations bill for the Interior Department — to expire by not including it in a stopgap spending measure (PL 110-329) to continue funding domestic programs into the new year.

The stopgap measure was needed because Democrats decided early in the year that it would be useless to try to negotiate with Bush over the annual appropriations measures. In 2007, Bush refused to yield on spending issues and carried through on threats to veto appropriations bills. Ultimately, Democrats were forced to give in to him on many of their major spending priorities.

“Democrats assumed they couldn’t work with George Bush,” Feehery said. “They thought they could get a better deal with a Democratic president.”

Some Longtime Goals Accomplished

Democrats did succeed in clearing several reauthorization measures, some of which Republicans had not passed for several years.

Congress cleared Amtrak reauthorization legislation (PL 110-432) for the first time since 1997, after supporters of intercity rail agreed to allow private companies to bid on the development and construction of a high-speed rail line in the northeast corridor. The House and Senate sent legislation to the president reauthorizing the Higher Education Act (PL 110-315). The bill, the first reauthorization of higher education programs in a decade, tightens ethics requirements and increases the maximum authorized Pell grant.

Congress also succeeded in overriding two Bush vetoes. In May, lawmakers voted to override the president on a $289 billion, five-year farm bill (PL 110-246). The measure, which cleared after Congress passed six short-term extensions, maintains the crop subsidy program and boosts funding for nutrition programs. And, in July, after a series of votes that included the dramatic return of Sen. Edward M. Kennedy , D-Mass., to the Hill for the first time since surgery for a brain tumor, Congress voted to enact, over Bush’s objections, legislation that blocked a scheduled cut in pay rates for physicians who participate in the Medicare health care program for the elderly and disabled.

Several issues, such as climate change, wage discrimination and tobacco regulation, were debated but never settled. Many of those are expected to come up again in the 111th Congress, when Democrats hope that their wider majorities in the House and Senate and a member of their own party in the White House will make bills addressing those issues easier to clear.

“The debate that took place in the current Congress shaped the policies that are likely to evolve in the next Congress,” said Scott Lilly, a senior fellow at the liberal Center for American Progress and former Democratic staff director of the House Appropriations Committee.