Tuesday, September 30, 2008

What led to the bailout's defeat...

CNBC discusses the backlash:
In the end, the financial markets did not stand a chance against voter antipathy, partisanship and election year politics.

The defeat of the extraordinary $700 billion financial rescue package represented a perfect collision of the forces of modern politics — a fast-moving Internet campaign, vulnerable incumbents, a weakened and unpopular president, and a roiling presidential campaign — all working against the so-called Masters of the Universe.

Polls showed widespread public opposition to the plan — the biggest federal intervention in financial markets since the Great Depression of the 1930s — and many Republicans saw such an enormous set-aside of taxpayer money as an unnecessary intrusion into free markets. Of the 19 most-endangered House incumbents, 13 voted no. ...

Such a roaring confluence of opposition could only have been overcome with strong party discipline and presidential power. But a weakened and unpopular President George W. Bush and lawmakers forced to weigh the vote against their political careers conspired against success.

Outside Congress, however, furious pressure built up against the bill in e-mail campaigns and on Internet Web sites. The Club for Growth, a conservative free-market oriented group, warned lawmakers that it would count a vote in favor of the legislation against lawmakers seeking the group's support. The Club for Growth is viewed with apprehension by many Republicans because it has been known to support challengers running against party incumbents in primary contests.

Longtime conservative activist Richard Viguerie warned that lawmakers who voted for the rescue package would be targeted for defeat. "Republicans and Democrats alike who support this monstrosity will face the wrath of the voters if they stand side-by-side with predatory politicians and bureaucrats and their greedy friends who got us in this mess," he said.

The opposition on the House floor came from an unlikely coalition of conservatives and liberals. The progressive grassroots group MoveOn.org aired an ad blaming the financial crisis on John McCain and his allies.

All those forces worked against powerful special interests. The U.S. Chamber of Commerce and a diverse group of industry lobbying organizations ranging from the National Association of Realtors to the American Hotel and Lodging Association pressed Congress to back the bill, pointedly noting that they too would consider this a key vote when ranking members.

The vote also represented an extraordinary rejection of Bush, who personally called wavering lawmakers and delivered a last-ditch public appeal Monday morning, as well as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

"Despite days of negotiating, this is still the same bailout bill, written by a Wall Street guy with a Wall Street solution to a problem created on Wall Street," said Rep. Mike Rogers, a Michigan Republican. "This bill was still a blank check to Henry Paulson."
I saw Chris Matthews on MSNBC last night berating a Republican congressman who voted against the bailout. Matthews asked the congressman if he was just doing what was politically easy, since he voted the way his constituents wanted instead of the way President Bush wanted. Matthews behaved as if America is a dictatorship rather than a representative democracy.

Congressmen have an ethical responsibility to listen to their constituents. Their loyalty should be to the people, not to the President. If our founding fathers had intended for congressmen to obey the President, Congress and the Presidency would not have been made separate branches of government.


  1. "Congressmen have an ethical responsibility to listen to their constituents. Their loyalty should be to the people, not to the President. If our founding fathers had intended for congressmen to obey the President, Congress and the Presidency would not have been made separate branches of government."

    The fathers also recognized the perils of letting the largely uninformed public vote on things they do not understand. Hence this is a representative democracy, not a true democracy.

    Do you think J6P understands how things like derivatives, CDOs, Ted spreads could have an effect on their lives? Hell no - all they hear is a bunch of BS populist rhetoric about fat cats and bailouts and the like and they get mad as hell and call their congressmen to complain.

    Now is the time for congress to show a spine and not listen to the masses who have no idea if this may or may not affect them. They dont need to do what the president tells them, or what bernanke tells them, they need to do what they think is right for their people even if it will prove unbelievably unpopular to the unwashed masses who only listen to Limbaugh or Al Franken. Well see if they have the guts to do so.

  2. "Now is the time for congress to show a spine and not listen to the masses..."

    To hell with that.

    This crappy payoff legislation should be rejected out of hand - repeatedly if need be.

    Worried about your 401k?

    You should have taken precautions more than a year ago.

    Oh, were you a bubble denier?

    If you are young, you have time to make it back.

    If you are one of these older people that are happy house prices "made you rich" then you now reap what you have sown.

    No free lunches.

  3. I could give a rats ass about my 401K. I am young and its so small, it doesnt matter at this point.

    What I am worried about is a massive amount of job loss as the ability of many employers to get a working capital line is frozen.

    All the college educated types who likely dominate this board, do you work in a small to mid size business? Do you work in technology, aerospace, R&D, & the like? If so, go ask your employer whats going on with his working line. Has the bank frozen it yet. If so, does your employer have the ability to pay you?

    Im not saying any of these things will happen. However, if you have any understanding of how the commercial paper markets work its not far fetched to see this whole thing imploding and having massive job losses.

    To say that this is in any way concerning 401K or the housing bubble shows that you too are not thinking about this the right way. This has gone so far beyond those tangential issues now that its not even funny.

  4. Adam Smith's invisble hand will correct this, it just takes pain and time.

    Throwing more money at, and involving more and more government will only prolong the problem and delay the needed fix.

    That is why the opposite approach, which you advocate, is the wrong method.

  5. I disagree completely. One of the hallmarks of capitalism is that those that engage in high risk, high reward games can get burned. Thats why I have no problem with the current banking implosion. They were pigs and the pigs get slaughtered.

    The problem is, what we are talking about here is pure collateral damage. Its the law of unintended consequences that the shakeup of the homebuilding and financial industries will bring down the very cash poor industries of technology, R&D and the like.

    If we pump the money in, it will likely dimish the pain for some of the pigs, but a good many will be killed anyway. Same thing with housing - all it does is delay the inevitable - housing prices will continue to go down until they reach a market clearing price.

    At the same time however, will spare these market segments that never got caught up in the housing or financial BS to begin with. The one that drives a good portion of our economy and makes us the worlds leaders in technology.

    Think of it this way - the bailout costs what 700 Billion. Ignore for a second that yesterdays paper losses were 1.2 trillion, what are the costs of doing nothing? How many people COULD (not will but could) needlessly going to end up on the unemployment lines - taking free money from you and I and never having to pay it back. How much demand destruction will there be? How much will we all lose as a result of their no longer paying FICA, FUTA & other items that finance the general walfare.

    When you add them all up, its not so clear that the $700 billion really saves us anything. Even worse, 6 months from now, if it really has gotten that bad, all those jokers who are so against the bailout now will be clamoring for it. THus we will spend 700 billion regardless. The question is do you want to destroy much of the larger economy before you do so?

  6. no one knows for sure the 700 billion will cause the credit markets to unfreeze. the banks could just as easily sell the junk assets and have to keep the cash to maintain their capital ratios. the who idea of short term borrowing is just like ford or gm caught in their profits now mentality. it is a structural problem and the companies need to adjust. I would rather see the fdic do what they can with shotgun weddings first. let some firms fail, let the foreign banks and investors take their losses. then, we will have to build an economy based on something instead of flipping houses and living on massive debt! I don't trust paulson as he is in it to help his buddies at goldman sacks and the other big banks! someone has to take all the losses, i'd rather move into a trailer and have a depression then give in to their greed and extortion!

  7. anonymous said...
    "[Congressmen] need to do what they think is right for their people even if it will prove unbelievably unpopular..."

    I agree. In my post, I debated whether I should elaborate on what I meant by "listen to their constituents". I decided for the K.I.S.S. approach.

    But, to clarify: Just because congressmen should listen to their constituents does not mean they should simply do what their constituents tell them. Congressmen should also listen to experts on the subject at hand (in this case, economists). And, hopefully congressmen are knowledgeable themselves, thus they can listen to their own conscience. They need to weigh these different inputs to make their decision.

    Even people who are very knowledgeable and well-informed can disagree on whether the Emergency Economic Stabilization Act of 2008 should be enacted. That's because an attempted bailout of the financial system has short-term benefits (avoid a sharp economic contraction), but long-term consequences (moral hazard). Congressmen have to weigh economic facts with the public's opinion and their own opinion.

  8. Anon at 4:37. That is a reasonable comment. You are right, I really dont know if it will work or not. I think the adjustment comment is correct, I just am concerned about the severity. We had 13 months of easing into it, followed by 3 weeks of massive disruptions. Personally, I think a longer period of adjustment is well worth it. The last 3 weeks however, looking at the CP markets (assuming it continues) has been more damaging than anything conceivable.

    James - Gotcha. I see where you are coming from.