The surprising Republican backbencher uprising against the Hanke-Panke bailout was fuelled by partisan political calculation and opposition by a group of economists to the proposal.
For much of the week, Republican lawmakers were cowed by the wise men of Wall Street and the Treasury Department into going along with the plan. Opposition was confined to the Republican Study Committee, a group of conservatives in the House. “Just say no” seemed an irresponsible position, although many Republicans believed that approach was more in keeping with their free-market principles.
As the week went on, however, Republicans began to analyse the political fallout from the bailout in a way that led them to believe their was little political advantage to be gained by supporting the bailout. The public is divided on the bailout, with many voters undecided. Democrats, who hold the majority in both houses of Congress, were poised claim credit for a bailout. Republicans saw that they wouldn’t get credit for supporting the bailout but could win points by opposing it.
Democrats are fearful of passing the bailout without Republican legislative support. After years of lambasting the GOP as the party of big business, allowing the vote for the bailout to break down along partisan lines strikes fear into the Democrats. If the bailout is ineffective, they fear being blamed for wasting taxpayer money. Even if it works, Democrats fear a populist backlash against the plan to deliver billions into the coffers of Wall Street.
The political calculation by Republicans was aided when 44 economists, including former GOP congressman Dick Armey, signed on to a letter again the bailout, claiming it posed a threat to taxpayers and could make problems in the market worse.
“In addition to the moral hazard inherent in the proposal, the plan makes it difficult to move resources to more highly valued uses. Successful firms that may have been in a position to acquire troubled firms would no longer have a market advantage allowing them to do so; instead, entities that were struggling would now be shored up and competing on equal footing with their more efficient competitors,” the economists explained.
Armed with this intellectual armour, Republican lawmakers were emboldened to oppose the proposal, Washington insiders say.
Below, the letter from the economists.
We, the undersigned economists, write to strongly advise against the proposed $700 billion bailout of the financial services sector as a response to current trends in the market. Granting the Treasury broad authority to purchase troubled assets from private entities poses a significant threat to taxpayers while failing to address fundamental problems that have created a bloated, over-leveraged financial services sector.
Such a large government intervention would create changes whose effects will linger long into the future. The Treasury plan would fundamentally alter the workings of the market, transferring the burden of risk to the taxpayer. At the same time, the $700 billion proposal does not offer fundamental reforms required to avoid a repeat of the current problem. Many of the troubles in today’s market are the result of past government policies (especially in the housing sector) exacerbated by loose monetary policy. Congress has been reluctant to reform the government sponsored enterprises that lie at the heart of today’s troubled markets, and there is little to suggest the necessary reforms will be implemented in the wake of a bailout. Taxpayers should be wary of such an approach.
In addition to the moral hazard inherent in the proposal, the plan makes it difficult to move resources to more highly valued uses. Successful firms that may have been in a position to acquire troubled firms would no longer have a market advantage allowing them to do so; instead, entities that were struggling would now be shored up and competing on equal footing with their more efficient competitors.
Although it is clear that the financial sector has entered turbulent times, it is by no means evident that providing the U.S. Treasury with $700 billion to purchase troubled assets will resolve the crisis. It is clear, however, that the federal government will be facing substantially higher deficits and taxpayers will be exposed to a significant new burden just as the looming crisis in entitlement spending appears on the horizon.
For these reasons, we find the proposed $700 billion bailout an improper response to the current financial crisis.
Dick Armey, FreedomWorks Foundation
Wayne Brough, FreedomWorks Foundation
Alan C. Stockman, University of Rochester
Ambassador Alberto Piedra, Institute of World Politics
Arthur A. Fleisher III, Denver Metropolitan State College of Denver
Bryan Caplan, George Mason University
Burt Abrams, University of Delaware
Cecil E. Bohanan, Ball State University
Charles N. Steele, Hillsdale College
Charles W. Baird, California State University East Bay
D. Eric Shansberg, Indiana University Southeast
Donald L. Alexander, Western Michigan University
E.S. Savas, Baruch College/CUNY
Ed Stringham, Trinity College
Erik Gartzke, University of California, San Diego
Frank Falero, California State University, Bakersfield
George Selgin, West Virginia University
Howard Baetjer, Jr., Towson University
Ivan Pongracic, Jr., Hillsdale College
James L. Huffman, Clark University
James McClure, Ball State University
Joe Pomykala, Towson University
John P. Cochran, Metropolitan State College of Denver
Kishore G. Kulkarni, Metropolitan State College of Denver
Lawrence H. White, University of Missouri-St. Louis
M. Northrup Buechner, St. John’s University
Melvin Hinich, University of Texas, Austin
Nikolai G. Wenzel, Hillsdale College
Norman Bailey, Institute of World Politics
Paul Evans, Ohio State University
Randall Holcombe, Florida State University
Richard W. Rahn, Institute for Global Economic Growth
Robert Heidt, Indiana University School of Law, Bloomington
Rodolfo Gonzalez, San Jose State University
Roy Cordato, John Locke Foundation
Samuel Bostaph, University of Dallas
Scott Bradford, Brigham Young University
Soheila Fardanesh, Towson University
Stephen Shmanske, California State University, East Bay,
T. Norman Van Cott, Ball State University
Walter Block, Loyola University New Orleans
William Barnett, II, Loyola University New Orleans
William F. Shughart, II, University of Mississippi
William Niskanen, Cato Institute
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