The US House of Representatives today voted down the hastily arranged bailout of the US financial system that would have purchased up to $700 billion of toxic financial instruments and warehoused them until the market recovers. Before the vote, trading on the stock exchanges had already seen stock prices tumble from Friday’s close; when news of the No vote hit the markets, prices careened downward, sending market historians to the books to look for comparable meltdowns.
What they discovered was that today represented the single-largest decrease in market capitalization ever. In terms of percentage losses, only a few trading sessions since World War Two exceeded the damage this one wreaked upon stock prices. When the final count was tallied, the New York Stock Exchange had lost 6.98%, the NASDAQ 9.14%, and the S&P 500 index 8.79%.
Why the bailout failed
Proving that bipartisanism is alive and well in Washington, the government-sponsored bailout failed for the same reason that the Comprehensive Immigration Reform Act of 2007 failed – rank-and-file Democrat and Republican lawmakers banded together to thwart the leadership of both parties.
Depending upon your point of view, today marked a great display of courage or a thorough lack of it. My own view is that the bill, like last year’s immigration bill, was a piece of political sausage and was apt to create as many problems as it solved. Lefties hated it because it didn’t do enough to stuff more folks into the lifeboats; conservatives hated the very idea of a bailout on any terms, especially one that would bail out Wall Street at the expense of Main Street; therefore, populists of both parties were able to break bread over what the bailout would or wouldn’t do.
Full disclosure
My sympathies in the matter are divided. On the one hand, I loath the idea of adding such an enormous sum of potential liabilities to the federal balance sheet, which is already in shaky condition at best. Inflation would surely soar, adding injury to insult for Joe Taxpayer. It would also necessitate the large-scale borrowing of money from foreign lenders, exacerbating the leverage problem foreign governments have over our financial condition.
On the other hand, I am sensitive to the credit freeze now being experienced by the lenders and borrowers of large sums of money.
Two points seem to rise above the rest in making sense of all of this. First, the more I read about the text of the bill, the more I hated it. The bill is laden with little political Easter eggs. It’s a bad sign generally when a three-page first draft balloons into a 110-page bill, and Jim Lindgren, writing for the Volokh Conspiracy, has done admirable work reporting on the kinds of political gifts that folks attempted to sneak into the bill.
Second, the so-called crisis affecting our financial system seems only to be affecting parts of the system, not the system as a whole. On the whole, small lenders and small commercial bankers seem to be doing okay – it’s the bulge bracket that is getting killed, i.e., Wall Street, and a few regional banks. Todd Zywicki, also over at Volokh, quoted an article from National Review in which Arizona congressman John Shadegg claims,
I can’t tell you how many members of Congress were stunned at that news, and were stunned that none of their local bankers were calling them. And then they called their local bankers, as I called my local bankers, and my local bankers said, “I think things are just fine.” I talked to one banker who said, “Gosh, we’ve got money, and we’re liquid, and we’re making a profit. And we’re in the market selling loans, and we’ve got competitors trying to sell loans against us.”
So, at that point, there’s a disconnect. Secretary Paulson is claiming that this is a catastrophe of generational proportions that could go worldwide. And none of what we were hearing back home matches that. And I’m not speaking just for myself, but also for many of my colleagues who were making similar calls. They weren’t being called by their bankers, or by any of the businesses back home saying, “I can’t borrow any money.”
Mr. Shadegg isn’t the only one questioning the premises upon which the bailout is based. It seems a similar story is being told across the Internet, such that the only reasonable conclusion to draw is whether such a large investment of taxpayer money is warranted. Unlike many conservatives, I have no problem pulling the trigger on massive government intervention when faced with a doomsday scenario, but the proponents of the bailout have not convinced me that such a scenario exists.
It is clear to me that certain kinds of lending are not being consummated at this time. For example, when Dow Chemical or Exxon Mobil wants to issue billion of dollars in senior notes, they’re not going to Main Street Bancorp to do that (they go to Wall Street), and so your average local commercial banker would naturally have no idea what is or isn’t happening in the precincts of American big business. And perhaps they don’t care.
But this line of thought gets closer to what’s really going on with the political squabbling in Washington. It is Wall Street versus Main Street; therefore, it is the political leadership of both parties – bank rolled by high finance and Fortune 50 companies – versus Main Street, bank rolled by local Chamber of Commerces, activists, small business, and the like. What we are seeing is the strange ways in which the American body politic is capable of cleaving, where rank-and-file politicians are in fact rebelling against the leadership of their parties, sensing a bad deal for the American people.
Some cynics among us have suggested that Democrats brought forward this vote because they sensed it would do more damage to John McCain’s presidential aspirations than to those of Barack Obama. Don’t believe it. I’m sure there are fans of Mr. Obama within the Democratic caucus, but I don’t think they are so fond of him that they would make themselves out to be incompetents, which is what the failed bailout bill does. No, this isn’t about presidential politics; it’s about something much closer to home.
Be that as it may, populists of both parties would do well, however, to consider to what lengths they are willing to go to teach the elitists on Wall Street a lesson. Treasury Secretary Hank Paulson could be more right than wrong, but for the moment, I don’t think it does great harm to deliberate a little longer on this bill, stock markets be damned.
Addendum (11.25 PM): Bear in mind, too, that there is a shitload of money sitting this out on the sidelines. I have heard several times over from the proponents of the bailout that, in the end, the US government could actually see a profit from warehousing all these toxic financial instruments. If there was profit to be made, rest assured that the hedge funds, private equity firms, sovereign wealth funds, and healthy financial institutions would be chomping at the bit to buy up these distressed vehicles. They are not. One should consider that when weighing the facts of the bailout. In the end, the promise of profiting from the bailout begins to ring hollow, not unlike the Fannie Mae and Freddie Mac bailouts.
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