You would think Republicans in the US Congress would have learned something from the Great Depression. In the 1920s the Congress supported the misuse of credit for over a decade. This was not however the sole cause of that protracted depression since the Fed at that time made the same mistake of not supporting the banks. This resulted in the collapse of thousands of banks.
In this economic cycle the Congress has embraced 'easy money' for two decades. It was amazing that Congress supported the blow out in US debt. Having done so , its current decision is even more surprising. It would be nice to think that the Republicans in Congress had principles. We knew they didn't for the two decades they supported easy money. But its reported that Republicans did not support the bill because the voters didn't want it. The problem of course is that the public don't understand the issues. Economics is a complex subject, but actually its a small challenge to understand the problem.
The US banking system is highly leveraged. Investment banks rely on derivatives to insure their risks. What insurance does is limit the risk on the downside so that the investment banks can expose themselves to all the upside. The risk is covered by the counter-party in the derivatives transaction. The counter-party is fully exposed to its position. It can hedge its risk with more derivatives contracts with other financial institutions. The problem is that this spreads the exposure. Derivatives make sense if debt levels are kept at reasonable levels, but if they aren't then the whole financial system is vulnerable. One large bank failure is likely to precipitate the collapse of the whole system.
It's hard to believe that Congress will not overturn this decision. More concerning is the lack of reason in this decision. The way this issue is being handled castes dispersions upon the way our financial system is managed, not to mention the way our political process functions. I have of course been highlighting these problems publicly for several years now. It should spark a debate about the legitimacy of our fragile democracy and our financial system. Reason needs to be the standard.
This decision highlights an abysmal incapacity of this government to communicate to vested interests. More concerning still is that it highlights an incapacity for Bush to lead his party. More concerning still is that Republicans are abandoning the party in order to comply with their constituency, the voter, who just doesn't understand the issues. Of course if the media frame a question to voters "Do you want to bail out the banks with your money?" - of course a voter is going to be strongly opposed. Some I dare say would be sending emails to their Congressman. If the media have framed the question "Are you willing to support the bail out of the banks to protect the financial system and your jobs?" then the voter is likely to support this.
The implication then is that the media has precipitated this crisis as much as the Republicans in Congress. The problem of course are journalists who don't understand how the economy works framing questions in a way which is driving policy rather than following it.
May one day we live in a society wherwe reason is the standard because people - most people - have totally lost their sense of reality. The reality however is that this is just political posturing. I can guarantee that Congress will meet again in the next day and miraculously agree to terms. The whole ploy was about Republican Congressmen distancing themselves from the Bush Administrration, whilst at the same time appearing to act in the interests of their electorate. At the end of the day, its about keeping their jobs.