Banking Law

Of all the places you???d least expect to find some of the most cogent comments on the "bailout" legislation, perhaps the blog of the conservative Catholic magazine "First Things" might be the winner. Today, in a post entitled "A Car Wreck," associate professor of theology R.R. Reno at Creighton University offers some insights not generally found in other blogs, where quick-hits and snark, along with politically partisan rants, are more the order of the day.

With respect to the initial defeat of the bailout bill in the House of Representatives, Professor Reno makes an assertion that will be certain to set off the sirens of many bloggers and blog commenters: "We were collectively experiencing the bad consequences of something that the Founders feared: too much democracy."

The men and women of the House of Representatives will face their constituents in November. Not surprisingly, therefore, the usual cajoling and enticements had little effect. Promises of legislative goodies???say, a bridge or a highway or a sub-committee chair???and the threat of punishment by withholding these goodies usually carry the day. But ordinary (and necessary) legislative log-rolling doesn???t work well when voters are agitated???and are able to cast ballots to throw you out in November because you supported ???a Wall Street bailout.???

Moreover, the party leaders, the pundits, the media, and the voters themselves are worked up into a lather about the upcoming presidential election. For the last few years there has been a mounting frenzy as Democrats have gained the upper hand. They smell blood in the water, and Republicans are eager to find any issue with which to regroup and survive.

As a result of the inevitable pressures of the election season, the major players in Washington naturally find it very difficult to shift gears and drop the rhetorical attacks and counter-attacks.

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And it???s not just the politicians. Only Rip Van Winkle wouldn???t know that the media is fully engaged in the partisan rumble. The most obvious reason is because hype sells. ???Two men shot late this evening. Killer on the loose??? sounds pretty much like ???Wall Street bailout proposed. $700 million on taxpayers??? tab.??? Moreover, reporters are like all of us: full of envy, resentment, and wooly-headed ideas about economics. Thus we???ve had endless empty and false rhetoric about Main Street versus Wall Street, calculations about how much the Paulson plan will ???cost??? each American household, interviews with the proverbial man-on-the-street, and all the other bread-and-circus inanities of our scandal-a-day news industry.

Notwithstanding the populist outrage that initially derailed the legislation in the House, and notwithstanding the fact that the Senate is peopled with the likes of [INSERT NAME OF YOUR LEAST FAVORITE SENATOR HERE], Professor Reno points out the additional fact that the Senate functioned as the founders intended: as a brake on popular impulses.

We can argue the details, but the basic impulse is surely wise. The hurly-burly of democracy, however necessary for the accountability of government, can sometimes drive us off the road. We are living through a real-life illustration. It is transparently the case that the unique political timing of this crisis has led us to the point where uninformed voters animated by simple-minded slogans are exercising a potentially disastrous influence over their representatives. The election season is democracy in its most powerful form, which is not necessarily its best form.

The political car wreck was averted. Not surprisingly, the bill that was signed by President Bush on Friday was hammered out in the Senate. It is the legislative chamber that the Constitution insulates from voters with long, six-year terms, ensuring that only one third of the Senate must face the voters on Election Day. In fact, the Senate is even further from voters, and again by design, because each state elects two, regardless of population.

Anybody who has had fantasies about the unalloyed virtues of ???the will of the people??? should be grateful that the Constitution has frustratingly undemocratic aspects. God knows that if our system had allowed the voters to decide, we would have been doomed to a long, dark night of economic distress.

That "long, dark night" would have been perfectly fine with the ideological purists who believe that the world???s financial system is a purely "free market" in which unrestrained participants must face the pain of their unsound judgments or a "moral hazard" will result in which future risky behavior will be sanctioned, even encouraged. That???s all well and good for the Kool-Aid drinkers who would follow their ideology into the abyss; for those who still believe that the concept of a ???free market??? actually applies to either the domestic or the international banking systems (which, sorry to say, are actually heavily, if often unwisely, regulated businesses); and for those who deny that the problem needed a bailout (or, at least, not the bailout that was concocted by the men and women in the trenches). For the rest of us, who???ve been in the banking business for several decades, and who have seen how bad things can get, when the Chairman of the Federal Reserve Board and the Secretary of the Treasury tell us that we???re on the cusp of a systemic meltdown, and the result will be a disaster, we tend to believe that they know more than bloggers, TV pundits, and other assorted talking heads, and we side with people like Warren Buffett, who last week compared the U.S. financial system to a top athlete who has suffered a sudden and severe heart attack. He said the proper response to such a heart attack is to use a defibrillator as soon as possible, not argue about the precise placement of the paddles or argue about whether the athlete should have taken blood pressure medication beforehand.

As Professor Reno alleges, in a deep recession "the middle class gets blindsided."

Their jobs are more likely to disappear. Their retirement accounts tank, and suddenly selling the house and buying a condo in Phoenix is out of reach. But it???s invariably the folks at the bottom who really get trampled, because they live with no savings, no home equity, no margin of safety.

Professor Reno is no more a fan of "K Street" than he is of "Wall Street," which he makes clear. Nor am I, which should be obvious to regular readers. On the other hand, neither of us are ideologues who are willing to play the part of Slim Pickens??? character "Major Kong" in "Dr. Strangelove," riding the nuclear warhead straight into ground zero. A lot of innocent people would be killed not only in the initial blast, but by the fallout.

Yes, last week we saw potential for real harm to real people caused by too much democracy. The actual effect of our present collective fixation on making sure that the market punishes the gamblers who brought us the sub-prime mess???a sentiment that unites the free-market ideologues on the right and the anti-market ideologues on the left???is punishing economic circumstances for all of us, and especially the poor.

Against the self-serving self-deceptions of most Americans, I hope that the ability of our political leaders (narrowly) to avoid a political car wreck is followed up by an effective use of the $700 billion to avoid the economic wreck that continues to be a real possibility. You and I are not just watching. We???re all in the car.

Good stuff, whether or not you agree with it. The facts are (A) the bailout legislation passed and has been signed into law, so get over it, and (B) we all need to make sure not only that the guilty are punished, but that whatever structural changes are necessary to minimize the chances of a recurrence of this near-disaster without committing future economic suicide are made. That will be a delicate balancing act and there will be plenty of opportunities for yelling, frothing at the mouth, and launching ICBMs at "the enemy," so the blogosphere???s pundits and their fellow travelers should have plenty to write about instead of, you know, working.

And while we???re at it, let???s not forget to look at the role of Congress in creating this mess. Congress will take the lead in "investigating" the roots of this crisis, and if the S&L mess is any debacle, it will never be taken to task for its role. While ding so, however, let???s try to remember that it will take more than Hindenburg-sized gasbags like Bill O???Reilly shouting at Barney Frank to get that done, or at least to get it done properly.

A good start will be next month???s elections. Vote your conscience, and try to vote in your long-term interests, no matter how pissed off you are at the moment.