After the Bailout Failure: What Now?

In refusing to provide enough votes to enact a bipartisan bailout bill, Republicans may well have done Democrats a favor. The Democratic leadership gave up several provisions that their members wanted, including more relief for homeowners. But the Republican leadership took the position that they had extracted all they could get, and GOP House members were now free to vote their consciences. In practice that meant listening to the uproar of constituent backlash against a bill that did much for Wall Street and little for the common American. So the easy Republican vote was "No."

House Speaker Nancy Pelosi had been promised that 80 or 90 Republicans would vote for the bill. That way, both parties could share responsibility. But in the end, just 66 Republican votes materialized.

According to my sources, once Pelosi learned of the double-cross, she told the Democratic whips to make it a conscience vote on the Democratic side as well. With the likelihood of voter indignation and the strong possibility that this bill would not fix what was broken, Pelosi was not prepared to make this primarily a Democratic bill. Knowing that the Republicans were walking away from the deal, she held the roll-call anyway, to make clear just whose failure this was.

When the vote came up short, she held it open a few minutes but made rounding up additional supporters the Republicans' problem. When the votes did not materialize, she banged the gavel, and the bill went down.

What now?

First, we will face the inevitable round of recriminations. But the record is pretty clear. The Democrats were prepared to step up and take a politically difficult vote. The Republicans weren't -- and were willing to play Russian roulette with fragile financial markets.

Second, Republicans will face huge pressure from Wall Street to try again. But the moment for this bill may have passed. Pelosi was also facing growing rebellion in Democratic ranks.

Third, both parties will now go back to the drawing board -- and it is here that Republican calculations may have backfired, big time. For while many Republican legislators are posturing populist, they really don't have anything up their sleeves that is true to right-wing ideology, that will please angry taxpayers, and that will fix the problem. Vote No is not a program, and as the crisis deepens the vote will look increasingly cynical and opportunist.

Republicans can talk like Roosevelt, but when it comes to legislating it is hard to imagine them out-Roosevelting the Democrats. People in both parties are now talking about some variation on Roosevelt's Reconstruction Finance Corporation, in which the government gets an equity stake in an enterprise that it bails out. But the Republican version is likely to be more of a giveaway to Wall Street -- mocking the right's rhetoric. As I have been arguing, the entire Paulson approach was flawed. The Democrats were mistaken to try to add some bells and whistles to a concept that was bad at its core.

The Democrats should write a bill that includes:

  • An RFC-style agency to have the government take over or take major equity positions in failing banks.
  • Direct refinancing of threatened mortgages, on the model of Roosevelt's Home Owners Loan Corporation.
  • Extension of FDIC guarantees -- and standards -- to other financial institutions, with government takeover if they fail.
  • A small transfer tax on financial trades to pay for a lot of the cost of recapitalizing Wall Street.

It was Winston Churchill who observed that you can count on Americans to do the right thing -- after they have exhausted the other alternatives. This could be one of those times.

Since the Democrats are the majority party, the White House, Hank Paulson, and the supplicants on Wall Street may now face stronger medicine. They can thank the Republicans for that.

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