While many of you may be popping champagne bottles tonight in honor of the bailout plan that never was, we need to realize that this is only one step. The bailout is by no means dead. Having dealt with the legislative process before, here is my speculation about what may happen in the coming days, and the options that Congress has before it:
1) The House schedules a re-vote on the same bill.
Keep in mind that victory today was a very narrow one. The final vote was 228-205. That means a switch by 12 congresspeople would make all the difference. All the leadership has to do is put 12 Bridges to Nowhere-type earmarks buried in the fine print of some appropriations bill, and those 12 votes can magically appear. Or promising to give/withhold campaign funds or plum committee assignments. The list of carrots and sticks available to the leadership is endless. In many ways, the vote turning out the way it did had nothing to with the bill per se, but rather represents a colossal failure of the leadership's whipping process. You don't walk into a critical vote like this without knowing how many votes you have beforehand. Indeed, a report in The Hill suggest that Roy Blunt, the Republican whip, miscalculated the votes in his pocket by 10, which was a huge mistake and probably cost them the vote.
2) The House schedules a re-vote after some minor alterations.
The leadership is by no means out of options in the horse-trading that's likely occurring now. Some of the congresspeople voted no not because they disagreed with the gist of the bill, but because their pet issue (e.g. foreclosure assistance, tax cuts, regulatory changes, etc. etc.) wasn't included. Just like adding the meaningless bond insurance plan into the bill bought a few Republican votes, similar minor provisions can be added to convince a few more people.
3) The Senate votes first, and the House uses that to pressure members to fall in line.
While the Senate seems to have the votes for passage, all bets are off right now until they come to grips with the House defeat. Senators are now deciding whether they want to walk the plank for Wall Street and possibly lose their jobs for a bill that won't pass anyway.
4) The process starts again, with new proposals and plans debated.
While this is perhaps the ideal situation, the likelihood of such an orderly debate will depend greatly on how the markets do in the next few days. If chaos continues to reign, the pressure will grow to pass something. This is where all those economists need to come together and come up with an alternate plan fast. While the University of Chicago writing a letter condemning the current plan was nice, it would have been better if they proposed an alternative. Remember that when a house is burning down, and someone proposes doing something, and another proposes doing nothing, chances are that something will win out, no matter how bad it is, simply because doing nothing is not an option.
Economists with ties to the Hill, or with journalists that could publicize such a plan, need to come together to propose a reasonable alternative. Throw enough academic credentials behind it, and they have a fighting chance of being more trustworthy than Bernanke and Paulson. We'll see if the academic community which has been so vociferous in its criticisms can also make constructive proposals (It doesn't have to have all the details in place, just remember 3 goals that can be reduced to soundbites for public consumption: save the financial system, punish Wall St., and cost less than $700 bil).
5) Congress is paralyzed and adjourns before passing anything.
This may not be as far-fetched as it sounds. Right now, many congresspeople are desperate to get home and campaign. Plenty of people are locked in tight elections, and every day they spend in Washington is one less day spent rounding up votes. The number one priority of most congresspeople is getting re-elected. If that means leaving DC and leaving the economy in a tailspin, so be it. This will likely depend on how badly the markets are doing, and how far off from getting enough votes the leadership perceives themselves to be.
6) The executive branch (Treasury and the Fed) finds new executive powers that allow them to substantially implement the bailout without Congressional approval.
This has happened plenty of times during this current Administration. No reason to suspect they're going to stop now.
Those are the possible scenarios that I see possibly playing out in the next few days. The bottom line is that today's defeat of the bailout was a tactical victory, not a strategic one. There are still plenty of ways that we can end up with a bad plan, and we need to remain vigilant.
Per Lune's final point: there is plenty the Administration could do on a stop-gap basis. One correspondent pointed out that the Administration could use the Exchange Stablization Fund (admittedly, it might need to be beefed up) to stand behind certain types of dealer trades or other "market maker of the last resort" as Willem Buiter likes to put it, activities. |
