TARP as Congressional Failure [how to lose the ObamaTARP vote]

CATO ^ | February 4, 2010 | John Samples

[palmer]

...Congress did a poor job of deliberating regarding EESA. Its leadership deferred to leaders of the executive branch and failed to show a seemly skepticism about the bailout. In the end, Congress resorted to less seemly methods to pass the law. After the initial rejection of EESA, congressional leaders purchased the necessary votes for passage by offering funding for projects favored by members who had voted “no” earlier. In other words, the leaders bought the passage of EESA by wasting perhaps $150 billion on what were essentially bribes.56 Vote-buying, not deliberation, brought victory on October 3....

...The first vote taken on September 29 failed in the House of Representatives. Afterwards, members of both parties said prior to the first vote “those who voted ‘no’ had encountered too much hostility for the bill among their constituents, and were worried that a vote in favor would be political suicide.” The same day of the negative vote, the Dow Jones Industrial Average dropped 778 points. Public opinion seemed to shift thereafter: “Congressional offices reported a shift in angry calls from constituents, with some now demanding that lawmakers take some corrective action—a distinct change from the outpouring of public opposition that contributed to the defeat of the plan.” Four days after the rejection, Congress passed EESA.

[palmer]

Lessons from TARP

The basic lesson from TARP are that the executive branch will push and pull levers and get what they want. In the current situation I believe that Obama will propose legislation that he will work out with Reid and then force the House to pass it in the same way that they passed TARP, using bribes for the members who need those but also using a threat of economic armageddon to rile up the plebes to put pressure on the rest of the House members.

Alternative histories are difficult to predict but what would have happened if the House had not passed TARP? One thing is that the executive branch would have gone ahead with more bailouts anyway. But suppose some large banks had failed? We would have had to spend a trillion or two to insure the depositors, but the other economic disruption (asset price plunges) have happened anyway, but merely in slow motion over the last few years rather than all at once. Obama would have won anyway although McCain would not have looked quite so lame running back to vote yes on the big bank bailout. It is likely we would have had a much quicker economic recovery since the worthless bank mortgage assets would have been recognized to be worthless right away instead of dying a long lingering death.

The Angry House Leader

Lots of people seem to want to replace Boehner with an Angry House Leader. Obama will play that anger over and over in the media while claiming obstruction and the desire to crash the economy as revenge for the election. Then he will work up a TARP-like bill with Reid. It may fail on an initial vote. Then he will bribe some RINOs and threaten others until he gets his numbers. You can be sure there will be a manufactured outpouring of public anger at the House.

The bill will pass, the economy will not crash, Obamacare will stay funded cutting into medium or smaller businesses and eventually kill off the private insurance industry (their goal is single payer like Europe), the economy will hesitatingly recover but the government will keep growing as Bernanke will keep easing thus creating artificially low rates for treasuries so the politician can borrow more. The inevitable result is a final default and/or massive inflation and/or the end of the government, defense and all.

The Upside

The upside is pretty simple, it will hasten the demise of the Republican party which will allow room for a new party. The new party will start small of course, but will be for strictly limited government and solidly opposed to the borrowing followed by default scenario I described above. The Angry House Leader may end up as an early leader in the new party, but it is more likely that the R party will have to completely lose elections first with new party challengers obtaining more votes than R. When the ruling D party finally confronts the overgrowth of federal government it will be much too late (it is arguably too late already, we are like Greece except with a strong currency and a lot of momentum). The new party will be able to pick up the pieces from the rubble and start over.

The Alternative

The alternative is to leave Boehner or a Boehner-like leader in place with a public negotiation stance. In private the leader will have to rally the other leaders to make sure he can win some votes on alternatives including cuts to Obamacare funding and rejection of tax hikes. The public conciliatory stance is necessary otherwise Obama will steamroll his funding legislation through in TARP-like fashion. A lot of people do not seem to realize how that worked or have forgotten. Obama can and will crash the stock market after a "no" vote on his legislation. The only way to get the things we want in any legislation is to get to the cliff.

The Senate is much more beholden to corporate interests than the House. They need much more money for reelection plus many have been around so long that defense company executives have an open door at Senators like Feinstein. You can be sure that the Senators will hear from those executives as we get closer to the cliff. The Senate will give the House some things that Obama is unwilling to give up.

Decisions, Risks, Unknowns

There are lots of risks in either scenario. The Boehner scenario has the obvious risk of caving too soon (he will be accused of that regardless). The Angry House Leader scenario has wild cards for the third party. While I don't think it is plausible for the Angry House Leader to block ObamaTARP, it might be. I think it would be a miracle however. My rep (Wolf R VA) is a illogical wimp and is easily bribed, threatened or both. The economy can do a number of things, continue a stumbling recovery like the last few years with no underlying robustness. It could double dip and fulfill what I would call the "crash fantasy". It could also take off with new bubbles by Bernanke and industries sucking off the government teat. This is the crackup boom scenario and will end very badly. In short, I don't know, nor does anyone else. I will work towards the best outcome for America regardless of what happens because this is my country and I want to keep it strong.