Train wreck coming?

Think about a six-way game of Chicken. There might be no bill after all.

If you’d asked me forty-eight hours ago, I would have predicted that some version of a Garbage Pail bill would be signed into law this week or next. Like the prospect of a hanging, the prospect of a financial melt-down should have managed to concentrate the minds of the players. (Richard Neustadt defined a “crisis” as “a situation in which something can happen.”)

Now, I’m not so sure. The stock of trust in Washington &#8212 both trust among the participants in national politics and the trust the citizens have in the politicians &#8212 has been badly worn down: first by Nixon, then by Gingrich, now by Bush and Cheney. There may not be enough trust left to allow a deal to go through.

Lots of people (and not just Democrats) don’t trust the Bush Administration not to treat the bailout, as it treated the war in Iraq, as an opportunity for looting the Treasury and enriching its friends. And some of the same people don’t even trust the Treasury and the financial-industry leadership when they say that there’s a real catastrophe in the offing if nothing is done. (“Where is the financial panic? Right next to the WMDs.”) The Paulson “Blank Check” bill, and especially its unreviewability clause, was an especially unfortunate move in this context, because it forced people to think about power grabs and Dick Cheney.

Lots of people (an overlapping but not identical set) also don’t trust the managers of the financial services companies not to use their superior knowledge and their lobbying muscle to turn the crisis and the bailout into one more opportunity to enrich themselves at the expense of everyone else. Not to do so would, after all, violate their deepest principles.

And &#8212 this is the part I didn’t guess up front &#8212 the Democrats don’t trust the Republicans not to double-cross them by allowing a bailout to pass (thus satisfying the Republicans’ paymasters) while mostly voting against “the Bush-Pelosi bailout” and running as populists.

Most of all, no one trusts John McCain to do anything except pursue John McCain’s best political interests. I have no idea whether Patrick Ruffini reflects the thinking of the McCain camp, but someone who chose Sarah Palin as a running-mate simply can’t be trusted not to throw a “Hail Mary” pass as his otherwise losing campaign grinds toward its end. And Mitch McConnell is already laying the basis for the double-cross by expressing “serious questions.”

At minimum, Harry Reid should announce right now that no bill will reach the Senate floor unless both Presidential candidates have signed on as sponsors. A more subtle play would be to tell the Republicans, and the bankers, that he will offer a bill without some of the more New Dealish provisions, but that if it doesn’t get at least X Republican co-sponsors including McCain he will drop that one and write something that they’ll like even less. (The Dodd bill is clearly on the “less New Dealish” side; maybe Barney Frank can provide the “bad cop” bill.)

There’s no clear evidence from polling about what the voters want. (About two-thirds want the government to Do Something, but about the same proportion expect that the taxpayers will get the shaft.) If a bailout passes, there will no way to show that the world would have come to an end otherwise, and &#8212 relieved of fear &#8212 the voters will be able to give full vent to their (well-justified) rage at a world in which the people who ran Lehman into the ground are walking away with $2.5 billion in bonuses.

The apparent refusal of the European and Japanese central banks to participate in a bailout that assertedly is needed to prevent a worldwide financial collapse raises questions about how dire they think the situation is. Or perhaps they’re simply trusting that the U.S., as the largest single player, can be stuck with the entire burden. (That sort of thinking is an aspect of every coalition effort; Mancur Olsen called it “the exploitation of the great by the small; it’s one reason every American should hope for the quick emergence of a United States of Europe.)

Perhaps a rule forbidding the GPA buy assets from the U.S. subsidiaries of firms domiciled in countries whose governments or central banks don’t contribute might change the political calculus abroad. In the meantime, that refusal is only going to deepen the outrage among U.S. taxpayers, and is in fact a good reason for Congress to drag its feet a little, until the pressure on the foreign central banks grows great enough that they’re willing to make their pro rata contribution to the project.

So as between the financial-services sector and the rest of us, as between Democrats and Republicans, and as between the U.S. and the rest of the OECD, we have a multi-player game of Chicken, where any player can try to profit by stubbornness, but where if enough players get stubborn we could actually see the disaster everyone wants to avert. The Democrats have one huge tactical advantage; they can always pass a bill and send the Members and Senators home, daring Bush to veto it. That gives him what the accident lawyers call the Last Clear Chance to avoid the wreck.

That raises a serious question: Is there a way to kick this can down the road past the first Tuesday after the first Monday in November, without having the system melt down in the meantime? I wish I had a clue about the answer.

Footnote It’s possible that the Last Clear Chance was really Paulson’s, and that he blew it by offering the Blank Check. How could he possibly have published that draft without first confirming that the Hill would hold still for it?

Update And with glibertarian economists like Steven Landsburg promising that the Market Fairy will solve all our problems, it’s not going to be hard for wingnut legislators to convince themselves that they can afford not to abandon their pet ideologies. Note to Landsburg: bank loans are better than personal loans because the bank is better at collecting money, isn’t so likely to need it in a hurry, and, most important, diversifies risk. If I lend to you and you go broke, I’m in trouble. If I lend to (deposit money in) a bank and the bank lends to you and you go broke, that’s already figured into the interest rate. So the notion that all we need is a financial is actually pretty frigging stupid. But that’s what glibertarians get paid for.

Second update Nothing in this NYT liveblog of today’s hearings makes me more confident that something will pass. John Cole thinks Paulson told a whopper right to start with.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: