House Kills Best Likely Bill to Save the Markets

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Myth vs Fact on bailout compromise

If John McCain had not used his presidential campaign to shine a media spotlight on the process, the Dodd version would probably have been passed over the objections of House Republicans. Once the spotlight hit, Pelosi knew she needed political cover in the form of large numbers of Republicans voting for it (She claimed she wasn't bringing it to a vote unless a minimum of 100 Republicans agreed to vote for it).

If the House Republicans had not come to the bargaining table, to force anti-pork concessions in return for that political cover, the Dodd version would have passed over their objections.

Wall Street Journal has a history of who tried to fix it and when.

Q and O has a list of differences between the three plans - original Paulson, Democratic Congress, and current, after the House Republicans came to the table. Now, the bill is mostly insurance rather than a direct bail-out.

Ladies and Gentlemen, it looks to me like the House Republicans with assistance from John McCain just saved the taxpayers at least $150 billion dollars just by eliminating the ACORN slush fund. Possibly as much as $500 billion. On a $700 billion allocation.

UPDATE before publishing: Oh, hell: House defeats $700B financial markets bailout

Stocks plummeted on Wall Street even before the 228-205 vote to reject the bill was announced on the House floor.

Unpopular with the voters. Unpopular with a Congress that's facing re-election in five weeks. They really want to delay it until a "lame duck" session, but the markets can't wait.

However unpopular it may be, something is necessary, and necessary now. Three observations:

1) If Congress can't get something through in the next week, it will have done in one week what it took Hoover the rest of his term to do: Cause Widespread Banking Panic. We could see the bank runs of 1933-1935 all over again.

2) By being unwilling to support the bill en masse, the House Republicans shot themselves in the head. They came to the table, and used their minority influence and Nancy Pelosi needing political cover to the utmost. They stripped a lot of pork out of it, and got the main thrust redirected to insurance, rather than a direct buyout, and in stages as necessary. I am pretty sure that this bill was the best bill the taxpayers could have hoped for, and now the only proposal on the table currently is the Dodd monstrosity.

3) The House Democrats also shot themselves in the head. They also needed to support it en masse, in order to keep the House republicans on the hook. Now they're on the horns of a dilemma: Force an unpopular bill through on a party line vote, assuming all political responsibility, or do nothing, and be observed to do nothing, while the markets melt down. It doesn't get any stupider than that.

One minor question: Why is Chris Dodd still leading the Senate Finance Committee, rather than in jail? The answer is because Democrats are in the majority, and he is powerful among them.

One very major question: Is Congress going to act to fix this while the situation is still repairable, or are they going to wait until after the election, permanently driving a stake through the heart of the notion that when the issue is important enough, Congress can act responsibly in the best interests of the country.

There is no doubt. The markets are down five percent in the last hour since it happened. Congress needs to get together and fix this - because the crisis in financial liquidity is hitting us right in the spot that underlies the development and improvement of the entire economy. Every day they delay is going to mean more wealth wiped out - which will make the recovery that much harder. Nor are the bond or even government securities market going to be spared. We don't have five weeks for this. We may not have one.

I have just emailed all three members representing me (Filner, Boxer and Feinstein). I'm giving them an ultimatum, and a chance. If there is not a working, acceptable bailout plan in place before the markets melt down, my vote will go to the opposition - but if there is, and they support it, I will vote for them for the first time ever. I urge literally everyone to do the same.

This is that important that I am willing to vote for three of the worst voting records in Congress if they can get this one thing right.

I don't like this. I hate the thought of bailing out these incompetent, shortsighted assholes on Wall Street. It's just that if we don't, we're looking at hurting everyone a lot more that they will be if we approve this. It may be a "crap sandwich", but I'd rather eat a crap sandwich than what will happen if we don't eat that crap sandwich. At least what we had was about the least putrid crap sandwich we could have hoped for.

UPDATE: Michelle Malkin has been being a complete and unmitigated idiot on this, but she's got the complete roll-call vote. Find what your representative did.

UDATE 2: Hot Air has the update on why it failed: Pelosi couldn't suck it up and not make it a partisan political issue. Despicable, but the Republican response was just as stupid.

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Republicans respond

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The good news is Boehner still wants to be part of the solution, if only Ms. Pelosi will stop stabbing him and his caucus in the back for the sake of political posturing.

UPDATE 3: Investors swarm T-bills as House rejects bailout . Not just T-Bills, but bonds of all sorts.

As the Dow Jones industrial average plunged nearly 780 points, the yield on the 3-month Treasury bill fell to 0.46 percent from 0.87 percent late Friday, after dropping as low as 0.32 percent. Low yields show that investors are prepared to get meager returns on an investment as long as it is secure.

However, expect any dip in rates to be short term (If you're in California and are thinking about a refinance, contact me right now:

LIBOR, or London Interbank Offered Rate, for 3-month dollar loans had risen to 3.88 percent from 3.76 percent on Friday, suggesting that banks have grown increasingly unwilling to lend to each other. LIBOR for 3-month euro loans, meanwhile, soared to 5.22 percent, the highest rate ever.

Now let me ask: What happens if the folks putting out those bonds cannot repay them? This is a credit crisis, which means that the standard refinance out of personal, government, or corporate debt is going to be both expensive and problematical if Congress cannot get on the stick about stabilizing the lending markets.

"Right now, banks don't trust one another," said Axel Merk, portfolio manager at Merk Funds. Even if the rescue package does get approved eventually, it "is a tool that the Treasury can use, but it's not the solution to all the problems out there."

If the banks don't trust one another, how the heck are they going to trust anyone else?

UPDATE 4: More on Pelosi's speech at Volokh Conspiracy

Speaker Pelosi's speech before the House today was remarkable, but not in a good way. She was trying to round up votes for a bailout package that shes claims to believe is essential for the stability of the American economy. She can't, and doesn't want to, pass the bill without a substantial number of Republican votes. So what does she do? You would think she would say, "let's pass this emergency measure now, in the best interests of the country, and talk about who is to blame later." Instead, Pelosi began her speech with a highly partisan tirade against "Bush" and "Republican" economic policies, which were allegedly to blame for this situation. She focused on an attack on the growth of federal deficits, which clearly are at best tangential to the current crisis. That, to me, is the sort of irresponsible thing you do when (a) you're not claiming there is a vast emergency; and (b) you are in the minority, and not claiming to exercise leadership. [Commenters point out that Republican Housemember were acting equally irresponsibly to the extent they rose to Pelosi's bait and voted against the bailout out of pique at Pelosi. True. But the Speaker of the House is a leader, not just a random member of the House, and her actions inevitably and justifiably get more scrutiny than those of her colleagues.

In the comments:

I have no idea why any particular member, or group of members, of the House, voted for or against the bill. All I'm saying is that if you are trying to rally the House to pass an emergency bill, you make it seem like there is AN ACTUAL EMERGENCY, which more or less precludes partisan attacks. E.g., after Pearl Harbor, no one was giving speeches in the House talking about how FDR's reckless provocations of the Japanese invited their attack, even if they believed it.

Daniel Drezner:

There have been two problems from the beginning with the proposed rescue plan. First, it was labeled a bailout, which is a really, really bad public opinion frame. (Let me add that neither presidential candidate has helped. McCain's interventions seem to have bolstered the House Republicans who said no; Obama's frame of Wall Street vs. Main Street made it easy for voters to believe that a financial meltdown would not affect them in the slightest.

Second, the idea of the package was to prevent a financial mewltdown. But here's the thing -- no one gets credit for stopping a meltdown if it doesn't happen. To use a security analogy, think about what would have happened if either the Bush or Clinton administrations had killed the leadership of Al Qaeda and the Taliban prior to June of 2001. Even if they had claimed that they were foiling a terrorist plot against the United States, no one would have known about it, and it would have been pretty easy to attack either administration for belligerent unilateralism. In other words, it was only after 9/11 that the American public was ready to take the actions that would have prevented 9/11.

Read the whole thing

UPDATE 5: Without a Bailout Plan, What Will the Cost Be?

But there's a catch: taxpayers are already on the hook for the failures of financial institutions, and it's possible that the bill will actually be larger without bailout legislation than with it. That's because the regulators who mind the financial industry -- the Federal Reserve, Treasury and FDIC -- will keep doing what they've been doing: stepping in to prevent the chaotic failure of banks and other large financial institutions. This means continuing to put hundreds of billions of taxpayer dollars at risk, but in a way that adheres to no clear plan of action and doesn't require members of Congress to explicitly approve their actions.

In other words, the costs will still be there, but the likelihood is that the economy will crash completely.

Where will congress go from here

UPDATE 6: via Hot Air, Rep. Paul Ryan

The Statement of Sen. Coburn, probably the most principled fiscal conservative in Congress:

Taxpayers deserve to know that there is no guarantee this plan will work, but there is a guarantee that we will face a financial catastrophe if we do nothing. If banks continue to fail and stop lending the average American could lose their job, be unable to secure a loan for a car, home or college education, and find their life savings and retirement in jeopardy. Our economy depends on having liquid assets available for credit and lending just as an automobile engine needs oil. If those liquid assets stop flowing, our economy will be seriously damaged and will require far more costly and lengthy repairs."

Karl Rove explains the politics of the failure of the bail out (audio). When the Democrats are promising the persecute the Republicans for approving it, but giving their own members carte blanche to vote against (and he names names), you shouldn't be surprised when the Republicans decide to bail on the agreement.

In other words, the Democrats are asking the Republicans to give them the election by voting for it, while they play partisan political games by allowing their vulnerable members it's okay to vote against this the unpopular bill, and stab those Republicans in the back with the electorate by demogoguing the issue. And they were surprised the Republicans bailed en masse?

Let's put this in more familiar terms. You and your co-worker are facing a review, at which point one of you is going to be let go. The problem is that there's a really big important job both of you have to get done together, or both of you will be let go. You manage to work together to find a way to get it done. Then you find out that your co-worker has enlisted a third party to slander your work with the boss and blame it all on you. Sure, you could be the mature adult, but that's a no-win situation for you, and your company isn't likely to give you a good review for your next prospective employer. So you decide to roll the dice and let your jerk of a co-worker's tactics be seen to have sabotaged the project. The outcome for the company isn't optimal, but the outcome for you can't get any worse, and you're preventing the co-worker from reaping gains for their tactics.

There are limits to how selfless you can expect even the most mature adults to be for your benefit when you're acting like a spoiled child. And the bulk of the blame for the fall-apart goes squarely on the shoulders of the jerk co-worker who played office politics when you both needed to cooperate. In this case, Nancy Pelosi and the Democratic leadership.

Quotes of the day

Diogenes spent a lifetime searching for one honest man. Where are we supposed to find 12? - Megan McArdle

Well, I hate it that we have to start looking in Congress - Glenn Reynolds, in response.

The one I keep remembering, even more than usual, is this one:

"I knew water runs downhill. I didn't dream how terribly soon it would reach bottom."
-Professor Bernardo de la Paz, The Moon Is A Harsh Mistress by Robert A Heinlein.