Remember the so-called 1994 revolution? That was the group of Republicans who in 1994 were swept into control of Congress, with a mission of slashing and burning the size of the federal government. Now, after eight years of a Republican president who spent like a Democrat and with Congress poised to pass what might be the biggest spending bill in history, it's hard to believe that this small-government fervor was only 14 years ago. But a majority of Republicans in Congress voted against the bailout on Monday: Could the small-government wing of the GOP be resurgent?
I recently interviewed Dick Armey, one of the key figures of that era. Although he had come into Congress in 1985, he was House majority leader from 1995 to 2003 and so was one of the dominant politicians along with Newt Gingrich jousting with Bill Clinton over control of the time when "big government [was] over" (in Clinton's words). He is now the chairman of the free-market advocacy group FreedomWorks. I asked him about the political debate over the bailout plan.
Why did Republicans choose now to stand up to the big-spending ways of the Bush administration?
Armey: I don't think their opposition was about the amount of money the bill was spending. It's about restructuring the relationship between government and the market system. If you listen to Barney Frank's discussion, he says, "We need to do this because the market system is a failed system." The Republicans who voted against this—particularly Jeb Hensarling—have said, "We've got failed public policies, and we're about to put on another new level of failed policies that will screw up the market's ability to work." Hensarling said it very well: "Our problem is that this is fundamentally altering the relationship between government and the markets." This is taking government control of the private capital markets to a level that many people—myself included—think it should not go, and we don't think it's necessary. Bush and Paulson have gone up there saying, "If we don't do this, there's going to be a crisis." But if you talk to real Americans around the country, they just don't believe it.
What would you like Congress to do instead of this bailout plan?
[Right now] they're addressing none of the things that made this crisis inevitable. Go back and fix the things that caused it. You won't get Barney Frank to fix the Community Reinvestment Act. We've already done some things with Fannie Mae and Freddie Mac. Let's take that to the next step and make them responsible and disciplined financial institutions, probably by taking them to the private sector. Let's go back and review Sarbanes-Oxley and see what it is that we've got mandated there that causes firms to present balance sheets that understate their value.
None of those steps seem very politically viable right now. Why is that?
Secretary Paulson has only three months left in office. Rather than say, "Let's take our time and do it right," they're saying, "Let's get it done while it's still on our watch."
You mentioned the Community Reinvestment Act as one cause of the current financial crisis.
The CRA is a mandate to every bank in America that 30 percent of your mortgage portfolio must be bad loans. Bankers wouldn't make these loans by their own initiative. They must be mandated to be that bad in their banking practices. Every bank got a major headache from a piece of law that is asinine to begin with.
What about Fannie and Freddie? If this crisis was foreseeable, why did they fail to be reformed?
There were people like Richard Baker and Mike Oxley who tried to reform Fannie and Freddie and put more stringent regulations on them. They were thwarted by Clinton in 1999. The Clinton administration issued a directive to Fannie and Freddie to loosen their requirements. Chris Dodd and Barney Frank's hypocrisy knows no bounds. I am appalled at what they did to thwart any effort to regulate Fannie and Freddie. Barney Frank has been quoted as saying that Fannie and Freddie were not facing any financial crisis. [Armey is referring to a September 2003 New York Times article.]
The public perception seems to be that the free market created these problems. You mentioned Barney Frank as one person most loudly saying that.
Democrats are not stupid about politics. Barney Frank sees that he stands at a juncture in this country where he can make a massive change in the structure of the political economy, diminishing the power of the market and aggrandizing government. Ideologically, that fits his model. It suits his purposes to say that the market doesn't work.
But even Republicans no less than John McCain have been saying that Wall Street is to blame for the crisis.
One of the worst things that could ever happen is for any politician seeking elected office to recognize that the problem is not as bad as it's being characterized. John McCain learned that lesson when he said something very obvious: that the fundamentals of the American economy were strong. They beat him around the ears. He's going to conform to prevailing political discourse, which is always dumb. Politics is the only activity in America where you can prosper by being purposefully uninformed and simple-minded. McCain wants to get elected, so he's going to conform to the same nonsense.