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.
Do you have any concerns now?
Yeah, I do. The $700 billion is still there. My worry is not just with the amount of new debt, but the problems going forward when the government owns such a large stake in so many banks and businesses. How would you like to be a business competing with a business that has a government stake? It's just going to create some conflicts we aren't thinking of right now.
So do you think the Senate will pass it?
Yes, overwhelmingly.
What about the House?
It will too. Of course, I thought the House would last time. In eight years in Congress I've never seen a significant piece of legislation come to the floor when the leadership of both parties didn't know the outcome. It was a shock to all of us that the votes weren't there last time. It won't happen again. That sort of thing only happens once in a congressional career. They'll make sure this time.
How are you going to vote?
I plan to vote no as long as the $700 billion is there.
Do you have confirmation on when you'll vote?
It'll be Friday. I think we'll do the prep work for it tomorrow evening in the House and the vote will come up Friday.
If this doesn't pass, what do you think may happen?
We will see the markets fall. We will continue to see problems. I'm not denying there are problems. We have severe problems on the confidence side and the liquidity side, but there are other ways to deal with that than putting taxpayers on the hook and inserting government into the market place. As someone who opposes this piece of legislation I am not saying we shouldn't do anything. We should. We do need to act quickly. If this were to fail then we'll come back with a new piece of legislation.
But do we have time for that?
I think we do. As long as the markets know we're coming back. I think the mark-to-market should help with liquidity and the FDIC should help in the confidence area. There are some other things on liquidity and other ways to expand the FDIC and allow Wall Street to finance a lot of their own insurance. We've put those plans forward and if this fails on Friday we'll push some of those ideas.
Let me ask you about the campaign. Some have suggested that the failure to pass the initial bailout bill really hurt Sen.John McCain's candidacy. Do you think that's true?
I don't. The bill was a better bill than it would have been otherwise largely because of his involvement. He came to town to get a better deal for the taxpayer and it did have some improvements. I don't know how anyone can say that it affects him that much more than Obama. He had a positive impact on the legislation. I don't know that you could say the same for the other side.
But McCain did think the bill was necessary even if it wasn't perfect. There is a question as to why he wasn't able to rally enough GOP House votes. What do you make of that?
That makes it sound like every member of the House is a "yes" man. We're not potted plants. I think we certainly respect opinions from outside of the House but in the end we need to work it out ourselves.