Anatomy of the Bailout: Senate’s Conservative End-Run Pre-empts Pelosi’s Progressives

Begin By Understanding the Southernization of the GOP

An anatomy of the House GOP revolt on the Bailout Bill begins by going back to 1984—that’s when GOP House members from the South and West began to equal and surpass the number of GOP House members from the Northeast and Midwest. This was a momentous change that would only accelerate in future elections—a change driving the GOP to the right, empowering the rise of the conservative Republican Study Committee in the House, and ultimately explaining why so many House Republicans voted against the Bailout.

The Southernization of the Republican Party is real and has profound political implications. The power of the Southern/Western/conservative wing of the Republican party has lodged itself in the institutional vehicle called the House Republican Study Committee (RSC). It was the RSC that led the way to defeating the bailout, and seems to be leading the way to growing public distaste at Republican values and leadership in Congress—Republicans lost control of Congress in 2006 and are poised to lose more seats in 2008. Though the RSC captured the center of gravity of the GOP with the “No” vote on the bailout, its leaders are marching their party ever deeper into the box canyon known as the conservative South, and thereby preparing the party for coming political oblivion in the 2008 election. In this, the Southernized RSC members are “the congressional equivalent of those Japanese soldiers hunkered down on remote islands, unaware that the war had ended years before and that their side lost” (Paul Waldman, The American Prospect).

2006 Elections Accelerate the GOP’s Southern Drift

Though the long drift of the Republican party, especially House Republicans, towards southern dominance is a chronic condition of American politics, things were acutely accelerated following the 2006 elections. For a detailed regional analysis of the 2006 elections, see here.

  • Of all House seats lost by the GOP in 2006, 85% were outside of Dixie—strengthening the dominance of the Dixie wing of the House Republican delegation. 27 of the Democrats 30 House pickups came from outside the South.

  • Following 2006, Republicans controlled only 1 of the 22 House seats from New England (Shays-CT), punctuating the fact of the GOP increasingly irrelevance in the Northeast and across the West Coast.

  • Massachusetts switched Governors from Republican to Democrat (after 16 years)

  • Rhode Island voters tossed their traditional Senator Chaffee, a Republican

  • Connecticut Democrats gained a veto-proof majority for the first time in 25 years

  • New Hampshire voters tossed two Republican House members—and for first time since 1874, Democrats control both New Hampshire State Houses.

  • The GOP also collapsed in the Midwest in 2006: Ohio, Wisconsin, Iowa and Indiana all experienced strong GOP losses.

For a visual picture of the Southernization of the GOP, check out these maps.

Democratic versus Republican Control of House Delegations

Democratic versus Republican Control of House Delegations

The House Republican Study Committee and Conservative Ideology

In the South, and in the South alone, the GOP remains strong in its conservative redoubt. And the Southern branch of the GOP is the most conservative: the most committed to reducing taxes, deregulating businesses, rolling back government, and regulating social morals. It is this branch of the Republican party that repudiated the Bailout bill in the House, throwing a massive monkey wrench into the emerging elite consensus on passing the bill.

These conservative Republicans have actually been ascendant (see 09/26/2008 post here) following the 2006 drubbing of the Republicans in the 2006 elections. The 2006 election sent the GOP into the House minority – and also sent several key moderates down to defeat. Since then, the remaining House conservatives have asserted their authority in setting the House GOP agenda, through their institutional vehicle, the House Republican Study Committee (The RSC).

The RSC was founded as a small group of committed conservatives in 1973 by the very conservative Paul Weyrich, with a mission to keep an eye on and pressure House Republican leaders, who the RSC saw as too moderate. Through the years, the RSC has carried the “free market” conservative torch, standing always for fewer business regulations, cutting taxes, rolling back government, and privatizing large institutions like Fannie Mae and Freddie Mac. Today, of the 199 current House Republicans, roughly 100 are members of the conservative Republican Study Committee, and the The RSC is a stepping-stone to larger leadership positions in the House and Nation (e.g., Vice President Richard Cheney, and former House Majority Leader Tom DeLay). (see 09/26/2008 post here)

It was the RSC that led the charge as 65% of House Republicans voted “NO” on the bailout bill. Rep. Jeb Hensarling (R) of Texas, chair of Republican Study Group: “I fear that under this plan ultimately the federal government will become the guarantor of last resort, and that does put us on the slippery slope to socialism.” (see “credit crisis” blog post)

The House RSC Alternative Solution

Instead, the RSC offered an alternative solution to the economic crisis, including familiar bromides such as tax cuts and privatization. Elements of the RSC plan included:

Suspend Capital Gains Taxes for Two Years

Offer tax credits to private companies that buy bad debt from financial institutions

Fully privatize Fannie Mae and Freddie Mac

Offer tax-payer subsidized insurance plan to investors in bad debt, keeping those investments fully private with no taxpayer “equity share.”

End SEC Mark to Marketing Accounting regulations, which require banks to value their assets at current market values, which means that their balance sheets in a declining market show declining capital and result in less ability to lend (since banks must hold 6% of their capital in reserve). The RSC would like banks to be more free to value their assets at predicted future values, thus resulting in better balance sheets and more current capital to lend.

Enamored with these pro-market solutions that would privilege private investment and tax cuts over government investment and regulation, Southernized RSC members voted NO on the Bailout, and the plan went down in the House.

Here’s how RSC Chairman Jeb Hensarling (R-Texas) described the principles behind the Republican “No” vote.

Pelosi’s Progressive Alternative

In the immediate hours after the NO vote, House Democratic Speaker Nancy Pelosi threatened to further isolate the conservative RSC by crafting a more progressive bill (including more relief for average taxpayers and increased taxes on Wall Street) that could attract more Democratic support and pass the bill without any Republicans at all. We will create a bill that Democrats can deliver a “conscience-vote” in favor of, Pelosi argued.

Pelosi’s Democrats began to bat around ideas for a new Bailout bill including such ideas as:

An extension of unemployment pay and a $1,000 tax credit for less affluent homeowners.

An new government agency authorized to take over or take major equity positions in failing banks.

Public payoff or refinancing of middle-class mortgages.

A new transfer tax on Wall Street trades to help pay for it all

The Senate End-Run around Pelosi Progressives

It is reflective of the continuing power of conservative supply-side thinking in America in general (and the power of the conservative Southern wing of American politics in specific) that before more Pelosi big-government liberalism could creep into the final solution, the Senate acted to steal the liberal thunder. When the Senate passed it’s “Rescue of the Rescue” Bill on Wednesday, October 1st, it had several components meant to please pro-investor, anti-tax RSC members, as opposed to appealing to the more liberal wing of the Democratic party.

The Senate principles include:

  • Increasing the FDIC insurance limit from $100,000 to $250,000 deposits, thus insuring the wealth of larger investors.
  • $100-plus billion in tax-cut “sweeteners,” including: Relief from Alternative Minimum Tax, increasing tax credits for alternative energy, enhancing the Child Tax Credit, Disaster Relief tax credits and a host of business tax credits for everything from race tracks, to offshore rum production, to wool research
  • Suspending the SEC to Eliminate “Mark to Market” accounting rules. Essentially, this de-regulation of bank accounting frees banks to lend more money, under the assumption that the market will soon rebound and asset values will inevitably grow

This deal will be more attractive to the tax-cutting, de-regulating wing of the Republican party, and it can be expected that the RSC will deliver enough “Yes” votes to pass the Bailout when the House re-votes on the bill in the days to come. House Democrats could theoretically amend the bill to more palatable to the liberals in their party, but i liberal revisions in the House are not likely to advance given the Senate decision, which has established the new “center” in Bailout Bill politics. The Senate moderates and the RSC Republicans have completed an end-run around House progressives, and the final Bailout bill will reflect more concessions to the ever-powerful Conservative and Southern wing of American politics than to the liberal Californians like Pelosi.


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