The visible hand of Congress.
A bipartisan majority in Congress voted down the bailout engineered by Secy. Paulson (R – Wall Street) and Congressional leaders (D – San Francisco, Nevada, others), a bad market promptly turned much worse, and by the time the markets closed the major U.S. indices had lost 7 – 9 % of their value on the day.
Chris Cillizza of the Washington Post suggests that the defeat of the bill came because many members of Congress, following the old adage that “all politics is local,” believed they were better served to respond to their constituents’ mistrust of the bailout bill than they were to pass a law that Paulson, Democratic Congressional leaders, the President, and Warren Buffett had all said was vital for shoring up the rickety U.S. financial sector.
Buffett’s opinion is apparently shared by many investors, since they headed for the exits in droves after the bill was defeated.
But what was the motivation of all those constituents who put the fear of the ballot box into those “Nay”-saying members of Congress — who had to go against their co-partisans in either the House leadership or the White House? Maybe the same sentiment that Adam Smith expressed 232 years ago when he published The Wealth of Nations:
The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.
Most of the businesspeople I know are honest and upright. My personal opinion is that Paulson and Bernanke are smart, sober, and incorruptible. I hope that no member of Congress would willingly throw the U.S. economy in the tank.
But I know that the U.S. electorate — like the Wall Street class — often acts from the gut. From where I sit, it looks like the fears and doubts of voters, by proxy of Congress, have only stoked the fears and doubts of investors.
If you ever made the ill-conceived wish to live in interesting times, that wish has come true.
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(Image via Wikipedia.)
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The curse of a representative system is that it affects our overall country’s well being. Sometimes a member of Congress must do what is right for the country, knowing that it might not be popular or even good for his or her particular state or district. If the whole doesn’t hold, then all the parts are worthless. We are stuck nowadays with politicians instead of statesmen and women.
Great post Tim, though I would note that politicians often acts from the gut as well and I think in this case the electorate was reacting to the very short time span allotted to review of the bill. I don’t think anyone involved would choose to damage the economy, but this bill was put together in a very short period of time but it will have an impact for decades to come. I think it’s fair for the electorate to pressure their representatives to slow down a bit and read what they’re voting for and amend it where needed. I bet many of them have yet to read it in full, choosing to follow the pressure of their party leaders or the calls of their constituents.
On the business-side, I agree, the majority of business folks I know are solid, trustworthy and intelligent, The problem lies in the fact that there are enough who do not meet that bar, which is why we are where we are economically. Smart people made dumb decisions. Honest leaders were either in the dark or looked away at pivotal times. It happens; we’re human.
As for Paulson, I would have agreed that he was likely incorruptible prior to the three page plan he submitted, but those now-infamous 32 words has convinced me otherwise:
That’s not how our democracy works and it sure doesn’t fall into the expectations our founders and the lawmakers since set out in crafting our nation. I’m not claiming that Paulson is corrupt in the sense of greed, but rather in the sense that he feels that he and those who follow should wield great financial power unchecked by the Legislative and Judicial branches. In fact it evens allows him to sidestep the Executive branch to which he belongs.
Had Congress rushed into a vote on a bill that they hadn’t fully read nor researched by consulting economic experts outside of Wall Street (some of whom disagree with Buffett and have proposed other plans), we could have passed a very dangerous law.
Our economy is going through a tough time, but a few days of intelligent research, debate and bi-partisan compromise will shore us up in the long run far better than a quick reaction.
Interesting indeed. I have mixed feelings about what is going on, and my current thinking is that the government should be helping home owners (yes even the ones who took out mortgages they couldn’t afford) before it helps the people who were wildly betting with all of our retirement – overleveraging those mortgages to buy their oversized homes in Greenwich. See this article in the NY Times: http://www.nytimes.com/2008/09/28/business/28every.html?em
I think people like Paul Volcker should be listened to… instead of dumping a ton of money into the hands of those who brought us to this point with only the vaguest idea of how it will be used. There are some voices of reason to be heard who actually want to consider what might work in the long term rather than saving themselves, friends, and trying to make political hay.
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Kay — We may be stuck with them today, but my bet is that it’s always been like this. In other words, I doubt the members of Congress we have today are worse than in, say, 1837.
Alex — Thanks so much for the long and thoughtful reply. Clearly Paulson (or a staffer) overreached in the first draft of the bill. Like you, I’m glad that there’s been a process (still ongoing) of bipartisan wrangling to bring the bill forward. What surprised me is that a bill actively supported by folks as different as Barney Frank and George W. Bush would have been defeated. Maybe I’m also surprised that a vote of this magnitude would even be taken if the House leadership wasn’t sure of the outcome.
Laura & Chris — The trick here will be to separate what we “should” do in the moral or ethical sense from what we “should” do in the technical economic sense. We’re probably in for some stomach-turning hard medicine, regardless.
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