Katrina's Unlearned Lessons Leave Financial Mess

Commentary

With the country still in crisis mode, President Bush declared, "The system, at every level of government, was not well-coordinated and was overwhelmed."

The president was not talking about the current financial meltdown that has overwhelmed the executive and legislative branches of the federal government. He was talking about Hurricane Katrina, back in September 2005.

But a Katrina-like storm has hit Wall Street.

And once again, the government was unprepared, despite months, perhaps years, of warnings. Our financial first responders were feckless, our legislators spineless and our lessons from Katrina unlearned.

What does Katrina have to do with Lehman Brothers?

It is hard to conjure up the memory now, but the conventional wisdom in the fall of 2005 was that the debacle of Katrina, coming so soon after 9/11, would usher in an era of Competent Government: The voters suddenly were sick of ideology and adventurism; they wanted government to focus on the meat-and-potato basics — security, protection and enforcement of the laws. The 2008 nominees would be political technicians like Hillary Clinton or Rudy Giuliani, not dreamers like Barack Obama and John McCain.

That trendlet lasted a couple weeks before it fizzled under its own nonsense. The business of campaigning soon eclipsed the business of government in the national attention span.

And just as when Katrina plowed through the Gulf Coast, we are again reminded that — holy cow! — government matters: that government screw-ups take a deep toll; that when the solution of last resort fails, it's a big problem.

The money hurricane wiped out $1 trillion in market value in a single day — Sept. 29, 2008. That's a lot more than Katrina cost.

The immediate cause of the cash catastrophe was the failure of the House of Representatives to pass the Wall Street bailout bill. That inspired the Dow to shed 777 points.

The 205 representatives who voted "nay" are now condemned as weenies, but I don't blame them too much. They were doing what members of the lower body are supposed to do: reflect popular opinion. They were also scaredy-cats trying to hold on to their jobs.

I blame their leaders: the president and his administration, the speaker and her cronies, the minority leader and his whips. They knew this vote was about as unpopular as they come. A bailout for investment bankers? Puh-lease. How about amnesty for pedophiles next?

Among some of the bill's unappealing aspects: Voting for the bailout means renouncing the psychological architecture of the free market's system of risks and rewards, securing the personal portfolios of predator-class financial professionals and paralyzing the government with debt and deficit for another generation or two. The rub is that voting against it would probably have worse consequences. As Steve Pearlstein wrote in The Washington Post, "You can try to prevent a financial meltdown or you can teach Wall Street a lesson, but you can't do both at the same time."

Knowing all this, competent practitioners of statecraft don't allow a vote on a bill until it's greased. The president, apparently out of mojo, left the arm-twisting to Henry Paulson; the man they called King Henry for a couple misguided days not only was a legislative rookie, but he ran the Mother of All Investment Banks before joining the administration. His arm-twisting didn't work.

Speaker Nancy Pelosi, for her part, thought it would be cool to make a shrill, partisan floor speech right before the vote. That really helped. The minority leader, John Boehner, was busy trying to placate rightfully rabid Republicans who would probably dethrone him if he got rolled by the administration without putting up a free-market fight.

So there was no greasing for this vote.

The bailout failed, and hurricane winds picked up and plowed through the markets that Monday afternoon. The Dow had its greatest ever one-day point loss. A measure of market volatility nicknamed the "the fear index" set a record high. Those are pretty clear measures of a blown rescue plan.

As with Katrina, there is a back story for government's dysfunction: It's a long saga involving the fervent renunciation of the idea of financial regulation, bought-and-paid-for tax favors, confusion about how globalization affects money markets, a general ignorance about the modern financial world and a stunning lack of common sense. It added up to a profound absence of financial disaster planning.

The bailout will probably be bailed out. A few House members will be able to say they voted down the bill, forced crucial changes to help the good guys and punish the bad guys and then passed a better bill.

That's fine. Passing a bill will probably protect more innocent bystanders than not passing it. It would have been nice, however, if the government actually had gotten back to basics at some point in the past decade or two. Oh, well. There's always next time.

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