Here’s some perspective on Congress’s failure to pass a financial rescue plan: As soon as the House vote was announced Monday, the stock market plummeted, falling nearly 800 points and wiping out more than $1 trillion in assets.
Many will point out that the market “losses” were only on paper and that the market rebounded a bit on Tuesday. This is true. But the $700 billion price of the bailout was only on paper, too. And, on paper, it appears the cost of doing nothing was more than the cost of the bailout.
The bigger message is that financial systems – around the world; this mess isn’t just clobbering Wall Street – crave certainty. With House rejection of the rescue plan, certainty – or at least some level of it – vanished, causing a massive sell-off.
Public outrage over the bailout is understandable. Big investment companies made bad decisions and put trillions of dollars into investments that even analysts can’t explain. Why should their mistakes be remedied with taxpayer dollars when no one is offering rescue plans to homeowners who were talked into mortgages they couldn’t understand?
One answer, that is far from satisfactory, is that the stakes – further erosion of the U.S. economy – are too high to not have the government buy up the troubled assets.
The other, which is troublingly vague, is that the bailout won’t cost $700 billion. When the government, sometime in the future, sells the securities after markets have stabilized, much of the $700 billion, perhaps all of it or even more if they sell for a profit will be returned to the treasury. The Congressional Budget Office, in a recent analysis, says the bailout likely won’t cost taxpayers $700 billion, but it refused to hazard a guess as to where between zero and $700 billion the program would actually cost.
This vagueness, and the lack of consideration of alternatives, prompted 2nd District Rep. Mike Michaud, along with 94 other Democrats, to vote against the bill. “In the end, after a very careful review and meetings with top economists and financial experts, I concluded that the package as presented to the House for a vote did not adequately protect the taxpayer,” he said Monday.
For 1st District Rep. Tom Allen the risk of inaction was the deciding factor in his vote for the plan. “It is unconscionable that the House failed to reach consensus on legislation to stabilize financial markets as America stands on the brink of the worst economic crisis since the 1930s,” he said. “The jobs, the savings, the homes, the educational opportunities and the retirement security of millions of Americans are at risk.”
Both perspectives are right. The difficulty for lawmakers as they try to craft a more palatable package is to accommodate both. Cutting capital gains taxes (people and companies that are losing money don’t have gains to tax) as House Republicans have suggested isn’t a solution, nor is solely increasing the amount of savings deposits that are insured as Democrats have pushed.
In the absence of realistic alternatives, a phased rescue plan with strong oversight must be passed soon.