Thank you for your thoughts on this. It certainly is hard to make a clear case to the American people that this bill is necessary when the DJIA is up 300 points, down 700, then up 400 again in the course of only a few days. That’s what people see: the stock market. Credit markets are less visible, and its easy to come to a conclusion along the lines of , “Well, credit got us into this mess, credit should be tighter, that’s a good thing.”

The problem is, if confidence isn’t restored to the point that banks at least lend to each other and to businesses on a day to day basis, then some businesses will fail, consumer purchases will fall off even more sharply, and the downward spiral will speed up significantly. That is harder to sell to the public, and no one likes to be told that “it’s all too complicated for ordinary people to understand.”

I think that underlying much of the outcry against the bill is a total lack of trust in our leadership and Wall Street, and also a belief that we are in for tough times no matter what the government does. It will be interesting to see how the Senate vote goes.

Reminds me of the supposed Chinese curse:

“May you live in interesting times.”

Throw in the fact that there was a petition signed by 200+ economists, some Nobel laureates, some from MIT and Harvard stating that his was bad for the economy and the only question I have is how it got to a full vote in the first place and how it was so close???

Great stats on the RTC losses, you don’t hear those everyday from the MSM.

I am saddened that the Senate is trying to make a go of it now. I keep thinking don’t double jeopardy rules apply??? j/k

Do note that while the DJIA fell 500 points after the bill was defeated (I know it closed down 777 but it was already down about 280 prior to the vote) oil fell by $10/barrel, the dollar rallied, and treasury yields which make up long term interest rates fell 0.2%.

Executive compensation is just one. Hundreds of millions of dollars in pay or bonuses or golden parachutes simply seem excessive to many of the folks in what is now euphemistically called “Main Street.”

When it comes to those firms “bailed out” by the federal government, we certainly couldn’t agree more. After all, he (or she) who has the money makes the rules.

Unfortunately, too many potential voters fail to see the greater philosophical implications of the bailout in the first place. Do we really want a “free market” or do we feel more comfortable with a higher degree of socialism?

Of course, the timing could not have been more unfortunate, coming at the tail end of a national political season. The campaign already pointed out the very essence of the difference between what passes for capitalism and government paternalism.

The rush by members of both major parties to a federal bailout was reminiscent of the immediate support for the legislation following the sad events of 2001. That panicky legislation, with its blank check attached, resulted in another long, drawn-out war, which the United States cannot and should not have to afford.

If CEO compensation was a key sticking point of the failed bill, as House Speaker Nancy Pelosi suggested before the bill’s vote, the vague language of the rest of the bill could not provide any comfort to the plethora of lawyers represented in Congress.

Especially noteworthy was the phrase “unnecessary and excessive risk.”

How should “risk” be defined? Who is to judge and set the limits?

Maybe it’s old-fashioned, but banks should be safe, not given to undue risk. An invetment house, on the other hand, is purely in the business of risk.

Protecting people’s savings during the S&L crisis seemed prudent. Bailing out banks and investment bank does not.

Depositors from “Main Street” are already protected by FDIC or the courts, as in the various settlements with
Credit Suisse, UBS and many others.

Massive regulation of the investment and banking world might simply shift investment to venues more friendly.

Switzerland, with its centuries-old banking business, makes clear its regulations out the outset. Even better, the chief executive in charge of a bank faces going to jail even if he/she was not personally responsible for any personal wrong-doing!

That model might serve as a poignant example to Wall Street and Congress.

Thank you for your comments and questions. In answer to your suggestion about the details of the blog, I actually wrote this blog before the vote, and it was then edited it to make sense once the bill failed. Things happened so fast that it was tough writing about them as fast as they were happening! Not just here at Amateur Economists but everywhere. When I wrote this the amendments were still being negotiated.

Anyway, in the future I will certainly give more attention to specific clauses should Congress be able to write another similar bill. I don’t think the CEO salaries were the only objection the public had to this one–I think that it was a more general revulsion at the idea of handing so much taxpayer money over to the very industry that has caused the economy so much damage and that caused this problem in the first place.

I also think there was a lot of distrust of the Bush administration and the Treasury Secretary. Hank Paulson used to be a CEO at Goldman Saks, and I know many people saw this as an attempt by Wall Street to “cash out” before the economy tanked completely. Last but by no means least, I think Paulson and Congress did a very poor job of explaining what it was they were doing and why ordinary people should care about it. The term “credit markets” means nothing to most people. People hear the term”credit” during a financial meltdown and they think, “Well, we should stop using credit anyway.” The core issue wasn’t explained very well at all.

Thank you for your thoughtful post and all the best to you. Now that this first bill has failed, it will be interesting to see what, if anything, happens next.

I liked how you used the comments on New York Times editorials as evidence of a confrontation between Main Street and Wall Street. It adds a tangible aspect to a claim that is otherwise hard to quantify. I also liked your analysis of the analogy between this bailout plan and the Resolution Trust Corporation of 1989. I have seen the link made between the two before, especially in the context of the bailout not costing taxpayers as much as initially thought, but did not know enough about the Resolution Trust Corporation to be able to make the comparison. I agree that the comparison is not valid, for the RTC bought and sold actual assets, while this proposed bailout plan would be buying faulty financial instruments, the mortgage-backed securities.

Though I thought your blog was well researched and informative, I have some questions and comments about it. First, do you think the only reasons for the public outrage were CEO salaries? I don’t see any other reasons in the article other than the lack of a guarantee that the plan would work. Also, while you say that Congress negotiated some governmental oversight and provisions for helping homeowners keep their homes, I think this article would have benefitted by explaining those changes in more detail. The current description is relatively vague.

Thanks again for the helpful insight and I am looking forward to continuing reading your blog as the financial crisis progresses.