Democrats reject TARP

I know this is a bit of contratriety as the Democrats are as deeply in the pockets of the big banks as Republicans. But let us imagine the composite of the Democratic legislature was much more in line with our current more Liberal/Socialist leanings and maybe even a bit further left. Let’s say at this time 10 years ago when Tresury Secretary Paulson came before Congress asking for billions in handouts to save the financial system with no questions asked and no strings attached, the Democratic base reject this proposal out of hand and not even Pelosi can corral her legislators to the table. What if the Democrats come back with exorbitant demands of acquiring a piece of the banks for their loans, the automatic termination of all CEO’s and an open book to see all transactions, an exorbitant interest to be paid off yearly, and finally a reciprical bailout of the homeowners left underwater or evicted from the housing crash?

First would Paulson try to negotiate terms of the deal or simply reject this kind of blackmail out of hand? Would Bush simply call the Democrats bluff on the belief that if Democrats voted against TARP and the stock market crashed, they would get the blame? Could such a stand by Democrats actually galvanize voters and give them an even bigger electoral landslide than they got or turn off moderates to this type of militaristic populism?
 
How to have TARP not pass: Have the Dow *not* go down 777.68 (which was −6.98% at the time...) when the House first rejects it. http://abcnews.go.com/Business/MarketTalk/story?id=5912806

As I have said here in the past: people get this wrong because they remember that there was a populist backlash against banks and bailouts--and forget that this largely came about later, after the situation was relatively stabilized. In September 2008, the predominant reaction was not anger but fear.
 
I remember quite well there was an outrage and disgust over the bailouts at the time. Even Republican voters called their constituents to vote the bill down, which they did. The main reason Obama won was the big bump he received at this time over voter backlash.
 
I remember quite well there was an outrage and disgust over the bailouts at the time. Even Republican voters called their constituents to vote the bill down, which they did. The main reason Obama won was the big bump he received at this time over voter backlash.

No doubt the bailouts were unpopular but when the House rejected TARP, the Dow went down 777 points in one day. If it had kept on rejecting it, who knows who would have collapsed--Merrill Lynch, Citi, even Goldman Sachs? A lot of people who are unhappy about bailouts would still recognize them as a lesser evil than total financial collapse.

I once compared the situation with Trotsky's justification for initially opposing Brest-Litovsk. True, he said, doing so led to Germany driving deeper into Russia and making the terms of peace even harsher. But it was necessary to reject it at first just to show the Russian people how disastrous rejection would be and how helpless Russia would be if it stayed in the war; without this demonstration the Bolsheviks would have been denounced as German agents. (Actually, Lenin and his party had gotten money from the Germans, but that's another story.) In September 2008, tanking stocks had the same effect German tanks had in 1918: they showed that resistance was futile.

The voter backlash that helped Obama was not primarily over the bailouts--which he supported. It was over the whole state of the economy.
 
Since almost all of the votes came from Democrats they had the real power here. Now I did not say Democrats would not continually vote down TARP but that they would come back to Paulson with demands of their own. How would he react? The Dems would have the moral high ground here and the support of virtually the consensus of the American people. Paulson's main argument was I need 50 billion dollars and I need it in 48 hours or the economy crashes, oh and I will have total dictatorial powers in how to distribute the money and there will be no strings attached. As you can see this stand simply would pass the mustard test no matter your political leaning.
 
Since almost all of the votes came from Democrats they had the real power here. Now I did not say Democrats would not continually vote down TARP but that they would come back to Paulson with demands of their own. How would he react? The Dems would have the moral high ground here and the support of virtually the consensus of the American people. Paulson's main argument was I need 50 billion dollars and I need it in 48 hours or the economy crashes, oh and I will have total dictatorial powers in how to distribute the money and there will be no strings attached. As you can see this stand simply would pass the mustard test no matter your political leaning.

(1) It's not true that "almost all the votes" came from Democrats--they did vote heavily for it, but so did 91 Republicans (as against 108 opposed) and it could not have passed without their support. http://clerk.house.gov/evs/2008/roll681.xml

(2) If the economy is in fact crashing very rapidly, the argument that there is no time for fine-tuning does indeed become politically persuasive. (This is also something ignored by people who blame FDR for not nationalizing the banks, or at least reforming them more radically, in March 1933. There just wasn't time for that, given the severity of the banking crisis.)

And no, polling does not support the idea that the public hated TARP from the beginning. It was more complex than that. "In a mid-September 2008 Pew poll, 57 percent thought the government potentially investing billions to try to keep financial institutions and markets secure was the right thing to do. That dropped to a 45 percent plurality by late September. In late September CBS News/New York Times poll, people were evenly divided, 43 to 43 percent, on providing money to financial institutions to avoid a crisis, but by mid-October in this poll, opinion had moved against, with 38 percent in favor and 48 percent opposed. November and December 2008 Gallup polls showed opinion divided about whether, all in all, the government provided assistance to the financial institutions was a good idea..." http://www.aei.org/wp-content/uploads/2011/10/EconomicCrisis-2010.pdf Obviously, a lot depended on wording (use of the word "bailout" led to more negatives). And the public practically always thinks (usually rightly) that even if it approves of the goal of some legislation, Congress should have done it better.

In any event, the issue as most politicians saw it was not whether the public approved of the bill, but whether the public would prefer having the economy totally crash. No doubt many of the people who voted for it disliked it. But it is also true that many of the opponents were privately glad it passed--they could denounce "bailouts" and still avoid blame for economic collapse.
 
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