Review of House No Vote

Collection of thoughts on the House’s "no" vote on the bailout, our so-called leaders and their political game playing, and the potential consequences of the failure to take action in this ongoing financial crisis. Courtesy of Mark Thoma, at Economist’s View.

House Votes against Bailout Package

The House voted against the bailout package. Brad DeLong says:

Bring Congress Back into Session After the Election…: …and go for the Swedish plan: nationalize the insolvent large financial institutions: dare Bush to veto that after the election.

Vote Count:

Democrats: 141 Yea, 94 Nay
Republican: 66 Yea, 132 Nay.

This Republican Party needs to be burned, razed to the ground, and the furrows sown with salt…

Swamped today – quickly – and holding back the shrill reaction, this is irresponsible and needlessly puts our economy at risk. I’ll update with more reactions as I find them.

Update: Initial market reaction:

The Dow Jones Industrial Average, which had posted a loss of less than 300 points heading into the House vote, posted a decline of nearly 700 points as the "nay" votes reached a majority.

The market has recovered slightly. We’ll see how it goes. They can revote, so there’s still hope, but don’t know if that is planned, or if that would do any good. But it’s not the stock market I care about, it’s employment and growth. Even if this is not a catastrophe, you don’t take this kind of risk with the economy. Even without a major crash, it’s likely a lot of people just lost their jobs, though they don’t know it yet. If the problems aren’t addressed, it is likely to constrain credit, that in turn causes firms to cut back on new investment projects, and as they do, employment and growth taper off. You don’t see the effects as a big drop off in employment all at once since investment projects can take years to complete and momentum from the past keeps the ball rolling. But as those projects end, if they are not replaced with new ones, employment and growth will suffer. And it’s not just investment, people who sell cars, refrigerators, tractors, TVs, stereos, and so on, rely upon credit markets. If the credit isn’t there, they aren’t needed.

I’m worried, maybe for nothing, but why take this kind of a chance with people’s lives?

Megan McArdle:

I didn’t think it was possible to be more disgusted with politicians than I usually am, but I find it impossible to express the seething contempt that I feel at this kind of opportunism. I don’t mind when they screw with the normal operation of the economy for venal personal gain. But risking a recession in order to get a cut in the capital gains tax? Letting it tank because you can always blame it on the Republicans? …

The public doesn’t quite grasp what’s at stake, and there’s no reason they should. But the representatives do. … But anyone who tanks a bank bailout they think might be needed, in order to get a cut in the capital gains tax, deserves to be tried for treason.

Paul Krugman:

OK, we are a banana republic: House votes no. Rex Nutting has the best line: House to Wall Street: Drop Dead. He also correctly places the blame and/or credit with House Republicans. For reasons I’ve already explained, I don’t think the Dem leadership was in a position to craft a bill that would have achieved overwhelming Democratic support, so make or break was whether enough GOPers would sign on. They didn’t.

I assume Pelosi calls a new vote; but if it fails, then what? I guess write a bill that is actually, you know, a good plan, and try to pass it — though politically it might not make sense to try until after the election.

For now, I’m just going to quote myself:

So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes.

Republicans are admitting they nuked the vote. Why? They are saying it’s because of Pelosi’s speech during the vote (read it and judge for yourself):

Rep. Boehner and others say Pelosi’s partisan floor speech is to blame for the financial rescue bill’s defeat.

Barney Frank wonders why a speech would cause them to change their votes:

“Because somebody hurt their feelings they decided to punish the country.”

Steve Benen adds:

But more important that than is the truly ridiculous frame Republicans are establishing for themselves by using Pelosi’s speech as an excuse for their own failure. The House GOP, for reasons that defy comprehension, has decided to characterize itself as a caucus of cry babies. Worse, they’re irresponsible cry babies who, according to their own argument, are more concerned with their precious hurt feelings than the nation’s economic stability.

Willem Buiter:

What is likely to happen next? With a bit of luck, the House will be frightened by its own audacity and will reverse itself. If a substantively similar bill (or a better bill that addresses not just the problem of valuing toxic assets and getting them off the banks’ books, but also the problem of recapitalising the US banking sector) is passed in the next day or so, the damage can remain limited. If the markets fear that the nays have thrown their toys out of the pram for the long term, the following scenario is quite likely:

The US stock market tanks. Bank shares collapse, as do the valuations of all highly leveraged financial institutions. Weaker versions of this occur in Europe, in Japan and in the emerging markets.

CDS spreads for banks explode, as will those of all highly leveraged financial institutions. Credits spreads generally take on loan-shark proportions, even for reputable borrowers. Again the rest of the world will experience a slightly milder version of this.

No US bank will lend to any other US bank or any other highly leveraged institution. The same will happen elsewhere. Remaining sources of external finance for banks, other than the facilities created by the central banks and the Treasuries, will dry up.

Banks and other highly leveraged institutions will try to unload assets at fire-sale prices in illiquid markets. Even assets not viewed as toxic before will become unsaleable at any price.

The interaction of a growing lack of funding liquidity and increasing market illiquidity will destroy the banks’ business models.

Banks will stop providing credit to households and to non-financial enterprises.

Banks will collapse, both through balance sheet insolvency and through liquidity insolvency. No bank will be safe, not even the household names for whom the crisis has thus far brought more opportunities than disasters.

Other highly leveraged financial institutions collapse on a large scale.

Households and non-financial businesses revert to financial autarky, among wide-spread defaults and insolvencies.

Consumer demand and investment demand collapse. Unemployment shoots up.

The government suspends all trading in financial stocks until further notice.

The government nationalises all US banks and other highly leveraged financial institutions. The shareholders get nothing up front and have to wait for an eventual re-privatisation or liquididation to find out whether they are left with anything at all. Holders of bank debt get a sizeable haircut ‘up front’ on the face value of the debt and have part of the remainder converted into equity that shares the fate of the old equity.

We have the Great Depression of the 2010s.

None of this is unavoidable, provided the US Congress grows up and adopts forthwith something close to the Emergency Economic Stabilization Act as a first, modest but necessary step towards re-establishing functioning securitisation markets and restoring financial health to the banking sector. Cutting off your nose to spite your face is not a sensible alternative.

PS My remaining financial wealth is now kept in a (small) old sock in an undisclosed location.

PPS The conduct of both US Presidential candidates in this matter makes them unfit for purpose.

Washington Wire:

“I do believe that we could have gotten there today, had it not been for the partisan speech that the Speaker gave on the floor of the House,” Boehner said. “We put everything we had into getting the vote to get there today.” …

Minority Whip Roy Blunt (R., Mo.) said he had 12 Republicans who would have voted for the bill but changed their minds, while Rep. Eric Cantor (R., Va.) holding up a copy of what he said was Pelosi’s floor remarks – said the speaker “frankly struck the tone of partisanship.” A senior aide to Pelosi rejected the Republican claims against the speaker, saying the suggestion that her speech motivated House Republicans to vote against the bailout plan was “absurd.”

“You don’t vote on the speech, you vote on the bill,” said the aide.

Frank, speaking at a press conference, mocked the suggestion. “Give me those twelve people’s names and I will talk uncharacteristically nicely to them,” Frank said.

Jeff Frankel:

The Revised Troubled Asset Relief Plan Deserved to Pass: When the Treasury came out with its $750 bailout plan on September 22, I thought it lacked so many necessary ingredients that it deserved a thumbs down. …

But in the negotiations between the Treasury and Congressional leaders over the course of last week, the missing ingredients were inserted. Starting with the additions that were most necessary on the merits, and moving toward the ones where the necessity was more political, they were…

The plan (TARP for Troubled Asset Recovery Program) would still be unprecedented in magnitude and in the discretion it gives the Treasury Secretary. Even if the congress had passed it today, it would not have guaranteed an end to the financial crisis, let alone averting the recession that is probably already inevitable at this point. Furthermore it does little to begin with the reforms in regulation that our financial system now clearly needs.

Nevertheless, as distasteful as it is to be “bailing out” Wall Street, or even bailing out those homeowners who took out loans that they shouldn’t have, or bailing out policymakers who were asleep at the switch, my view is that the program is necessary. It is better than the alternatives:

better than the Treasury proposal of 9/22,

much better than the proposal we would have gotten from a pre-Paulson Bush Administration,

better than the alternative that the House Republicans were offering, and

(most important of all) better than the alternative of doing nothing, which would (will?) quite likely mean a severe recession.

I suppose it is not surprising that Congressmen facing elections in 5 weeks don’t want to go on record supporting something so unpopular. What will happen now that the House rejected the deal in its vote today?

Most likely the stock market and real economy will plummet, until the pain gets so bad that a bailout package like this one accumulates more support.