An Analysis of the Financial Services Bailout Vote

By Couch, Jim F.; Foster, Mark D. et al. | The Cato Journal, Winter 2011 | Go to article overview

An Analysis of the Financial Services Bailout Vote


Couch, Jim F., Foster, Mark D., Malone, Keith, Black, David L., The Cato Journal


Washington's remedy to the financial problems that began in 2008 was the Troubled Asset Relief Program (TARP)--the so-called bailout of the banking system. Whatever its merits, it was, for the most part, unpopular with the American public. Lawmakers, fearful that the economy might actually collapse without some action, were likewise fearful that action--in the form of a payout to the Wall Street financiers--would prove to be harmful to them at the polls. Thus, politicians sought to assure the public that their vote on the measure would reflect Main Street virtues, not Wall Street greed.

Members of Congress, addressing the public's misgivings about the bailout, asserted that they were wrestling with difficult issues such as fairness and equity, banking regulation, executive pay, job losses, moral hazard, 401(k) values, and the proper role of the state. Furthermore, they argued, these complex issues were difficult for the public to understand, and legislators, vigilant in carrying out their duty, were weighing the pros and the cons in order to cast a vote that was in the best interest of the nation.

But it turns out that when one moves beyond the speeches, the underlying motivation behind most votes cast was hardly complex and actually quite simple. In this article, we construct a model to analyze the bailout vote of each legislator. A simple reelection model of legislator behavior explains a majority of the votes taken either for or against the measure from politician to politician.

Wall Street vs. Main Street

Those with an appreciation of the merits of limited government enjoy reflecting on the past. They recall those halcyon days when a balanced budget amendment--a rather quant notion by today's standards failed by only a single vote in the Senate. How things have changed.

The economic zeitgeist is government takeovers, bailouts, and stimulus plans along with escalating debt and deficits. Indeed, commenting on the federal budget for FY 2009, Stanford University economist Michael Boskin (2009) put government borrowing in perspective: "The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents--from George Washington to George W. Bush--combined." Indeed, the FY 2009 budget deficit was larger than the entire economy of India and almost as much as the Canadian economy. "Forecasts of more red ink mean the federal government is heading toward spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this fiscal year" (Crutsinger 2009).

It could be argued, however, that the staggering explosion of federal debt under the Obama administration was precipitated by unprecedented spending during the Bush administration. The Emergency Economic Stabilization Act of 2008, otherwise known as TARP, whatever its merits in terms of rescuing the economy, represented a dramatic departure from normal government operations. As President Bush all but acknowledged in his November 12, 2009, address at Southern Methodist University, TARP opened the floodgates of government intrusion into the private sector:

I went against my free-market instincts and approved a temporary government intervention to unfreeze credit and prevent a global financial catastrophe.... As the world recovers, we will face a temptation to replace the risk-and-reward model of the private sector with the blunt instruments of government spending and control. History shows that the greater threat to prosperity is not too little government involvement, but too much [Bush 2009].

The $700 billion dollar stabilization package was designed to provide liquidity to the nation's banking and financial firms that faced, at best, uncertain futures. Assisting the financial industry through taxpayer loans and grants proved to be unpopular with the American public.

Jonathan Weisman, writing in the Washington Post, acknowledged the unusual nature of the vote: "Rarely has a congressional vote held such high drama and produced such immediate repercussions, directly from the House floor to the trading floor" (Weisman 2008).

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