Fear drove the House Republicans to vote against the rescue bill yesterday. Not fear of an economic calamity but fear of their own ideology's demise. As I wrote in Voodoo Economics Is Dead:
The reigning economic philosophy, the one that has gripped this country for decades, defined the "norm" and kept the Republicans in power, is Voodoo Economics (aka Reaganomics) with its belief in unruled markets, unlimited deficits, unpatriotic tax cuts for the rich and unproven, trickle down benefits for everyone else.
Those "conservative" Republicans have now doubled down on their ideological bet. They have killed the bill designed to rescue our economy from the effects of their religious zealot belief in "free markets." The ultimate irony, however, is that by doing so, they may have killed the goose that, ever since Reagan, has enabled the American way of life and has kept the GOP in power: deficits and the world's willingness to finance them.
As I quoted James Grant in The Really Scary Thing At Stake: Our Deficit Fueled Way Of Life:
That a piece of paper of no intrinsic value should pass for good money the world over is nothing less than a secular miracle. We pay our bills with it. And our creditors not only accept it, they also obligingly invest it in American securities ... the dollar is uncollateralized and unconvertible ... As never before, that trust is being put to the test.
Now, here is today's the Wall St Journal:
The country has learned in recent weeks the price of financial failure. Now it will learn the price of political failure ...
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.
Yesterday, it became clear that the Republicans would rather lose an economy than acknowledge they have lost the ideological war.
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