The initial failure and eventual passage of the $US700 billion dollar US financial rescue package is a disturbing example of what we can expect of the US Government’s response to the global financial crises over the coming months — paralysis and lack of authority.
The President of the United States, his Treasury Secretary and Republican and Democratic leaders in Congress told the American people for days that a massive financial rescue plan was need to keep the sky from falling in. The American people did not believe them. The legislation failed. And the sky fell in. The 777 point freefall of the Dow Jones was followed by similar freefalls in financial markets around the world, including the Australian Stock Exchange.
A number of political factors conspired to sideline the rescue package. The first was an unpopular President, with waning influence in his own party (which voted two to one against the bill) and little to no credibility with the American people. The second was the proximity to the US Congressional elections, felt most keenly by members of the House of Representatives, all of whom come up for election every two years. It was the House that initially voted down the legislation.
The final element was a constituency enraged by the prospect of a "bailout" for CEOs, investment bankers, and other Wall Street fat cats. As the rescue plan was being fiercely negotiated by party leaders, rank and file members of Congress were flooded with angry calls, emails and letters from their constituents, livid about the "bailout". The fact that it was labelled a "bailout" was one of the many political failures in justifying the plan to the American people.
So, while the majority of the House may have wanted the rescue plan to pass, many of them could not afford, politically, to vote for it — especially those facing tight races. Reluctant Congressmen were probably counting on the market to crash and thus provide them with the political cover they needed. The American people had to see their investments decimated before they would concede to the plan. Indeed, the New York Times reported that calls to Congressional offices against the package eased after the market crash that followed the initial failure of the legislation.
The rescue package was then revived in the Senate, which is not as electorally sensitive as the House. Senators are elected to six-year terms and only one third are up for election at any time. The Senate made some amendments to the legislation to make it more politically palatable, then passed the package with an authoritative majority of 74 to 25, before sending it back to the House for another vote. In the end, it only took a few days to shake free the 12 vote switch needed in the House to pass the legislation.
Unfortunately, the rescue plan did not stem the tide of the credit crisis: the funds had yet to flow and the cancer had already metastasised, spreading to Europe and Asia. Since then, world leaders and their financial lieutenants have been meeting and talking with the goal of coordinated action to alleviate the crisis.
So what can we expect from the US Government?
The timing of the crisis would have seemed far-fetched in an episode of The West Wing. The greatest financial crisis the world has seen since the Great Depression is unfolding just as Americans are heading to the polls.
Anything that requires another vote of Congress will be difficult to achieve. In the US system, elections are held in early November but the new President does not take office until Inauguration Day, on 20 January the following year. In the intervening period, President Bush will have constitutional authority, but his political authority will be greatly diminished. This is the case under normal circumstances. President Bush’s low approval ratings, combined with a Democratic Majority in both the House and the Senate, have led many commentators to call him a "lame duck" for the past two years.
Similarly, we will have a "lame duck" Congress until the newly elected Congress takes office in early January. By tradition, neither the President nor the Congress push through significant legislation during this time. While they have the legal authority, the political mandate lies with the newly elected government.
Complicating matters is the potential for President Bush and the President-elect to send conflicting messages during the transition period, or to propose conflicting policies, which in turn could generate confusion and send jittery stock markets tumbling. This potential only increases with the probable election of Barack Obama. Tremendous discipline and coordination will be required from both the incoming and outgoing President, and the old and new Congress.
What we can expect is a "finger in the dam" mentality from the US Government over the next few months. The President, the Treasury Secretary and the Chairman of the Federal Reserve will use what authority they have to keep the flood waters from breaking the levy, until a new government takes office. The latest move has been the proposal to take a significant stake in US financial institutions through preference shares. This, and related moves by EU countries to bolster their financial institutions, has lead to a resurgence in stock markets, for the time being.
However, what is needed in the medium to long term is a considered overhaul of the global financial system. This needs to take account, for example, of the great free flow of global capital, which can suddenly flood a single sector — such as the US housing market — and can fly away just as quickly, leaving devastation in its wake.
Time is of the essence, but coordinated regulation of international financial markets will have to wait, along with many other things, for Inauguration Day.
In the meantime, Australians can take comfort from these words from Winston Churchill, which have rarely been more apt: "you can always count on the Americans to do the right thing — after they’ve tried everything else".