Rescuing the Rescue Plan

When it turned out that warnings from top economists, the secretary of the Treasury and the president himself could not move enough folks to pass the $700 billion bailout through the House, stocks plunged and the country saw $1.2 trillion dollars wiped off the market value. The market has since recovered slightly from the historic drop, but Congress is still hammering out a bailout revival. NEWSWEEK's Jessica Ramirez spoke to Rep. Jeff Flake of Arizona, who voted against the bailout, the future of the amended bailout bill, infighting among Republicans and John McCain’s presidential chances. Excerpts:

NEWSWEEK: With all the initial bipartisan cooperation why did the bailout bill still manage to fail ?
Jeff Flake: Well, I think a lot of House Republicans were obviously concerned about so much government intrusion in the private markets. I think that remains a concern. It fundamentally alters the relationship between the government and the public sector.

Some want to blame the lack of votes on a growing ideological civil war within the GOP? Do you think there's a divide? If so, what's causing it?
I don't know if you can call it that. I think a number of us are concerned about the direction Congress and the administration has taken with spending. Whether it's a prescription drug benefit or a bloated farm bill, you name it. We've grown government in every way you want to measure it and a lot of us are uncomfortable with that. So to come here with a plan that we're asked to approve in a week that fundamentally alters government and the private sector is just too much. Somebody needs to "stand athwart history and yell stop," as Bill Buckley would put it. So you can cast [the situation] however you like. People also wanted to say that some were upset at the Pelosi speech. I think that a lot of us have not paid attention to what she's had to say for a while. I'm not sure she has particular value in a discussion about economics. It's really just that we're uncomfortable going where we're going. At some point we're going to hit a wall with all of this and I don't think it's been fully appreciated.

Well why do you think the kinks that worried so many Republicans weren't worked out before the vote?
I really think that those who put this plan together figured the easiest way to sell this was by fear. But you don't get very good legislation when you work that way. The problem is once you put $700 billion on the table, you can't remove it without causing severe disruptions. So whether you're really facing a calamity in a few days or not, just the fact that you put that on the table ensures that you are facing a calamity. If there was going to be a market—and there's some evidence there was—to determine what they're calling price discovery on the value of these toxic assets, that price discovery left when government stepped in. Nobody in the private sector was going to step up in a meaningful way when that kind of money—$700 billion—is being promised from the public sector. I think they knew that if they put the plan out before they discussed it with Congress than we would be forced to do it.

Obviously some of the architects of this were Republicans. Why didn't they see the same issues you're pointing out?
I don't think the administration that's leaving is really concerned about the long term, apparently. That's all I can figure because the implications of this are going to be with us for a long time. It's very difficult for an administration that has only a few months left to have a rational discussion. I wish, I think all of us wish, that Paulson had come to Congress and said, "there's a credit crunch and liquidity is a problem. Here are some options." But putting $700 billion on the table means you can't remove it without fear of dislocations. That's why we're pressured to do something with this now.

The Senate is voting on the revamped version of the bill, which includes tax breaks for businesses and alternative energy and higher government insurance for bank deposits. What do you think of it?
Well, they'll succeed in getting the votes. But the FDIC insurance, from my understanding, can be done temporarily without any legislation. Some are pointing to this as a reason to vote for the bill. Really, once you increase FDIC insurance there's absolutely no way it will go back. In effect, we could have gotten it without the rest of the legislation. Certainly there are also tax extenders and solar credits, which will bring on a few more votes.