By Mark C. Partridge, Contributing Editor
September 29, 2008 will go down in infamy as one of the greatest financial losses of all time. Within the space of a few hours, the Dow Jones Industrial Average tumbled 777 points, the largest points drop ever. In the process, $1.2 trillion—yes, trillion—was erased from American equities markets.
The cause of the fall could be found 200 miles to the south, on Capitol Hill where conservative Republicans and populist Democrats allied to defeat the Treasury’s proposed $700 billion bailout by just a handful of votes. These groups of elected officials have rarely held common ground during the Bush years. That they were able to hold together and defeat the bill speaks volumes to the vehemence with which it was received. Beyond the many principled explanations for their actions—the plan being “socialist” and “un-American”—it is difficult to ignore the impending election; indeed, the only people to hate this plan more than those in Washington are their constituents.
Certainly there are other reasons for the massive losses seen on Monday. Wachovia, another one of the great American banks, was brought to its knees before being sold to Citigroup at a fire-sale price. But the real concerns were across the Atlantic where two giants needed government support to survive the day: The Benelux-based Fortis got a few billion euros injected into its balance sheet; England’s Bradford & Bingley was not as lucky, becoming the third British bank to be nationalized this year. That the crisis has spread beyond America’s shorts is becoming increasingly and painfully clear.
Therefore, three points stand out. First, watching the stock market is misleading. The southward migration of stock prices was the largest point drop, but nowhere near the largest percentage fall—that ignominy still belongs to October 19, 1987, forever known as Black Monday, when the Dow dropped more than 22 percent. By comparison, the contemporary version has not been so bad with just a 7 percent fall.
Second, U.S. voters and recalcitrant elected officials have been given a clear glimpse of what to expect should no plan be instituted. The full power of the inchoate market forces, that so many Republicans professed to be protecting with their votes on Monday, have been uncorked. Similarly, populist Democrats will have the satisfaction of knowing they voted against bailing out the Wall Street fat cats. Without the government’s plan, many experts expect the gales of this financial storm to gain speed and claim more victims. Now seeing the influence their votes have and the massive losses on the day will these “principled” officials reconsider their votes?
Third, there is the nagging itch that officials are being rushed into a decision on limited information by an Administration that has a history of rushing into decisions based on limited information. Commentators and citizens alike note with not just a hint of foreboding the similarities between today’s crisis and the run-up to the Iraq invasion.
But a few important differences stand out. First, U.S. voters are overwhelmingly against the bailout plan. Congress people are receiving nearly 100 phone calls and letters opposing the plan for every one that is positive. In contrast, when the invasion began in 2003, 72 percent of Americans supported the war, according to the Pew Research Center. To say that the country is being tricked into supporting this action—as many claim was the case with the Iraq invasion—is quite obviously not the case.
Second, unlike Iraq, which was more of an existential threat, the losses in the markets are measurable and very real. Trillions of dollars are being lost; unemployment rising to levels not seen in decades; inflation is cropping up around the globe: officials are desperate to right the ship. The threat of Saddam Hussein was never this real.
Finally, the Bush Administration is not the same group as it once was. Gone are the neoconservatives like Richard Perle, Paul Wolfowitz, John Bolton, and Douglas Feith. The hallowed halls of Washington are devoid of former Defense Secretary Donald Rumsfeld and former Attorney General Alberto Gonzales. In their stead is a cadre of professionals, promoted or hired for their pragmatism and considerable knowledge, rather than their links to the Bush family. With new leadership at the Departments of Defense, State and Treasury has changed the ethos of this Administration—and its actions.
Faced with these myriad challenges—from angry citizens to plummeting stock prices, rising unemployment to a nervous Congress—these officials will need all of their guile to contain this spiraling crisis.
