It may have been the oddest coalition of dissenters you’ll ever see: hard-core southern conservatives allied with ultra-liberal members of the Congressional Black Caucus, blue-collar Republicans from the Rust Belt, and a couple of dozen conservative Democrats known as the “Blue Dogs.” As a group they likely never agreed on anything before in their lives, and may never again. But they agreed on this—Treasury Secretary Henry Paulson’s US$700-billion plan to rescue Wall Street from a rising tide of toxic debts was a no go. And on Monday afternoon, 228 of them rejected the biggest private sector bailout in history and triggered the sharpest one-day plunge in world stock markets since the 1987 Black Monday crash.
Some said it was morally indefensible that ordinary taxpayers, many of them worried for their jobs, should have to foot the bill to support rich bankers whose idea of hardship is having to sell one of their vacation homes. Others complained the plan failed to address the root of the problem: millions of ordinary people declaring bankruptcy and facing foreclosure. With public opinion firmly against the deal, many simply opted to side with the voters and let the chips fall where they may. On his way out of the House of Representatives after the fateful vote, Rep. Steve Kagen, a Democrat from Wisconsin in the midst of a tough re-election fight, curtly explained his vote against the deal: “The bill does nothing for my constituents.”
The deal itself is not quite dead. Congressional leaders are meeting this week in hopes of reviving Paulson’s rescue plan, and many insist that some kind of bailout will get done, somehow. But with each passing day a more sobering reality is settling in: Washington’s intervention, whenever and however it might come, is already too late. Early Monday morning, Wachovia, the sixth-largest U.S. bank by assets, wilting under the strain of an estimated US$42 billion in bad loans, agreed to an emergency takeover by Citigroup. It is the sixth major American financial institution to crumple under its debt load in two weeks, and this week officials in Britain, Ireland, Iceland, France and Belgium all stepped in to shore up their own crumbling lenders.
Bailout or no bailout, America’s financial system is bucking under stresses that have been building for years, if not decades. The world’s biggest and most dynamic economy has been erected on a mountain of debt from the national government on down to the millions of ordinary families with hefty mortgages and wallets full of maxed-out plastic. America bought its vaunted standard of living on credit, and trading partners around the world profited wildly from its free-spending culture. Now the bill is coming due. Central banks around the world, led by the U.S. Federal Reserve, are pumping hundreds of billions into the system in hopes of keeping it moving. But that, even if it were combined with Paulson’s massive transfer of tax dollars to Wall Street, only buys a temporary deferral, not a solution.
“Everybody keeps saying if we do nothing, there’s going to be a severe recession. Yes. There is. There’s no way around it,” says Peter Schiff, president of Euro Pacific Capital in Connecticut. “We have to take our lumps. We’ve got to pay the price for all our reckless borrowing and spending.”
How painful will that bruising be? Worse than anything we’ve faced in our lifetimes, he says. He describes a depression that would forge a new world economic order, with sharply higher interest rates, a weaker American dollar, surging prices and shortages of consumer basics. These are the strains that can pull a society apart, and while not everyone believes it needs to get that bad, such warnings are fast gaining currency all over the world. There is no easy way out of the economic vice tightening around America, and all the many countries, like Canada, which rely on it for their own prosperity. Last week, with major banks failing, home foreclosures running at a rate of 10,000 a day and unemployment climbing steadily higher, it was clear that something big was happening. Something that is going to change the way we live for decades to come.
For a US$700-billion behemoth, there was a certain elegance to Henry Paulson’s financial rescue plan. A new federal agency called the Office of Financial Stability would buy hundreds of billions in distressed assets (mostly toxic mortgages) from ailing banks and hedge funds in hopes of defusing the spread of panic around the world. In return, taxpayers would receive an ownership stake in the bailed-out companies, along with provisions to discourage excessive executive pay at rescued firms and a promise that, if the program was still losing money after five years, the president would take steps to recover losses through new fees and taxes.
