Crisis of Partisanship Trumps Economic Turmoil

Image has not been found. URL: /wp-content/uploads/2008/09/relaxed-crisis2.jpgIllustration by: Matt Mahurin

With the housing market in turmoil, Congress has begun this week to consider proposals aiming to save the listing ship. But Washington has a dim record of moving major legislation in election years, and political experts and historians say that not even the thousands of daily foreclosures will be sufficient to overcome another national crisis — the increasing entrenchment of partisan politics. Even as financial troubles are rippling through the economy, a polarized Congress cannot pull together to tackle them.

Instead, Congress appears poised to provide a watered-down bailout for struggling homeowners without addressing many of the dubious lending practices largely responsible for the mess. For anyone who thought this was the year of a major banking overhaul, think again.

Illustration by: Matt Mahurin

Proving the theory, Senate banking leaders unveiled a bipartisan proposal Wednesday that they say will ease the woes of troubled-mortgage holders and incentivize home sales. Yet $6 billion of the $10 billion proposal goes not to homeowners, but to homebuilders who made a mint selling homes under subprime mortgages.

On top of that, broader measures to regulate non-bank financial institutions — like the hedge funds and investment banks that are largely to blame for the current crisis — have been put on the back burner. Even a modest Democratic proposal to empower bankruptcy judges to force lenders into refinancing subprime loans at lower rates is too severe an infringement on private markets to gain approval from the White House and most Republicans. The new Senate bill drops it entirely.

The Senate compromise is evidence that while the economic turmoil is evolving into the most significant issue of the election year, it thus far lacks the gravity to overcome the polarization that has become synonymous with Washington politics.

“The structural problems are big enough,” said Alan Wolfe, professor of political science at Boston College and author of “Does American Democracy Still Work?” “But there’s no indication we’ve moved beyond the Rovian style of partisan polarization. It’s going to be a long time before Republicans are seen holding hands with [Massachusetts Democratic Rep.] Barney Frank.”

Former Senate Majority Leader Trent Lott (R-Miss.), who retired from Congress in December, agreed. He said in a phone interview that Washington’s partisan bickering has become so pronounced in recent years that major legislative changes are hardly possible anymore — particularly in election years. For Congress to unite on truly significant banking reforms, Lott said, would require a crisis larger than what currently faces homeowners.

“If the pressure is hot enough, Congress might drop their usual guard,” said Lott, now a Washington lobbyist in partnership with former Democratic Sen. John Breaux (La.). “But for the housing [crisis], I haven’t seen much indication of that yet.”

Domestic unrest — whether economic, social or political — has been the surest historic catalyst to sweeping change. The banking collapse of the 1930s, for example, resulted in the New Deal reforms that guided the industry for decades. The bloody, race-based conflagrations in Birmingham and Selma in the 1960s allowed for the passage of highly controversial civil-rights legislation that would have been unthinkable just a few years earlier.

And most recently, the terrorist attacks of 9/11 led to a sea change in Washington’s approach to foreign policy and homeland security. Historians can debate the effectiveness of the chosen policies, but one thing is certain: Anxiety makes Washington act.

In at least one respect, the current crisis has already led policy-makers to take unprecedented steps. Last month, the Federal Reserve offered up $30 billion in taxpayer-guaranteed cash to prevent the bankruptcy of Bear Stearns — the first time the central bank loaned directly to a non-depository bank since the 1930s.

The turmoil surrounding the collapse, however, is young and not well understood. Lott said he doesn’t think “anyone has a handle on it — on either side of the aisle.” Without knowing the true severity of the trouble, some experts say, Congress has little basis to push for the dramatic policy shifts demanded by crises of the past.

David M. Kennedy, professor of history at Stanford University and author of “Freedom From Fear: The American People in Depression and War,” pointed out that many of the New Deal reforms didn’t arrive until 1935 — when the Great Depression was well beyond infancy. “The crisis has to last a while, and it really has to be acknowledged as genuine,” he said. “Maybe we’re not far enough into this thing yet.”

Not everyone agrees. Bill Schneider, former government professor at Harvard University and current CNN senior political analyst, said the crisis is already big enough to justify dramatic congressional intervention. In this election year, he said, Congress will likely tackle the foreclosure crisis while also applying stricter regulations to non-bank financial institutions. “You don’t want to be seen doing nothing,” Schneider said. “That is the lesson of Hurricane Katrina.”

Already, the Senate proposal, negotiated by Banking Committee leaders Chris Dodd (D-Conn.) and Richard Shelby (R-Ala.), is taking heat from consumers’ groups for going too far to help industry and not far enough to help homeowners. The bill, for example, would allow debt-ridden homebuilders to reclaim taxes they paid in years past — a $6 billion-plus provision. But a Democratic proposal to put up hundreds of billions of dollars in federal collateral to refinance troubled mortgages didn’t survive the bipartisan negotiations.

Instead, the bill features $4 billion in grants for hard-hit communities to buy and rehabilitate foreclosed homes. It would also provide $100 million in counseling to foreclosure sufferers; offer $7,000 in tax credits to each buyer who purchases a new or foreclosed home in the next year; and take steps to eliminate so-called “liar loans,” which allowed borrowers to get mortgages without proving an ability to pay for them.

Even Dodd, a sponsor, conceded the proposal falls short of what’s necessary to address the foreclosure crisis.

A similar bill will be taken up Apr. 9 by the House Financial Services Committee, chaired by Frank of Massachusetts. That proposal, however, may have a short lifespan — not least because it includes up to $300 billion to refinance subprime loans at lower rates. This same concept was rejected by the Senate Republicans negotiating with Dodd.

Then there’s the White House. On Monday, Treasury Secretary Henry M. Paulson released the administration’s blueprint to overhaul federal regulation of the financial sector. But that proposal, which would scale back the power of the states to oversee lenders and consolidate the responsibilities of a number of federal financial regulatory agencies, met immediate resistance from Democrats who say it offers the appearance of stricter regulation without actually providing it. In fact, much of Paulson’s proposal was developed before the recent crises arrived, leading to accusations that it was outdated even before its release.

On top of that, it does nothing for homeowners facing foreclosure, which is now being viewed nationwide as the more pressing crisis.

Despite the growing pressure from voters to act, the White House has already objected to certain elements of the Senate’s bipartisan foreclosure compromise. And President George W. Bush has shown a rare alacrity to veto legislation on “principle” even when the move might harm the image of the GOP brand.

“Most people would consider the effect of a veto on the party in November,” said Bruce Cain, director of the University of California’s Washington Center. “But Bush has always amazed us with his persistence in what he believes.”

Playing no small role throughout the process are the looming elections, which have lawmakers wary of supporting legislation that might be used against them on the campaign trail. That caution is exacerbated by the narrow margins in Congress, where the Democrats control both chambers, but with fragile majorities.

With the elections sapping political will, Washington’s approach to issues — even one as enormous as the multi-trillion-dollar housing mess — often prioritizes the appearance of change above change itself. Julian E. Zelizer, a congressional historian at Princeton University, pointed out that lawmakers, even in crises, face the interests of businesses that rely on preserving the status quo. “Congress has repeatedly shown its ability not to act on crises that affect millions of people,” he said.

Rather, Zelizer said, in the face of the current economic trouble, lawmakers will likely stick to “small, incremental steps that both sides can take credit for.”

Not that the slow approach is necessarily a bad thing. Kennedy, of Stanford, said that the nation’s Founding Fathers purposefully built a government that’s tough to manipulate. “We’ve created a system of counterweights that are very difficult to move in either direction,” he said. “That is by design.”