The failure to pass bailout legislation reflected a political system as bereft of confidence as the financial markets. President George W. Bush and Treasury Secretary Henry Paulson had no credibility to match the arrogance of their initial demand for absolute power in distributing $700 billion of public assistance (the old synonym for welfare). Many Republicans in Congress lacked the intellectual fortitude to cope with the spectacular collapse of their ideology.
So the rescue of capitalism once more becomes the sole responsibility of the Democrats.
Much can be said about the Democratic Congressional leadership’s fumbling and fearfulness, which have hobbled them ever since they recaptured the majority. Well meaning as they may be, Nancy Pelosi and Harry Reid can bear no comparison with the likes of Tip O’Neill or Lyndon Johnson. But just weeks before a national election, their reluctance to back the unpopular bailout proposed by the Bush White House without substantial support from Congressional Republicans was perfectly sound.
Facing a crisis that Secretary Paulson had outlined in the starkest terms, with his warnings echoed by the Federal Reserve’s chairman, Ben Bernanke, the Democrats tried in good faith to negotiate bipartisan legislation as quickly and prudently as possible. They had no more certainty than their critics that following regular order would not plunge the world economy into profound recession or worse.
When that effort failed by a dozen votes, the Republicans strained credulity by blaming Mrs. Pelosi, who had uttered a few hard and truthful (if politically unhelpful) words on the House floor. (Will the members who voted no because the speaker hurt their feelings step forward to prove that their leaders are right? Didn’t think so.) More likely, the dissident members of the minority were simply unable to abandon the dogma that brought them into public life, no matter how compelling the evidence of its hollowness. And like everyone on Capitol Hill, the Republicans feared the rage of their constituents—who no longer care to subsidize incompetent government and corporate misconduct.
As the Democratic leaders return to the drawing board over the next few days, they must understand that broad bipartisanship cannot be the guiding purpose of their choices. They would do better to try to bring back the dissenters on their side of the aisle, who could not tolerate the paper-thin protections for the ordinary taxpayer and working family in the bill they voted to reject. Unlike the Republicans who joined them to vote it down, most of the Democrats understand that the financial system desperately needs fresh liquidity—and that only the federal government can make those funds available in time.
What might bring back enough Democrats to ensure passage of a new bill? Certainly the Republican proposals for new forms of government financial insurance and lower capital gains taxes are beside the point. Further attempts to placate the confused, dispirited conservatives will only alienate the progressives who have resisted the Paulson plan so far.
Instead the Congressional leaders should restore and strengthen the provisions stripped from the original bill, providing new protections for homeowners and new protections against speculators and predatory executives. Rescuing the families who face foreclosure is just as urgent in economic terms as saving the financial institutions—in fact they are obviously complementary—and is also preferable both morally and politically. A publicly financed homeowners-loan corporation, like the agency that helped millions of families during the Great Depression, would be one means to accomplish that purpose.
Then, as New York University economist Nouriel Roubini and many of his colleagues have suggested, Congress should consider smarter ways to inject money into the banks, including the Scandinavian solution of direct government acquisition of preferred equity. Perhaps the Treasury will have to buy some of the toxic bundled mortgages right away, but a combination of measures designed to benefit taxpayers on the upside of the cycle is essential.
Such measures can only prevent the worst consequences of the recession that is already here. If the Republicans reject them, so be it; the Democratic majority should pass a new and improved bill and send it to the president. Let him whine, because he will sign it rather than leave office with the world in economic shambles.
Should the Democrats need encouragement, they need only look at the latest polls. Voters distrust both the White House and Wall Street, but want action in the public interest. As the Chinese say, while they review our mounting debt, a crisis is also an opportunity.