Dysfunction in Washington Exacts a Heavy Price By GERALD F. SEIB

WALL STREET JOURNAL
SEPTEMBER 30, 2008

CAPITAL JOURNAL

Dysfunction in Washington Exacts a Heavy Price

By GERALD F. SEIB

The country has learned in recent weeks the price of financial failure. Now it will learn the price of political failure.

The collapse of the financial-rescue package in the House on Monday may well be reversed, at some point. Discouraged House leaders yesterday sounded as if they hoped the Senate could lead Congress back out of the wilderness in the next few days, giving the plan a second crack at passage.

WSJ Executive Washington Editor Jerry Seib gives his take on Monday's House vote on the bailout and its effects on the market, saying "we're now going to learn the consequences of political failure." (Sept. 29)

But even if senators manage to revive the bailout plan, a great deal of damage already has been done:

American voters, who didn't like the plan in the first place, will like even less the discovery that Washington's response to their concerns was to collapse into genuine dysfunction. Three-quarters of Americans already think the country is on the wrong track, and the same share disapproves of the job Congress is doing. Before Monday, it seemed unlikely those numbers could go much higher. They can, and now probably will.

Beyond that, the hope that Washington had gotten the message in this campaign year that Americans were yearning for an end to gridlock and partisan warfare has been shattered. There will be plenty of blame to go around. House Republicans demanded changes in the plan last week, got some of them, and yesterday delivered just 65 votes -- a third of their members -- for a rescue package that their party's president, their party's Treasury Secretary and their party's House and Senate leadership all called vital to the nation.

Then on Monday, it was Democratic House Speaker Nancy Pelosi's turn to hurt the effort. She chimed in with a bizarrely timed and distinctly partisan floor speech blaming Republicans for the market mess, just minutes before her party needed scores of Republican votes to make the bailout work. Whether she turned votes against the plan, or gave Republicans a convenient excuse to vote against it, was being hotly debated in the Capitol late Monday. But either way, the atmosphere is even more sour as a result.

As it happens, Democratic leaders also failed to convince 95 of their own members to back the rescue plan, showing that the splintering of support was widespread in the halls of Congress.

Now, though, the consequences of simultaneous political and economic breakdown ripple well beyond Wall Street and Washington. The effects could well be global.

The U.S. -- meaning both parties and the public and private sectors -- has to worry about what global investors make of the picture of disarray they now see in the U.S. That's a crucial consideration because the U.S. now depends on foreign capital to finance both a trade deficit of more than $700 billion and a $400 billion federal budget deficit. Today, foreign lenders hold about half of America's public debt, and the nation relies on them to finance more than 70% of its new debt, the nonpartisan Peter G. Peterson Foundation estimates.

The reason foreign investors have been willing to pony up this cash has been their basic, longstanding belief that the U.S. system -- financial and political -- makes America the ultimate safe haven.

At what point does that basic belief start to erode? And what are the consequences of that possibly happening? The question is even more acute because of the likelihood that even more foreign capital will be needed, at least in the short term, to help the American government finance the very bailout now being debated.

The more immediate question, of course, is what happens now. In the House, many of the Republicans who voted against the rescue bill actually sounded more eager afterward to get something done than they did beforehand.

But the atmosphere now is somewhere between tense and toxic. House Republican leader John Boehner said Rep. Pelosi's speech, in which she blamed the "right-wing ideology of anything goes" for bringing about the market crisis, had "poisoned" the atmosphere among his troops.

Democratic caucus leader Rahm Emanuel countered that such a charge masked a more basic Republican failure to deliver the votes needed for a measure that failed 228 to 205. Democrats "delivered 140 votes; we were supposed to deliver 125," Rep. Emanuel said. "They were supposed to deliver 100 votes. They delivered 65."

In normal times, the burden of picking up the pieces would fall on the president and his Treasury secretary. But President George W. Bush is mired in lame-duck status and has shown little ability to move House Republicans, except perhaps for the chamber's leaders. And in the aftermath of the House revolt Monday, rank-and-file Republicans didn't voice much more respect for Treasury Secretary Henry Paulson, architect of the rescue plan, than they did for their Democratic foes.

So now the hopes for action shift to the Senate, where support for the Paulson approach is far stronger. The bill the House defeated likely could pass the Senate with some votes to spare. But now that isn't enough; the need is to adjust that plan in a way to attract House Republicans. That might be done by playing up provisions House rebels prefer, such as greater reliance on insurance of bad debt rather than government assumption of such debt, and changes in accounting rules that will limit the severe hit financial firms have to take on their balance sheets if they choose to hang onto shaky debts.

Starting now, though, another highly unusual dynamic comes into play. Both of the major-party presidential nominees -- Barack Obama and John McCain -- are members of the Senate, where the fate of the bailout may well be determined. It isn't unreasonable to expect them to show some presidential-caliber leadership. It's an unusual role for presidential candidates to play, but the times are unusual indeed.

Write to Gerald F. Seib at jerry.seib@wsj.com

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