There is no one I know of in the government who relishes the opportunity to commit $700 billion in taxpayer money to the nation’s failing financial system. There are probably only slight degrees of difference in how much individual members of Congress and officials in the Bush administration hate it. But there is a broad consensus that the alternative is far worse. Frozen credit markets pose risks so great to our business community and our economy they are difficult to even comprehend.
That consensus includes hardcore free market conservatives such as President George W. Bush and Secretary of the Treasury Henry Paulson, virtually all of the key officials within the Federal Reserve System, nearly all moderates in both parties, and a large share of the liberals in Congress including House Banking Committee Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Chris Dodd (D-CT)
So why has the process come to a complete standstill? Because extreme conservative elements in the House of Representatives have hijacked the negotiations and put forth a ludicrously unworkable alternative that only partially conceals the fact that they favor no intervention. The leader of the revolt is not John Boehner, the Republican Party’s floor leader, who had already agreed to the plan in principle. But Boehner’s moderate and responsible support for the Bush administration’s bailout plan brought the ire of the far right Republican Study Committee, and its Chairman, Jeb Hensarling of Texas, who served as an aid to former Senator Phil Gramm before being elected to Congress.
The Republican Study Committee, for years the power base of former Rep. Tom DeLay of Texas, is the same group that tried to pull the rug out from under George W. Bush’s father by blocking passage of the Budget Enforcement Act of 1990—an act that has since been credited with a substantial portion of the budget discipline that contributed to the budget surpluses of the late 1990s. That bill passed despite the opposition of future Speaker of the House Newt Gingrich, the Republican Study Committee, and a little more than 100 House Republicans, a coalition similar in size to the one Hensarling leads against the economic package put forward by the current President Bush.
The Republican Study Committee also was at the vanguard of the decision by congressional republicans in 1995 to shut down the federal government. After virtually all Senate Republicans and most of their House Republican colleague recognized the disaster that the shutdown had created for the country and their party, the Republican Study Committee continued to insist denying numerous agencies and programs across the federal government the funds necessary to reopen their doors. After it was all over, Tom DeLay commented that the worst thing the party had done was to allow the government to reopen.
But the consequences today of the game Hensarling and his organization are playing with the nation’s financial system are far greater than the mischief that the organization attempted in 1990 or 1995. They are risking bankruptcies of businesses that had no role in subprime mortgages, structured investment vehicles, or overleveraged investment banking. They are risking the loss of millions of jobs and the precipitous decline of nearly all of the retirement savings accounts of Americans and people around the world.
Ultimately this merry band of conservative extremists will cave to the demands of their president and the more sober minds in their party. They will cave because it will become apparent even to them that the alternative to the plan now before the Congress is untenable. The question is not whether but when or more specifically how many points will be shaved from the Dow Industrial Average before they offer the votes to move forward.
Will they relent at 10,000? 9,500? 9,000? While they dither, will the short-term credit markets that businesses need to fund their daily cash needs, such as making payroll every two weeks, completely freeze up?
This is probably more of a political gamble than a real argument over policy. With recent polls showing Democrats with a 14-point advantage in the generic question of which party voters prefer to win congressional elections, they may feel that they need a game changer. But this is really not a gamble at all. Their irresponsibility will end badly for everyone, and in particular for the political party they are hoping to protect. The question is how much damage will be done to our capital markets, the world financial system, and their nation’s economy before they figure this out.