Capital Markets

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Fiscally conservative Republicans were lost at sea in the Panic of 2008


Every Wednesday in Washington, conservatives gather in the conference room of Grover Norquist's pressure group, Americans for Tax Reform, to hash out arguments and promote their projects. The off-the-record meetings are notorious among liberals: proof of the shudder-inducing organizational powers of the right.

In late September, a White House economist arrived at Norquist's salon to sell a proposed $700 billion bailout of Wall Street firms whose investments in worthless mortgage-backed securities had sparked an international financial crisis. In a tense meeting, the president's emissary was turned into a piñata. Pro-market activists and economists with decades of experience battered him with questions, asking whether the administration was putting an end to capitalism as we knew it. The White House's economist responded coolly. Did these people really want to do nothing in the face of the great 2008 meltdown?

In the end, what fiscal conservatives wanted didn't turn out to matter much. As the Wall Street vapors scrambled every aspect of the 2008 presidential campaign and of George W. Bush's final days in office, no one was as angry as D.C.'s dwindling number of libertarians. They pointed out that Treasury Secretary Henry Paulson's plan involved a massive takeover of private firms and (in its original draft) unchecked executive power. They invoked previous examples of government meddling worsening crises, in the 1930s and the '70s. But as Washington faced the greatest economic panic in a generation, adherents of free markets were spectators in a debate between moderate interventionists and radical re-regulators.

Libertarians proposed alternatives, such as privatizing Fannie Mae and Freddie Mac and letting the market find a bottom. They were shouting into the dark. Instead the feds imposed a two-week ban on short-selling stock and engineered the largest economic intervention since Nixon's wage and price controls. "The market is not functioning properly," warned President Bush. "The government's top economic experts warn that, without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold."

People who should have been primed for such a crisis had little voice in the matter. Take the Republican Study Committee (RSC), the fiscally conservative caucus within the House of Representatives. The RSC regularly responds to pork-filled budgets with thriftier alternatives. As Wall Street shattered, the RSC was confronted with a spending package equal to a million earmarks.

On September 18, the committee sent a public letter to the White House opposing any Wall Street bailout because "the risk to taxpayers and to the long-term future health of our economy remain just too great to justify." The next day, RSC Chairman Jeb Hensarling (R-Tex.) put out a tentative, grasping statement on the proposed bailout that decried the idea without ruling it out completely: "My mind remains open."

The next day the draft of Treasury Secretary Hank Paulson's plan was released, with a giant price tag and a two-year ban on oversight of Treasury's activity. Former RSC Chairman Mike Pence (R-Ind.), who attracts TV cameras like lightbulbs attract moths, rejected "the largest corporate bailout in American history."

And then all went practically silent. Fiscal conservatives dared not come out swinging against a proposal whose effects they could not predict, offered by a White House they had trusted more often than not.

On September 22 at 5 p.m., the RSC met to strategize further. Who was opposed to the bailout, full stop? Who had alternatives to propose? According to staff who attended the meeting, the mood was somber and the opposition was not uniform. The next morning, when the full Republican conference met, there was even less unity. According to Arizona Rep. Jeff Flake, only about half the party's members opposed a bailout.

On September 23, a dozen members of the RSC called a press conference in the House to sell their suggestions. These fit on one piece of paper, and included a two-year suspension of the capital gains tax, full privatization of Freddie Mac and Fannie Mae "over a reasonable time period," and a suspension of the "mark-to-market" regulations that forced banks to value assets at zero if they couldn't be sold at that precise moment.

At the press conference, Republicans proposed fixes with little chance of making it into a bailout bill. Rep. Kevin Brady (R-Tex.) suggested that business tax cuts could attract investors to our shores, bringing in more revenue from "profits left stranded overseas." Rep. Joe Barton (R-Tex.), a dogged supporter of more oil drilling, claimed that the policies he favored would, conveniently, pull us out of the crisis. Mike Pence was the only legislator at the events who ruled out any vote for the bailout. He tried, in vain, to challenge the premise. "There are those in the public debate," he said, "who have said that we must act now. The last time I heard that, I was on a used-car lot."

"I would amend that statement," added Rep. John Shadegg (R-Ariz.). "The last time I saw the phrase 'act now,' it was advertising one of those time-share condo deals that lock you in after a free trial period."

"Did you try it?" asked a reporter.

"No!" Shadegg laughed. That summed up the fiscal conservatives' effort: outraged gallows humor with no expectation of success.

Members of the RSC got a louder megaphone for their ideas when GOP presidential candidate John McCain flew to Washington to tacitly support them. The stunt drew some attention to the House Republicans' proposals, and a coalition of Republicans and liberal Democrats defeated the bailout in an initial vote. But the suggestions themselves didn't challenge the central proposition of the bailout: that the government, in a crisis, needed to nationalize whole chunks of the finance industry. The minority of Republicans who spoke up were accused of being Chicken Littles stoking false fears about the "end of capitalism."

Rep. John Campbell (R-Calif.), an Ayn Rand devotee who made his name voting against earmarks, said he would reluctantly support Paulson's bailout. "People are struggling with it around here like you can't believe," he explained. "This proposal is anathema to everything I believe. I've voted against million-dollar bills, and here's a $700 billion one. But to do nothing—that really threatens a massive expansion of government."

Campbell says he was willing to make the sacrifice, just this once, because he believed the crisis was comparable to 1929. "If John Q. Lunchbucket doesn't understand this stuff, and waits in line for a block to get into his bank, and then is told 'we don't have your money,' he will respond to any proposal to prevent that in the future. Any populist who says 'I'll make sure these guys never get your money again' will have his ear."

But who's to say that this scenario hasn't already taken place? If libertarians had won the argument on the economy—if they were as influential as social democratic writers such as Naomi Klein and Thomas Frank claim they are—they would have dominated the argument about the causes of the crisis and the damage intervention would wreak. That didn't happen. A bill that failed on September 29 was re-written in the Senate, then passed the House on October 3. Among the congressmen who changed their votes was Shadegg, the man who had compared the bailout to a time-share ripoff.

Rep. Ron Paul (R-Tex.), with a media profile burnished by his presidential campaign, appeared on CNN many times over the weeks of the crisis to explain why the Federal Reserve was to blame. But Paul was lonelier than ever. No other Republican was willing to suggest that avoiding a bailout and risking "a bad year," as he put it, would forestall several more years of economic central planning. They accepted the crisis narrative and attempted to legislate around the margins.

"This does ensure that President Bush will have a legacy," laughed Competitive Enterprise Institute president Fred Smith after that Americans for Tax Reform meeting. "It's a legacy that will set back the concept of economic liberty by a century. The free market, for all intents and purposes, is dead in America."

David Weigel is an associate editor of reason.

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  1. Caption Contest!

    “If you think I’m smiling now, wait until I get to give your money to my friends!”

  2. The surprise is that there was any opposition to the bailout at all.

    Thank God there was.

  3. The bailout was essentially a jobs bill — Congress’ own jobs.

  4. Now that the communists are back, let’s just hope they kill all the lawyers.

  5. Spending money we don’t have to bail out corporations who are in trouble because they spent money they didn’t have. How could that possibly fail?

  6. But if we don’t do something, then nothing will get done!

  7. Of course we have to do something. How can we just not do anything? Nothing is not something when everything can be construed as doing anything.

    That’ll be $700 billion please.

  8. It’s about time progressive fiscal policy was enacted by our government, they’ve been spendthrifts for far too long.

    Why, in just a few short years we’ll be as powerful as Europe, in a decade or so South America.

  9. The minority of Republicans who spoke up were accused of being Chicken Littles stoking false fears about the “end of capitalism.”

    As opposed to the majority, who were rushing around in circles flapping their wings stoking false fears about “the most unimaginably hugest depression ever!”

  10. I’ve been amused by media accounts of the growing specter of “deflation”.

  11. CN,

    That was actually a Viagra ad, not a news story.

  12. But it’s still a “spectre.”

    [cue theremin music]

  13. Of course they bailed out the “system”! Why wouldn’t they? It was the very system of excessive debt and speculation that had enormously enriched and empowered them.

  14. caption:

    “It smells like that guy over there is smoking a fifty dollar cigar! I didn’t know they allowed poor people in here.”

  15. I’m pretty sure that somewhere in this whole thing there’s some serious political douche baggery afoot

  16. Without having RTFA, my guess is that “Crony Capitalism” (aka Crapitalism*) has once again raised its ugly head.

    *NoStar claims sole credit for coining this word, but grants fair usage to all who oppose the practice of this foul offspring of mercantilsm.

  17. caption: “I’m Hank Paulson, bitch!”

  18. Wow, I come in late today and see this great Weigel article and think that hell would be given to someone in the comment section.


    Libertarianism really is dead in this country.

  19. Quote: “And then all went practically silent. Fiscal conservatives dared not come out swinging against a proposal whose effects they could not predict, offered by a White House they had trusted more often than not.

    Hey, I found your problem right there! They couldn’t bring themselves to get off the Bush gravy train, even though they could see the bridge was out and they were headed for derailment.

    In fact, I think your article is far too generous to those “small government conservatives” — they were reacting more to fear of being exposed by the voters than any dislike of the bailout.

  20. The bailout was essentially a jobs bill — Congress’ own jobs.

    We have to protect our phoney baloney jobs here, gentlemen! We must do something about this immediately! Immediately! Immediately! Harrumph! Harrumph! Harrumph!

  21. TWC,

    I think it’s worth noting that there was opposition to the bailout from both sides of the aisle. Many more Democrats stepped up to do the right thing than I expected.

    Of course, Dianne Feinstein set a new low with her snotty little lecture about how I and the 55 thousand other people who contacted her office to protest the bailout just “didn’t understand” it.


  22. I didn’t get a “Harrumph!” outta that guy!

  23. Listen to economic experts Max Keiser and Gerald Celente discuss the so-called bailout. They are free MP3 downloads at

  24. The number one reason conservatives failed to come out swinging… Is because they were afraid to loose the system that put them were they are. Their rationale is, I can still be a conservative, and if this liberal thing works, I still keep my 401k and won’t suffer any losses.

    This failure, like the entire GOP party in the last 8 years has been a systematic failure of ordinary people who had to make extraordinary decisions, and not realize that that was there moment of truth. These people did not know this was the moment there were being tested.

    Jon Stewart played 2 clips, showing GWB giving the exact same speech in the runup to the IRAQ war as he did to the Economic bailout. It was in the same location too! Only thing different was the tie, even some of the sentences were gramatically the same.

    Young libertarians, especially ones that are not too rich, have absolutely no problem with the whole system coming down. Why? Because they have nothing to lose.

    These people will continue this path because in their disallusioned reality, they believe that they will escape the brunt of whatever happens. Perhaps they will!

    But what this President (and the rest of the GOP) has lost in terms of opportunity this last 8 years, will be dwarfed by the intellectual and investment captial that will be lost. Our economic engine of opportunity is at risk of extinction.

    You can analyze countries just the same as you can analyze people. Looking how a person spends and plans for his (or her) resources and invests in his (or her) future speaks to what the priorties are.

    Our priorties are unfortunately clear, just look at our actions.

    And for the hawks, when Eisenhower spent military funding, he built a national road infrastructure so he could move tnaks anywhere. And in the absence of tanks… Our spending shows no clear strategy, all we will have to show for ourselves is some cool miltary intelligence software (that probably breaks every privacy intention the constitution ever thought to protect) that a chinese teenager was able to replicate only 4-5 years after we designed it.

    We wil pay for these sins for generations.

    In liberty,

    Man of Liberty

  25. The irony is that the markets actually were working. Very well in fact. There were warnings the DOW would drop to 8000 without the bailout. Well, it did only it took weeks longer than it should have. The recovery will likely be extended for years because of the bailout and failure to correct the Congressional actions which resulted in the loans for losers program.

    Hold onto your hats folks, because the very people who accused Bush and McCain of helping the fat cats of Wall Street are about to throw money at the fat cats of Detroit.

  26. One of the big weaknesses at Reason is the way the world is divided up into “libertarians” and “all those big government people”.

    Many of the key leaders in the struggle for fiscal conservatism are also people who are not libertarians at all, such as Senators Coburn and DeMint. But that seems to be an inconvenient truth around here.

  27. I wish I could say that McCain’s actions were a dissappointment but they would have to have been surprising, no? That guy blew a lifetime record as a spending hawk in one gutless spate of capitulation. No, that’s not true. He had the record at least on earmarks but this crap is Classic McCainism; go with the flow, reacharound across the aisle for its own sake. Feh. Feh squared. I find myself uncomfortably with the RINO hunters only the RINOs have us all surrounded and outgunned in alliance with the DINOs who are racing to keep the limo-libs in the business world from having to compromise their taste in fizzy water. Feh6.02×10 to the 23rd.

  28. Where do I get my $1 million?

  29. I’m not sure what’s more discouraging: That in the clear absence of enumerated power to dick up the private sector they do so anyway, or that to prevent such a thing we have to sit around and argue with these fools on the basis of perceived outcomes.

    Congress doesn’t exist to discuss end-running founding principles. Yet they do and we enable them. All collective outcomes fail. All collective actions violate the principles we stand on and for.

    Vote the bastards out. Write them incessantly. They’re quite literally bankrupting us.

  30. Dave Weigel is just one of the factors that caused me to drop my subscription to Reason after 20 years. The magazine is intent on bashing the Republicans, who certainly have their faults, but in favor of what, the Democrats?

  31. Need to remember to visit and find out what Reason online was saying a month and a half ago about the bailout (if anything). Seems like this magazine has little interest in serious discussion about anything newsworthy. …Oh yeah, how have libertarians positions on the so-called emerging global warming and socialized medicine consensus changed?

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