To Save Capitalism

What now?

By Rich Lowry
Tuesday, September 30, 2008

It was just two days short of being an October surprise. A historic House vote on the Paulson bailout plan became historic for a reason no one expected: It went down to defeat, and not by a narrow margin.

As the Dow plummeted 777 points, Republicans and Democrats took to the microphones to play the blame game, no holds barred.

Superficially, both parties are to blame: 133 Republicans and 95 Democrats voted against, large numbers in both caucuses. But a majority of Democrats voted in favor.

Republicans said a harshly partisan speech by Nancy Pelosi turned off about a dozen Republicans who were set to support the legislation. That prompted a devastating rejoinder from Democratic Rep. Barney Frank — they voted to tank the economy because their feelings were hurt?

The simplest explanation for the defeat: The public opposed the bill, and all the intensity was against it. Congressional staffers couldn’t pick up the phone without getting harangued by angry constituents. Everyone suffered from taser-level sticker shock from the $700 billion price tag.

Treasury Secretary Hank Paulson was caught between two different audiences. He needed the $700 billion figure to reassure Wall Street he’d have a big bazooka to deal with the crisis, though it’s unlikely he’d ever spend that full amount. But it alienated the very people he needed to pass the bill.

Meanwhile, Paulson and Federal Reserve Chairman Ben Bernanke were underwhelming in congressional testimony last week when explaining how the program would work — basically saying “trust us.”

In the end, Lincoln was proved right again: “With public sentiment, nothing can fail; without it, nothing can succeed.”

What now? If nothing passes and a crash comes, Republicans risk getting tagged for the blame for a long time to come. The vote is a blow to John McCain, who had so dramatically “suspended” his campaign to return to DC and broker a deal. His campaign had explained his role as bringing to the table and coaxing along House Republicans, whose revolt now makes him look ineffectual.

Yet the bill will likely be revived — and deserves to be.

The phrase the “real” economy has become a hallmark of this debate, implicitly contrasted with the “fake” economy of the financial world. McCain talks of the honest laboring man as the strength of America. No doubt he is, but he wants to buy a house (which requires a mortgage), not pay for everything with cash (which requires credit cards), have a job (which requires a business that is very likely dependent on loans) and buy big-ticket consumer items he can’t pay for upfront (which requires car loans, etc.). Freeze up all those sources of credit, and economic life as we know it ends.

Already, the panic has sent investors to the safety of Treasury bills, leaving less capital for consumers and businesses. Few realize how much businesses rely on short-term loans for routine operations like meeting payroll, and how that most characteristic American entrepreneurial figure — the guy with a bright idea he works out in his garage — depends on investment and loans.

Conservatives who make so much of their knowledge of the markets would ordinarily be the ones to point this out, but they have a blind spot for the market’s failures. The financial system is subject to periodic panics that, if left to work their course, will wreak economic havoc out of all proportion to reason. They take down good institutions along with the bad.

If it works, the Paulson plan’s most worthy accomplishment will be saving innocent bystanders from the wildly swinging tail of the blind and panicked financial beast.

The financial crisis is so disturbing exactly because finance is so centrally important. Our sophisticated financial system has been one of the glories of Anglo-American capitalism. “The Bankers, accountants, investors, traders, and corporate officers whose joint efforts brought this system forth have changed the world far more profoundly than virtually any of their contemporaries,” writes Walter Russell Mead in his book God and Gold: Britain, America, and the Making of the Modern World.

Without this system, Britain and America wouldn’t have risen to global pre-eminence, and consumer capitalism as we know it — dependent on credit — wouldn’t exist. We may be about to find out what happens when it is rocked to its foundations.