Ideology, Politics, Ignorance Derail Rescue Plan:
John M. Berry
Commentary by John M. Berry
Oct. 1 (Bloomberg) -- Profiles in courage it wasn't.
A foolish, stubborn majority of the House of Representatives, some devoted to their ideology, others simply frightened with an election a month away, voted no.
Like ostriches, they stuck their collective head in the sand on Sept. 29 and refused to support the compromise plan to deal with the most serious economic crisis since the 1930s.
No, by God, they weren't going to risk $700 billion worth of taxpayer money to bail out Wall Street executives whose bad judgment caused the problem in the first place. No, no, no.
After the 228-to-205 vote, financial markets reminded the naysayers what's really at risk. Stocks lost more than $1 trillion in value, with the Standard & Poor's 500 Index falling 8.8 percent. And the London interbank offered rate, or Libor, that banks charge each other for overnight loans jumped 431 basis points to a record 6.88 percent.
That's what the crisis is really all about: frozen credit markets, not covering losses at big banks and brokerage houses.
Massive efforts by the Treasury Department and the Federal Reserve to provide enough liquidity to keep credit flowing haven't been enough. The rescue plan, which isn't a bailout in any sense of the word, is a desperate attempt to thaw the frozen credit market and keep the economy growing.
All year I have argued that the U.S. economy wasn't in a recession and probably wasn't going to be. But consumer and business confidence can only take so many shocks, and I suspect they have now had one or two too many.
Economic Contraction
The economy may begin to contract before the year is out, and if that happens the unemployment rate, which is already at 6.1 percent, will continue to increase. If financial markets don't improve, the recession could be a serious one.
That's what's at stake. The Senate should approve the plan the House rejected and give the House another shot at approving it.
Senator John McCain, the Republican presidential candidate, shouldn't just be there to vote for it; he also should demand that the 133 House Republicans who voted against, join the 65 who said ``yes'' in supporting the public interest.
His Democratic opponent, Senator Barack Obama, should do the same with the 95 members of his party who voted ``no.'' After all, 140 Democrats voted ``yes.''
The chairman of the House Financial Services Committee, Democrat Barney Frank of Massachusetts, is one of those who has demonstrated courage throughout the crisis. He has done his best to emphasize the danger of inaction and he has made every effort to work with Republicans in the process.
`Tough Vote'
``This is a tough vote,'' Frank said as the House vote began. ``This is a vote where many of us feel that the national interest requires us to do something which is in many ways unpopular because what we are talking about, to many of us, is the need to act to avoid something worse from happening than is already happening.''
It isn't about helping people on Wall Street, Frank said. ``The people who will be hurt, in our judgment, are those who are trying to buy or sell cars, because there won't be credit for the automobile industry. There won't be the ability to refinance your house or buy a house because there won't be any money there for any purchase that requires credit of any size.''
That was pretty plain language, and entirely on point.
A lot of investors and highly paid Wall Street professionals have already been hurt, and the rescue plan wouldn't make the whole or anything close to it.
In what is looking more and more like a mistake, Lehman Brothers Holdings Inc. was allowed to go bankrupt, inflicting billions of dollars in losses on stockholders, those holding Lehman bonds and notes and even those just dealing with the company. (editorial note: that is what CounterParty Risk IS ALL ABOUT)
Market Freezes
That failure caused the already tight interbank market to all but freeze.
Since then Washington Mutual Inc., the country's largest thrift institution, was taken over by the Federal Deposit Insurance Corp. Its depositors were protected, while JPMorgan Chase & Co. acquired the branches and accounts, leaving bondholders high and dry.
Two days ago, Wachovia Corp., the sixth-largest U.S. bank, was taken over by Citigroup Inc. after Wachovia's stock had plummeted.
With all those things happening in the days leading up to the rescue-plan vote, one would have thought they would have understood the need, as Frank put it, ``to act to avoid something worse from happening than is already happening.''
The plan, which allows the government to buy troubled assets from financial institutions, isn't guaranteed to work. Moreover, it will take a minimum of several weeks to put it into place if it does pass.
There isn't any alternative, though. So let's hope a majority of the Senate, and then in the House, can show enough courage to give it a shot.
(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net
Last Updated: October 1, 2008 00:03 EDT |
