In Killing Bailout, Did Republicans Doom McCain?

Well, maybe we don't need much of a private-sector financial system after all. That's the conclusion that most House Republicans, and a minority of House Democrats, seem to have reached in voting down the $700 billion bailout bill on Monday. Maybe it's best that, in a few weeks, there will be essentially two large banks left in the country, JPMorgan Chase and Citigroup. After all it has done, perhaps that's what the financial sector deserves.

Was the bailout bill killed by malice or by incompetence? It's hard to argue against incompetence, since it has been so rampant, especially on the Republican side of things in Washington. The congressional leadership and the White House clearly lacked the heft—or the energy—to whip recalcitrant members into line. "I don't understand why President Bush didn't go to members of his party and say vote on this," Maria Bartiromo wondered on CNBC Monday afternoon. (Maria, if you have to ask, you don't want to know.) Sen. John McCain, who interrupted his campaign to deal with the crisis, claimed—via his surrogates—that he wielded great influence in improving the deal and making it palatable. Then he left town as it collapsed.

Sure, the bill could have passed if more Democrats had voted for it. But Speaker Nancy Pelosi and co. were able to bring along 60 percent of their caucus. Why did so many House Republicans bail? Some say it's because Pelosi hurt their feelings by pointing out that Republicans were in charge when things went to hell. It also could be that a lot of them got religious on fiscal matters. (Of course, having approved an expansion of Medicare, massive increases in all sorts of spending, and huge tax cuts that led to the addition of trillions of dollars in public debt, this is a strange moment to stand on principle.)

Obviously, Republicans were motivated in no small part by political calculations—short- and long-term. But it's really hard to figure out what those calculations might be. Yes, incumbents of both parties—especially those incumbents facing tough re-election campaigns—don't want to be on the hook for this vote. But consider the big picture: Despite all the hemming and hawing, investors and analysts seem to think there will eventually be a deal—because there has to be. So, let's say that the House Republicans manage to draw out the process for a few more weeks. Maybe the final deal will be less costly to taxpayers—say, $300 billion instead of $700 billion. And maybe they will succeed in stripping some of the measures that corporate America and Wall Street find abhorrent (like limits on executive pay). Even in that best-case scenario, is there any reason to think that GOP politicians will be rewarded for their intransigence?

In the meantime, the chaos they've created by coming to the table and then throwing a fit works to their disadvantage. Each time a deal is close to done and then gets scuppered, the market (and its many participants) freaks out. Huge quantities of wealth are destroyed. The markets fell about 8 percent after today's stunt, likely wiping out close to $1 trillion in wealth. In so doing, they're turning off whatever base the party had left on Wall Street and likely closing off a huge source of campaign cash. Asked for his evaluation of what took place today, Lawrence Fink, the CEO of asset management giant Blackrock, said: "Major disappointment came from the Republican side." A Republican congressman who shows up for a fundraiser in Manhattan this week is likely to get tarred and feathered. In some congressional races, I suppose financial dislocation and bank failures could plausibly be good news for Republican challengers—but only if the challengers can pin them on the incumbent Democrats.

Finally, it's clear that the chaos is poison for the top of the ticket. McCain's poll numbers have eroded throughout September as the financial crisis picked up pace. The volatility in the markets doesn't seem to be doing much for the more volatile candidate in the race. Every time the market falls a few hundred points, Obama seems to pick up support. On Intrade, where the price of McCain's presidential contracts have slipped to their lowest levels in months, traders now give Obama a 60 percent chance of winning.

In general, I've found a lot of the analogies between the present situation and the Great Depression to be way off. But there's one area in which the analogy might hold true. Just as happened in 1932, it's possible that the Republicans' incompetence and bullheadedness in managing a financial crisis could lead to Democrats controlling both the White House and Congress.