Bailout blues

Market: heal thyself. That’s essentially the message Congress sent the financial system today by voting against the bailout. I must admit that I’m caught off-guard, because I always assumed that the bill would pass. Normally, considering the gravity of the situation, party leaders never would have let this come to a vote if they didn’t think they had enough support to pass it.

Perhaps this speaks to how tepid support for the bailout actually was, but this was never news. Who would relish spending more than the total cost of both our current wars in Iraq and Afghanistan on something that is poorly understood, roundly criticized, and widely disliked by the public? Nobody, especially not politicians, who of course have a sixth sense for protecting their own skin. The point is, as Messrs Bernanke and Paulson made clear this week, the bailout may be wildly unpopular, but it is also badly needed.

There is plenty to say about the plan’s efficacy, about its design, and about whether it would succeed. These are legitimate debates, which we need to have. They’ve played out nonstop since intervention was proposed about 10 days ago, and there are strong disagreements about how to proceed from every possible ideological viewpoint. Tellingly, the sole consensus among the levelheaded seems to be that the only thing worse than action is inaction, especially after the government implied that it would intervene. By my reading, everyone from Megan McArdle to Paul Krugman held their noses and endorsed the bailout.

Party leaders on both sides of the aisle understood the urgency and gravity of the situation. Hell, I’ll go further and argue that the rank and file party members understood this, ideological revulsion of the idea aside. I simply refuse to believe that there is even one member of Congress who does not appreciate how dire the circumstances are, even if they don’t grasp the financial nuts and bolts.

And yet, the bailout failed. Why? Some blame Nancy Pelosi’s “overly partisan” speech before voting. Some cite ideological qualms that were too great to swallow. Hogwash. Felix Salmon nailed it: this was a classic free rider problem. Collectively, the members of Congress expected that they would pass the bill, yet it was simultaneously in representatives’ personal interests to vote against it. As long as the bill passed, any Congressman who voted ‘no’ would doubly benefit. They would be able to claim to their constituents, mostly opposed to the bailout, that they made a principled stand and voted ‘no’, AND the dirty work would be done by others. The problem is, predictably in a free rider situation, too many people tried to take the easy route and the bill failed.

I am absolutely livid that Congress, even in a time of such great economic danger, would put their own partisan interests before what is best for the country they profess to serve. Read Megan McArdle’s scathing condemnation; that’s exactly how I feel at the moment.

So now the Dow has fallen 778 points in one day, which is a historical first. The S&P is down 8.8%, the largest fall since the 1987 crisis. The TED Spread is up 23%. This is very unnerving stuff, people. You remember in Ghostbusters when that jerk from the EPA shuts down the ghost storage facility even though Egon tries to talk him out of it? And then the buzzer goes off and all the ghosts are set loose and terrorize New York City? I hope that the experts are wrong, but that’s what today feels like: voting ‘no’ on the bailout was sort of like ignoring Egon, and you never ignore Egon.