Why It Was Good the Bailout Vote Failed

Noam Scheiber at TNR sums up what happened today pretty well:

It looks like the bailout bill just failed in the House, an alarming prospect as the Dow nosedives. My sense of what happened is this: There were a healthy majority of congressmen who wanted the bill to pass, but many of them (most of them?) also wanted to be on record voting against it, for obvious political reasons. So you got a classic prisoners' dilemma situation: Everyone's best-case scenario was to vote against the bill and have everyone else vote for it. Unfortunately, as anyone who's taken introductory micro knows, that usually leads to the worst-case scenario, where everyone defects and the whole venture collapses.

The problem here, from a political standpoint, was that there was very little upside to voting yes on the bailout. Even if the plan worked, it was not going to bring about prosperity. All it would do is avert total disaster. We're going to have a recession no matter what. So that means that those who voted for the bill--assuming it passed and worked as planned--would be stuck arguing that things would have been even worse had it not passed, a difficult counterfactual argument. Meanwhile, those who voted against it (or who aren't in Congress right now) would be free to argue that it was an unnecessary taxpayer boondoggle that only made the situation worse.

The good news about the failure of the bailout bill today is that it may help to put in more concrete terms the consequences of doing nothing. As I write this, the market just closed. The Dow is down 777 points for the day, the S&P down 106. Both shatter existing records for a one day losses. The market collapse will dominate the news tonight and the headlines tomorrow.

And while that might not be enough to completely change the political dynamics here, I do think it will help change equation somewhat. As Nate Silver explained earlier today, opposition to the bailout may not be as strong as some people think. Polls on the subject are very sensitive to the wording used in the question. And I think it's likely that today's events, ironically, will give more comfort to those who are inclined to vote for the bailout but are worried about the political ramifications. At least they'll be able to cite today's market meltdown as evidence for why a bailout was necessary.

Conversely, tonight's market reaction might scare some opponents of the bailout who may start to wonder if the political upside to opposing this bill is really as great as they thought it was. We'll see. It may turnout that this stumble was exactly what was needed to generate sufficient bipartisan support for the bill.