A key reason for the failure of the bailout plan to gain enough votes was constituent pressure against it, both from progressives and conservatives. That's because credible sources have done a poor job of convincing the public of the connection between the financial crisis on Wall Street and its far-reaching consequences for all Americans. I spoke with Dr. Robert Shapiro, an economist and former Clinton administration official, about the crisis and the bailout bill today, and he made this point succinctly:
"Members of Congress are very scared of their constituents right now, for whom the plan has not been well explained. If it had, it would get a lot more public support. The possibility of a total meltdown of the financial system in which credit flows stop -- this is not just U.S. but global -- is significant enough that it warrants very serious measures. ... Who is the first sufferer? Wall Street is not sympathetic. [But] It doesn't stop there. The economy runs on credit. All of our jobs depend on flows of credit."
Shapiro, like most economists, doesn't like the bailout bill even in its current iteration but still thinks it ought to be passed, ideally, he says, with much stronger measures to address the underyling cause of the crisis: foreclosures. But, he says, "I don't think you can take this apart and redo the basic structure of the deal right now ... We're way too far down this road to say, oh, we're going to do something entirely new. I've spent hours over the last week with members of congress trying to explain how this works. You come up with a new approach and you've got to start the education all over. I think we take a big risk waiting another two weeks to do that. We do need to limit the amount [of money used in the bailout] so we can come back and correct later."
The response of the two presidential candidates has been revealing. Today, Barack Obama gave a speech (excerpted after the jump) making the case for the rescue. And John McCain has a new advertisment out blaming Democrats and Fannie Mae/Freddie Mac for causing the housing bubble. It's not true, especially since homeownership policy has been a bipartisan enterprise, and Fannie Mae and Freddie Mac were both victims of the crisis, not it's cause. What's needed to fix the economy now is a constructive effort to build support for legislation that will fix it. That's what McCain said yesterday, before he started pointing the finger.
--Tim Fernholz