Tuesday, September 30, 2008
Editorial: The bailout flames out
The House rejected Treasury Secretary Paulson's approach, even with caveats. It's time to look for a new way to ease this looming crisis.
From the RoundTable blog
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Despite dire warnings from President Bush and leaders on both sides of the aisle that economic disaster loomed without action, the House of Representatives failed Monday to pass a controversial $700 billion bailout of the financial system.
The 228 representatives who voted against the bailout either didn't believe the warnings or cared more about their political future than the nation's economic future. The latter should be ashamed.
The Dow immediately plunged.
This is about as complex as an issue gets, so clarity is hard to come by.
No one knows if the bailout would even have kept the rot of bad loans from poisoning the entire economy or if some alternative might work just as well to ensure that America's banks have the liquidity to continue supplying the credit that makes the day-to-day economy work.
In fact, only one point seems truly clear: Many credible voices insist this nation's financial system is on the brink of disaster.
But the sense of urgency Congress is working under is profound -- and that was ratcheted up even further when Citigroup bought Wachovia over the weekend.
As House Minority Leader John Boehner said from the House floor while vainly urging his members to approve the deal, "If I didn't think we were on a brink of an economic crisis, it would be the easiest thing in the world for me to not vote for this."
Such dramatic statements from leadership on both sides of the aisle and dire warnings from President Bush were not enough to sway those who opposed the bailout.
What will happen next is also not clear, but after painting such a drastic picture of imminent disaster, Congress cannot simply walk away from this and see what happens.
Maybe a better proposal will come out of this defeat. Many economists have been questioning the wisdom of Paulson's basic approach. Perhaps a different way to recapitalize the markets can be found -- if there is time to go back to the drawing board.
Berkeley economist Brad DeLong makes a convincing case for temporarily nationalizing failing banks, liquidating those that can't make it and getting an ownership stake in those that can. That is what Sweden did when it faced a similar banking crisis in the early 1990s.
The New York Times summed up the results of the Swedish approach, "That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well."
Concerns about Paulson's approach have lingered on both the right and the left. Why not try something that worked during a very similar crisis, albeit on a far smaller scale? Or maybe there is another promising approach -- if it can be executed quickly enough. The only devastating response would be inaction.
Clear thinking about complex issues is never easy to come by in Washington, D.C., especially just weeks before an election. But having made a convincing case that crisis is upon the nation, members of Congress need to buckle down, put partisan interests aside and develop a course of action that people can accept.
