As of this moment (Friday noon), Secretary Paulson’s $700 billion dollar bailout plan is in deep trouble. That the revolt against it came from the House and not the Senate is probably not surprising – all the House members have to stand for re-election in a few weeks, while only a third of the Senators are up for re-election, and most of those have safe seats thanks to the years of partisan redistricting (we used to call it gerrymandering).
Public opinion, both Republican and Democratic, is running heavily against the plan. Opinion among economists of all persuasions is heavily against the plan. Opinion among rank-and-file professionals in the finance industry is running against the plan, even though their own jobs are at high risk.
Almost everyone sees this as a matter of Wall Street greed coming home to roost, and the bailout as government pandering to big Wall Street companies to save them with taxpayer money from the consequences of their own greed. Many people are suspicious that Secretary of the Treasury Paulson is showing excessive favoritism to Wall Street, since he was CEO of Goldman Sachs until 2006 (earning $34 million his last year as CEO). And almost everyone feels that the bailout plan does little or nothing for the average person trying to pay off their mortgage and keep their job. That may or may not be an accurate perception, but in politics, perception is reality,
So of course, with an election coming up in a few weeks, House members aren’t keen to be seen to be complicit in an unpopular “fat cat” bailout unless they have some political cover. Democrats desperately need lots of Republicans to support the legislation, so that they don’t look like they did this themselves. Conservative Republicans, of course, see this as exactly the worst sort of government meddling, and moreover in an area in which the government has never showed any competence. And they have a point. Other nations have tried variations of this approach in their fiscal crises and the results have been uniformly poor, as economists of all persuasions have been loudly arguing over the past few days.
Eventually some sort of agreement will emerge, probably committing a lot less than $700 billion in taxpayer dollars. Neither party can afford to be seen to be just ignoring the situation. And probably it will have little or no effect on the economy in the short term.
In fact, even while Congress debates, the right sort of free-market mechanisms are cleaning up the mess – badly-managed banks are failing and their assets are being bought up at fire-sale prices by competitors who were more prudent, as happened last night with the purchase of failing Washington Mutual by JP Morgan. This process will no doubt continue even without government intervention – more banks will fail (117 are on the danger list as of this morning) and their assets will be bought up by better-managed banks. Investors who were imprudent enough to invest heavily in poorly-backed securities will lose their money. They gambled on a high risk investment and lost.
Whether or not there is a big bail out in the end, the economy will no doubt be sluggish, unemployment rates higher, consumer spending lower, the stock market turbulent, and home prices and sales depressed for at least a year or two, and perhaps longer. That means that few if any of the big spending promises or tax cut promises that the two Presidential candidates have made will be possible unless they want to court rising inflation rates.
I’m inclined to think the process is operating as it should – the country is going through a long-overdue shakeout after a period of excessive speculation and borrowing, at the federal, corporate and personal level. The shakeout is certainly unpleasant, but delaying it with a massive bailout (even if it works, which it might not), probably just postpones the inevitable and makes it all the more painful when it finally does arrive. Short-term fixes hastily cobbled together for political gain are probably not what we really need – what we really need are some thoughtful, long-term adjustments in our economy.
I wish I thought either of the Presidential candidates, or either of the political parties, were capable of such dispassionate, non-partisan, non-political, thoughtful actions.
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