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Celebrating The Bailout Bill's Failure--and Looking Ahead

David Cay Johnston, who won a Pulitzer Prize for his innovative coverage of our tax system, retired this year as a investigative reporter for The New York Times. He is the author of Free Lunch: How The Wealthiest Americans Enrich Themselves at Government Expenses (and Stick You with the Bill).

Whether you favor the $700 billion bailout or not, the House vote today should make you cheer--loudly.


Because the majority vote against it shows that Washington is not entirely in the service of the political donor class, by which I mean Wall Street and the corporations who rely on it for their financing. These campaign donors, a narrow slice of America, have lobbied and donated their way into a system that stacks the economic rules in their favor. But faced with as many as 200 telephone calls against the bailout for every one in favor, a lot of House members decided to listen to their constituents today instead of their campaign donors.

The GOP members voted overwhelmingly against the bill, while two-thirds of the Democrats favored it. Right now you can be sure that cajoling and arm twisting is underway in an effort to persuade 16 GOP members (or perhaps a dozen Republicans and a few Democrats) to vote the public largesse for Wall Street.

None of this is to say that we need, or do not need, some government intervention in the markets. Rather it is to say that the administration has failed to make its case, instead assuming that just as with the war in Iraq and the Patriot Act, it could stampede Congress into thoughtless action and terrify the public into going along.

Also, do not get stampeded by the awful, ill-informed, and heavily one-sided coverage on cable TV, which I have been monitoring.  Several friends have emailed me in a panic asking if they should sell their holdings. Politicians and cable news deserve a lot of blame for fostering fear.

The Dow Jones Industrial Average, a measure of just 30 companies out of millions, closed down just under seven percent. Back in 1987 the Dow fell 22 points in a single day, and it was not the end of Western Civilization or even investing.

The stock markets may fall more. They also may rise. After all, Goldman Sachs shares were in a free fall just before the Bush administration declared a crisis, and even with today's 12.5 per cent drop, they are trading at more than $30 per share higher than at the low point eleven days ago.

Questions abound: Do we believe in markets, which can be volatile--or only in managed markets biased by government policy to the upside? Or do we believe in corporate socialism?

Is our economy so fragile that it cannot withstand shocks? Or is it fundamentally sound, as Senator John McCain was declaring until just days ago? And if our economy really is fragile, just how will borrowing $700 billion more to pay for bad loans make things better for anyone but the lenders and some of their customers?

What assurance do we have that borrowing $700 billion will not make things worse? None.

Keep in mind a paper released last week by two economists at the International Monetary Fund, who studied 42 banking crisis over the past 37 years. Their conclusions (not the IMF's) are: bailouts often do not work, they often result in more bad practices, and they distort economies by transferring wealth from taxpayers to bankers and their customers.

Congress held hearings last week, but it only listened to the advocates of the bailout. We deserve better. If Americans have to give up, on average, more than $2,300 of our substance, then it's incumbent on the plan's advocates to make a compelling, coherent case for sacrifice to the national good. But remember, this money is being sought by an administration that told us not to sacrifice after 9/11, but to go shopping.

It is also an administration that, as I revealed in a story in The New York Times in 2004, said that the American taxpayer could not afford an extra $12 million to pursue Osama bin Laden's financing of terrorist plots. And how tiny is this sum?  Roughly the interest every three hours on $700 billion. Ponder that--we cannot bear $12 million to get a murderous zealot determined to strike again, but we can afford 58,000 times that much in a bid to avoid the inevitable declines in asset prices that were artificially inflated by the offerings of Goldman Sachs and other Wall Street firms?

Perhaps the dissolution of this bailout bill means that we will now get a serious look at just where the problem is, how pervasive or concentrated bank problems are, and whether there are less expensive options, as suggested by economists like NYU's Nouriel Roubini, BU's Larry Kotlikoff and Columbia's Perry Mehrling, and the Center for Economic Policy and Research's Dean Baker.

Maybe we will also get answers to some hard questions. Like:

--Why was the CEO of Goldman Sachs in the room when government officials decided to bailout the insurer AIG, especially since Goldman has about $20 billion, half of its shareholder equity, at risk on AIG? Keep in mind that Treasury Secretary Paulson is the immediate former CEO of Goldman.

--Why was Lehman Brothers, a Goldman competitor, the only Wall Street firm in trouble so far left to collapse on its own? The Wall Street Journal reports today that it was the collapse of Lehman (which because of its structure may not have been an attractive firm for purchase) that "triggered cash crunch around the globe."

--Has Treasury obtained from every bank the amount of its illiquid assets, which would tell us if the problems are concentrated at a few banks or are pervasive?

--Would a temporary provision in the bankruptcy code, allowing people with toxic mortgages to get their loans rewritten or pursued to foreclosure, be a cheaper and better alternative?

Disclosure, transparency, options--those should be the issues in the next few days.