House to Wall Street: Drop dead! *
I've had my doubts about the right wing of the Republican Party in recent years, as far as the shift toward a populist style of campaigning focusing on "values," and the corresponding lack of concern for prudent oversight of the government which many of them exhibit. I've also argued that in times of emergency such as the present, the guidepost for making decisions should be pragmatism rather than ideology -- free market or otherwise. Sometimes the headstrong Republicans in the House just make me cringe. Yet the more I think about it, the more I'm inclined to give them credit for resisting pressure to go along with the dubious bank bailout bill demanded by President Bush.
After the initial panicked reaction to the failure to pass an emergency bailout bill on Monday (the Dow dropped a record 777 points, about 7%), Wall Street bounced back today, as investors apparently realized they don't need Uncle Sam after all. See CNN.com. Ironically, the gesture of refusal by the House of Representatives seems to have restored their faith in the ability of markets to correct themselves. Too bad President Bush lost his faith. World markets are another question, but for the time being, contrary to the consensus view of most experts, it appears fairly certain that the sky is not falling.
The House rejected the bailout by a 228-205 vote that had nothing to do with party affiliation, even though the partisan bickering before and after the vote was rampant. (See below.) A larger proportion of Democrats voted in favor of the bill than Republicans. Today's Washington Post dissected the vote, and found that about half of the liberal Congressional Progressive Caucus voted against the bill, as did three fourths of the conservative Republican Study Committee. In other words, House members on opposite ends of the ideological spectrum united against the centrists. Another finding was the most freshmen House members and those facing tough challenges in this fall's election opposed the bill, reflecting popular sentiment. That's exactly what the House is supposed to do; see below.
NOTE: One Republican did not vote.
In terms that rational choice theorist R. Douglas Arnold would use, this bailout (?) bill was a classic case of a "Politically repellant policy," that is, one in which citizens can't see the link between proposed policy instruments and intended effects. (I should note that, in her weak attempt to sell the bill to her fellow Democrats, Speaker Pelosi said it was not a "bailout," but rather a "buy in." From a Democratic (or Socialist) perspective, the main virtue in this bill is that it would get the foot in the door for a gradual takeover of the private business sector by the Federal government. In any case, President Bush simply did not have enough credibility to persuade skeptics to follow his recommended course of action.
I was surprised that Rush Limbaugh pointed out an irony today: Why the "rush to judgment"? What about the possibility of faulty or manipulated intelligence? Shouldn't members of Congress apply greater scrutiny to the arguments before making such a profound decision of such great historical magnitude?? After all the complaints by the Democrats about how the war in Iraq was approved, you would think they would have applied their own lesson to this case.
Democrats can scarcely contain their glee at ushering in the demise of the capitalist system, while getting credit for trying to save it. As Nate Silver wrote "the schadenfreude of certain liberals on this issue is absolutely obnoxious." Hat tip to Daniel Drezner, who remains deeply annoyed at the House Republicans, but perhaps he'll come around.
As Establishment Conservative George Will (no populist, he!) wrote last week, there is great uncertainty over the scope of the problem which ought to give us pause before acting. Instead, it is being used as an excuse for even more urgent haste. Something is not quite right.
The Senate is supposed to vote on the bill tomorrow. As the debate over the proposed $700 billion bank bailout continues, a striking irony is emerging: The House of Representatives, which is supposed to reflect the will of the people without while the United States Senate, "the greatest deliberative body in the world," can hardly wait to rush headlong into the Brave New World of state-run economics. It's a veritable constitutional role reversal!
Who's to blame?
I will let others argue which party is more at fault in the current crisis, although it should be clear what I think. Suffice it to say that Rep. Barney Frank's sarcastic derision of Republicans who resented Speaker Nancy Pelosi's highly partisan speech on the House floor just before the vote did not help the Democrats in the P.R. battle.
The problem really goes back years, and neither party's leaders are innocent. On one hand, President Bush has been closely associated with crony capitalism, and on the other hand, Barack Obama, Sen. Christopher Dodd, and Barney Frank are on unduly cordial terms with some of the crookedest operators in the financial sector. Indeed, the Democrats have been stalling on the need for reforming the mortgage sector for years, as this YouTube video demonstrates. (Hat tip to Steve, Chris, and Phil.) But you might say that most of the adult American population is complicit in one way or another. If this crisis began when too many people couldn't keep up with their mortgage payments, you have to consider the public policies that artificially stimulate consumer demand for homes. At the top of that list would be the mortgage interest deduction on Americans' personal income tax. Eliminating that unwarranted "middle class entitlement" would be a big step toward restoring a level playing field in the housing market. As I wrote in June 2005:
[The] Federal income tax deduction for mortgage interest rates ... constitutes one of the most outrageous entitlements in our country today, and it is beginning to have severe distortionary effects on the rest of the economy. Too bad so few politicians are willing to face up to this simple fact.
At the Mountain-Valley Republican breakfast on Saturday, Lynn Sisson of the AXA Advisors office in Staunton gave a quick summary of what led to the current economic mess, and how we can prepare for an uncertain financial future. She reminded everyone that pressure to loosen standards for loans at Fannie Mae and Freddie Mac began during the Clinton administration. She also discussed the problem with certain accounting regulations that need to be reformed urgently. A spirited discussion followed, and everyone present learned a great deal, including me.
* For you folks in Rio Linda, the famous "Drop dead!" headline originated in the New York Daily News on October 30, 1975 after President Gerald Ford turned down New York City's plea for a fiscal bailout.