Down in Flames

Today was indeed a momentous day in the ongoing financial crisis. With the House rejecting the new-and-improved Paulson Plan and the Dow falling 777 points, its biggest one-day loss in 20 years, once again our economic future is teetering on the edge of disaster. Congressional leaders need to regroup quickly to patch up the dam before it bursts: the Paulson Plan is covered in warts, and it is in no way a permanent solution to our unsustainable financial culture of debt and irresponsible leveraging, but inaction has the potential to be far more devastating than action.

This really is a microcosm of the global warming argument circulated widely on the web: the risks of doing nothing far outweight the potential waste of doing something that's not necessary. Of course, many House Republicans, who voted 133 to 65 against the bill, believe that the bailout plan isn't worth the expense because it probably won't work anyway. This is the equivalent of saying, "our climate is changing too rapidly for us to do anything about it anyway, so trying to stop it is like throwing ice cubes at the sun." Although according to most sources House members are united in the belief that something must be done urgently, the collapse of the bill puts the entire endeavor in jeopardy. Pelosi will call another vote; but why should we expect a different outcome when the nay-sayers are voting primarily on principle and politics, not on the specifics of the bill?

First the principles of the matter. The GOP-suggested provision to the bill - that the bailout basically be treated as a large insurance plan - never made it into the final version. Yet, by most accounts, this is not what's holding up the fractured GOP House members. The primary issue here is one of principle, namely that a bailout of this magnitude is tantamount to an un-American socialist coup. Jeb Hensarling, a Texas Republican, fears “the slippery slope to socialism.” In remark after remark by many of the House GOP minority, similar sentiments are expressed. Now, we can all be sympathetic to these comments - very few people in the country actually look forward to putting down their hard-earned money to get liquidity flowing through our markets again. But a time for emergency action based on the facts is not a good time for ideological arguments. Many House Republicans are not just rejecting the bill because they don't think it will work, a legitimate reason; they are rejecting it because it goes against every free-market fiber of their being. Ideology trumps action.

Another divisive issue in the bailout vote today had to do with the contentious politics involved. As soon as this thing passes/crashes, congressmen and women will be returning to their districts to campaign. The fact of the matter is that a majority of Americans are still hostile towards the Paulson Plan (although the margin has been shrinking). Supporting an unpopular bill a month before an election is never good politics. Furthermore, the future political dividends on a bailout vote are complex: if the bill passes and the economy stabilizes, people will still go on criticizing it simply because they never experienced how bad it could have gotten. Republicans, therefore, could argue that they fought against wasteful, socialistic Democrats in the House (net effect - the GOP wins). It is sad to think that in the best case scenario, those who vote for a bailout will probably not get any credit for averting disaster - after all, potential disaster is still an abstract concept. If the bailout passes but then fails to staunch the bleeding and the economy dives into a recession anyway, the GOP's view will be born out and voting "no" shows prescience and wisdom (the GOP wins). On the other hand, if the GOP effectively blocks this bill and the credit markets seize up, lending stops, businesses falter, employees are laid off, foreign central banks reconsider the security of their US treasury bonds in the face of a plummeting dollar that is tied of the plummeting cost of oil, and the ripple continues on down until every American is affected, then I think we could safely say that the Republican party is done for. In fact, David Brooks did come out and say that the other day (if this happens, "the GOP will cease to exist").

Again, getting back to risk assessment: provided the economy is able to creak along and nothing serious happens here, the GOP wins (although, we should remember, John McCain supported the bill today). The dissenters in the House have staked their political careers on this premise. But if our economy starts to go down in flames in the next couple weeks because of congressional inaction, the GOP will be at the center of it.

Update: This cogent analysis of the political crisis that yesterday's no vote represents was published by David Brooks this morning.