Financial crises are always the result of multiple causes. Historians and economists are still debating what caused the great crash of 1929 and the Great Depression that followed. But the inability of key political actors to recognize the depth of the crisis and what had to be done about it was clearly a factor. We may be seeing this fall a recurrence of the palsied debates in Washington during 1929 and 1930 that helped to lay the groundwork for a decade of global economic ruin and political extremism, culminating in world war.
Today's failure of Congress to pass a bailout bill reflected the paralysis in Washington. There is currently no leadership in Congress and certainly in the Bush administration capable of proposing a bill that could win public support and arrest the growing panic on Wall Street and overseas. First, of course, comes the role of the Bush administration. By defining the effort initially as an attempt to bail out Wall Street, the Treasury Department--with the cooperation of leading Democrats in Congress--made its failure almost inevitable.
You don't have to have a Ph.D. in history to know that even in moments of irrational exuberance, Wall Street has never been popular among Americans. That's part of America's populist legacy and it runs deep in the electorate. So it was virtually impossible for liberal proponents of the bailout like Representative Barney Frank to make the point that the bill was not aimed at rescuing Wall Street, but at preventing a financial panic that would undermine the entire system of credit on which consumer demand and business investment depend. That point simply didn't get across.
Secondly, you have among Republicans, and some Democrats, a lingering adherence to 19th century laissez faire capitalism that bars acceptance of any viable proposal for stemming the crisis. As Washington Post columnist Stephen Pearlstein wrote, the Republican plan for addressing the crisis--consisting at its heart of tax breaks to firms on income they no longer have--looked like "a parody of what Republican wing nuts might come up with." Some Republicans clearly opposed the bailout in this spirit. According to his press release, Texas Representative Louis Gohmert informed Secretary of Treasury Henry Paulson that "a socialist solution to this problem should not be an option."
Other Republicans might have banded together for more craven partisan reasons. That was suggested by statements after the vote from the Republican leadership that put the blame for the vote's failure on Speaker of the House Nancy Pelosi's presentation of the issue. Said Minority Leader John Boehner, "I do believe we would have gotten there had the Speaker not made this partisan speech on the floor of the House." In curiosity, I read Pelosi's statement. It certainly lacks eloquence, but she notes that "over the past several days, we have worked with our Republican colleagues to fashion an alternative to the original plan of the Bush administration." Hmmm.
Thirdly, however, one has to look at the bill itself and wonder. Even before the vote was taken this morning, the Dow Jones average had begun to plunge. That was attributed to skepticism about the bill's passage, but more properly, it may also have been due to skepticism about the bill's effect if it did pass. This morning, influential economist Nouriel Roubini, who along with Paul Krugman, was among the first to warn that the housing bubble could undermine the financial system, wrote in his newsletter that "the current financial crisis is becoming more severe in spite of the Treasury rescue plan (or maybe because of it as this plan is totally flawed.)"
Roubini's argument, echoed by other economists, is that the Treasury plan would simply not inject enough capital into the system to permit a recovery. Roubini argues--and with good evidence of bailouts and bankruptcies that have begun in Europe--that the crisis is global and not merely confined to the United states. "When a nuclear option of a monster $700 million rescue plan is not even able to rally stock markets (as they were in free fall today), you know this is a global crisis of confidence in the financial system."
What to do next? Roubini wants mergers between tottering American firms (including Morgan Stanley and Goldman Sachs) and solvent foreign banks and insurance companies. Krugman argued that support for the bailout, given the leadership in Washington, was the best available alternative, but he has also advocated a more far-reaching approach--modeled upon one undertaken by the Swedes in the 1990s in response to their banking crisis--that would involve the government's, in effect, nationalizing tottering institutions by buying stock in them.
I know too little to comment on what proposals might or might not work, but it seems clear that the Democrats face a pretty stark choice: whether to continue fiddling with the Treasury plan to make it more acceptable to a score of Republicans or Democrats, or to refashion a plan of their own that is not defined as a "Wall Street bailout" and that does go further in attempting to infuse capital into the credit system. It is a question of policy, but also of leadership--and it becomes more acute in the context of a looming change in administration.
What will the candidates do? John McCain's campaign has already blamed Barack Obama for the failure of the Democratic-sponsored bill. That's to be expected. And Obama has promised that the Democrats in Congress will get the job done. McCain clearly has nothing substantive to offer, but Obama might have to consider whether he should attempt to fill the leadership vacuum in Washington. That would be risking a presidential election that looks more and more favorable to him; but he must recognize, if he hasn't already, that the country is gravely in risk from the paralysis in Washington.
--John B. Judis