The Politics of Crisis

I’m a historian of 19th century America and I specialize in the Civil War era. The political crisis that led to war did not begin with the election of Abraham Lincoln in November 1860, but had its roots decades earlier. Nevertheless, a series of horrible miscalculations by political leaders in all parties, particularly after the Compromise of 1850, led the nation on a path toward secession and war. It’s possible that war could never have been averted; the structural differences between an expanding free labor capitalistic North and plantation slave-based South were largely irreconcilable in the context of an expanding nation. But there were several leaders who, more than anybody else, prevented a war as long as possible.

I’m thinking especially of two Kentuckians – Henry Clay and John J. Crittenden. One engineered both the Missouri Compromise of 1820 and the Compromise of 1850. The latter attempted right up through April 1861 to entice the seceded states back into the Union with a set of Constitutional Amendments and compromises. It failed, of course, but it represented a good faith effort to stave off a calamitous war.

What we face today is nothing like the secession crisis. In fact, I’d venture to say that we face nothing like the Great Depression either. A better comparison is the earlier financial panics of 1873 or 1893, where collapsing industrial bubbles, corporate greed and disappearing credit sent the economy into a tailspin. Only once, in 1907, was a potential depression averted when J.P. Morgan locked the nation’s largest bankers in a room and devised a bailout plan.

Without a doubt we stand at a financial abyss right now. Washington Mutual just failed, with its assets seized by the FDIC and distributed to J.P. Morgan (ironic, huh?); it is the largest bank failure in US history. Last week insurance monolith AIG buckled under, with investment banks Lehman Brothers and Merrill Lynch faltering before that. With Bear Stearns gone and Morgan Stanley and Goldman Sachs now commercial/investment banks, the old investment bank is now a relic of history. And then there was the Federal bailout of Freddie Mac and Fannie Mae, which were responsible for packaging millions of mortgages into mortgage-backed securities and selling them around the world.

This crisis has already claimed many victims.

But now it may hit Main Street, as banks have essentially frozen their credit lines and mortgage rates have gone way up. Banks have no confidence in the viability of their assets, and will now make no loans with their dubious collateral in reserve.

Something must be done – now – or the spiral of failures will rumble through the economy. No single private entity like J. P. Morgan of old can save the day (the modern corporation has already done its fair share to help). It will take governmental intervention.

And that brings us back to the politics of crisis. The problem today is not regional. It is partly – but not entirely – partisan. And it is largely – but not wholly – ideological. The bailout plan worked around in committee all week is far from perfect. But it has a fighting chance of working. It could inject enough capital into the market to stimulate more lending, and it will remove bad assets from the books of troubled banks. If administered well, the government could even come out ahead. That’s unlikely, but it’s possible.

Still, the bailout plan – any bailout plan – has to be passed first. And this could not have happened at a more politically importune time, just 40 days before a Presidential election.

Neither Presidential candidate can claim expertise over banking matters. Though polls show the public siding with Obama over McCain on the financial crisis and the economy in general, that may be a matter of default; McCain’s behavior has been erratic since Lehman Brothers faltered last week and McCain declared the fundamentals of the economy strong – then in crisis; rejected a bailout of AIG, and then supported it; called for the firing of SEC Chairman Chris Cox, and then backed down a day later; called for a blue ribbon commission, and then nixed it; and now suspended his campaign and called for a postponement of the debate so he could…do something. Obama has gained by default, striking a calm if somewhat distant pose through this whole crisis.

But now the crisis enters a new phase. Negotiators from both parties, including Barney Frank, Spencer Bachus, Chris Dodd and Richard Shelby – and Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson worked day and night this week to improve upon Paulson’s original bill. By yesterday afternoon Frank said they were close to a deal. It seemed that today’s White House meeting would be a congratulatory photo-op. This morning Dodd announced they had reached a deal. Shelby said he didn’t like the bailout but he wouldn’t get in the way.

And then the White House meeting happened. House Republicans rejected the plan outright and felt trapped by the Democratic bill. Democratic negotiators felt ambushed by the GOP pushback, even though these House Republicans never indicated they’d support the bill. John McCain, who suspended his campaign so he could take part in the negotiations sat silently for 40 minutes, said nothing of substance, and the whole deal fell apart, with each side blaming each other.

Let’s think of the politics of this for a moment. The Democrats could have passed a bill with only Democratic votes. There may have been enough Republicans to break a filibuster (we don’t really know though, but Senate Republicans were more supportive of it than House Republicans). A Dodd-Frank bill could have been signed by Bush and the bailout would have gone ahead.

But there were risks involved for everybody.

1. The American public hates this bailout and it doesn’t yet know what’s different about the Dodd-Frank bill from the Paulson bill.
2. Democrats did NOT want to pass this bill without Republican support thus risking Republicans (including McCain) campaigning hard against this “waste of taxpayer money.” The chance to blast a Bush-Pelosi Wall Street bailout bill would be too much for Republicans to give up.
3. So Democrats, rightly worried about going this route without bipartisan cover, insisted that roughly half the GOP House caucus back the bill. Many Democrats hated it too, but at least both parties would own it.
4. Harry Reid suggested that John McCain could rally skeptical Republicans to support the bill. McCain responded by suspending his campaign and making a huge deal of going to Washington.
5. When McCain had a chance to voice support for the bailout plan at the White House today – ostensibly the reason he came to Washington in the first place – he punted.

So here we are. The Democratic strategy of seeking bipartisan cover is hardly a profile in courage. But it makes political sense given the seriousness of this proposal; who wants to get caught holding the cookie jar with George W. Bush? But when McCain had a chance to rally Republicans he did nothing, which signaled to Democrats that he tacitly supports the House Republicans opposed to the plan.

And now we have nothing. There will be a debate tomorrow night in Oxford, Mississippi, and John McCain might not show up. Barack Obama, for his part, has mostly just voiced support for the efforts of Dodd and Paulson to work out a deal under five principles he laid out the other day – though he did not explicitly endorse the Dodd bill. Obama plans to be in Oxford tomorrow, with or without McCain.

Presumably, John McCain hopes he can help put the bailout plan back together again. And Obama will leave the Finance Committee negotiators to do their work to mollify GOP objections.

Tomorrow morning the stock market may very well crash. The WaMu failure and the bailout collapse will weigh heavily on Wall Street. By the afternoon it’s possible that skeptical Congressmen will stare down their angry constituents and come up with a bailout plan regardless. Maybe McCain can be the hero that puts Humpty Dumpty back together again. Or maybe McCain will come in looking like the kid who wanted the crystal trophy so bad that he smashed it.

Tomorrow will be a very interesting day.