THE ECONOMIC MELTDOWN: Why did the deal to rescue the American economy go up in flames? James Cusick rakes through the ashes

At the Old Ebbitt Grill on Washington's 15th Street, just a short walk from the White House, it isn't usually too difficult to get a table for breakfast or brunch on a Saturday or Sunday morning. This weekend its been different. DC's movers and shakers, if you believe the doom-laden warning from the White House about the state of the US economy, are on a suicide watch.

Between today and tomorrow morning, when Wall Street's markets re-open for business, a deal will have to have been hammered out on Capitol Hill. And if there isn't a deal? That's all they'll be talking about in the Old Ebbitt in between mouthfuls of bacon and eggs laced with a level of economic stress Washington hasn't felt since the Depression.

They've been serving food at the Old Ebbitt since 1856. At one time or another in its history, presidents - among them Grant, Teddy Roosevelt, Cleveland - and generations of advisers, have stood at the Old Ebbitt bar and discussed where the United States is going, and where it's been. But no one, from Roosevelt, through FDR to Nixon and Clinton, will ever have heard a US president say he was worried "this sucker the US economy could go down".

George Bush is good at creating fear. He used fear to win approval for the Iraq war in 2003. He used the same speech, with just a tweak here and there, to warn that a collapse of the largest economy in the world couldn't be ruled out if Congress backed away and killed off the $700 billion bail out package that has been on the table for a week.

As an insurance policy, while the Hill talked, Bush and Treasury Secretary Henry Paulson had dispatched David McCormick, to Asia. As the Treasury's senior official for international policy, McCormick's mission implausible was to reassure the Chinese, and other huge holders of US treasury bonds, that the US's markers were still good. Don't dump our bonds' and give us more time' would have been McCormick's basic message.

If China and other wealth centres in Asia don't like what they are seeing and hearing in Washington, these global investors can act. Saving the US won't be on their agenda. Central banks round the world could conclude the US is currently incapable of solving its problems. They would begin selling off their gargantuan holdings of US debt, sending US interests rates sky-high and producing an international run on the dollar that would cripple an already struggling economy. The rest of the global economy could only look on and pray as the effects of the failure rippled outwards from Washington and New York's banks.

With such high stakes, and Washington supposedly full of the best economic brains the Treasury, the Republicans and the Democrats can afford, why is there a congressional death-wish hovering over Paulson's plan which, even if it isn't perfect (and it isn't), is the only game in town?

Over their breakfasts and brunches this morning, those who've worked in Washington long enough will know this isn't the way the game was supposed to be played. In the middle of the season when the country chooses its next commander-in-chief, there's always likely to be trouble from the left field, or an unexpected curve-ball. But what happened last week would have been ditched by the realism-loving scriptwriters of the West Wing as "preposterous" .

On Thursday afternoon in the cabinet room in the White House West Wing, those who run the US gathered round. The presence of television camera crews and news photographers suggested this wasn't a crisis forum, but a show of unity in troubled times. There was the president, the two candidates battling to take over from him, the Republican and Democrat heads from the Senate and the House of Representatives, the head of the Federal Reserve and the architect of the $700 billion rescue plan, Secretary Paulson. If this was a poker game, the pot in the middle of the table could have labelled the global economy'.

Each player was expected to show their hand, make a statement on the crisis, and then they would all move towards a consensus that most thought had been agreed before they came to the West Wing. But what followed stalled, and is still stalling, hopes of a rescue. The talks collapsed without an agreement.

What stalled the deal, at least for sceptical Democrats, was pure Washington political theatre. With Barack Obama ahead in the polls and leading the race for economic competence, the suspicion is that the Republican's house minority leader, John Boehner, created a problem for his party's candidate to fix. Create a crisis, have John McCain ride to the rescue, and do enough for him to be seen as the saviour of the Paulson's plan.

At 8.30am last Wednesday, the day before the cabinet room deal was supposed to take place, Obama is said to have telephoned McCain and suggested the two of them suspend their campaigns. Rivalry would be put aside and they would make a joint statement on the Paulson plan.

McCain isn't on the Senate Banking Committee and doesn't "do" financial regulation. A day earlier, after giving a press conference in which he said the "fundamentals of our economy are strong" his advisers admitted he hadn't so far had enough time to read the Paulson bail-out plan in detail. The document takes up just three A4 pages.

McCain returned Obama's call six hours later and said the two men should postpone the first of their debates in Oxford, Mississippi, on Friday night. He then gave a televised press conference saying he was suspending his campaign to go to Washington. "I'm an old Navy pilot and I know when a crisis calls for all hands on decks. The debate that matters most right now is on Capitol Hill and I intend to join it.'' Three pages of A4 were too much. But now McCain, like the Lone Ranger, was riding to DC to save the world.

When McCain eventually arrived in Washington, it initially looked like he'd come too late to be credited with saving anything. The cameras were already in the West Wing cabinet room. Reporters for the big television networks were outside on the grassed area reserved for the media and already talking about the deal that would end the threat of a banking collapse.

But in place of a deal, wider fears that had always existed suddenly came to the surface.

In the presidential contest, there were fears that one candidate could be perceived as making the difference, becoming the saviour. There was also fear that blame could be handed out to either the Republicans or the Democrats if the deal turned into a dud that simply bailed out Wall Street fat-cat financiers and simply left American taxpayers with the cheque for the feast.

But over the first three days of last week, caveats were written into the plan: limits on executive compensation, greater protection for taxpayers and homeowners, and a heightened degree of scrutiny required in the buying and selling of the core problem, namely the mortgage-backed securities that had turned financially toxic.

But inside the cabinet room, with McCain staying silent for all of the long session, Boehner suddenly announced that his party's caucus no longer backed the Paulson deal. Boehner offered up a make-shift alternative that involved a new form of banking insurance, that Paulson dismissed as essentially economically naïve and pathetic.

Probably realising the instant exposure of having the Democrats left by themselves to push through an unpopular bill, barely 40 days before the congressional elections, the House Speaker, Nancy Pelosi, demanded that Boehner get on board and deliver at least half of his caucus, around 100 GOP votes, or the Democrats would back off.

The Republicans say they've not been playing presidential politics, and point, j'accuse-fashion, to the Democrats' Senate Majority Leader, Harry Reid, who only hours before the cabinet room gathering, described the Paulson deal as adhering to "the Obama principles".

So there is no deal. And despite Paulson going down on one knee in the cabinet room and begging Pelosi for her support, there is no hint that a deal is imminent.

President Bush has, however, tried to stay optimistic. On Friday afternoon he made a brief statement, insisting legislators "will rise to the occasion" and pass the $700 billion rescue plan.

Bush said "the proposal is big, and the reason it's big is because it's a big problem." Barney Frank, the Democrat chairman of the House Financial Committee said he was convinced that by today an agreement will happen. Reid however was less optimistic. All he would say was that US lawmakers would stay in session till a deal is reached.

There are now fewer than 40 days until America votes on who its new president will be. The lawmakers won't be in session until then. Washington, even when it gets itself wrapped in political theatre, knows when the curtain has to come down.