The $700 Billion Bailout:
A Public-Choice Interpretation
Carlos D. Ramírez*
Department of Economics
George Mason University
Fairfax, VA 22030-4444
and
Center for Financial Research
Federal Deposit Insurance Corporation
Washington, DC 20639
Abstract
On September 29, 2008, the House of Representatives voted to reject HR 3997 (known as
the original $700 Billion Bailout Bill). On October 3, the House reversed course and
voted to approve the Emergency Economic Stabilization Act of 2008 (EESA). This paper
applies a political voting model to these two House votes—the rejection of the bill on
September 29 and its passage on October 3. Both economic conditions and PAC
contributions matter in explaining the two votes, but their effect is attenuated by
legislator’s power. PAC contributions from the American Bankers Association appear to
matter for explaining the legislators who switched. The role of ideology in explaining
either the September 29 or October 3 vote is limited.
* I would like to thank, without implicating, Ed Kane, Vivian Hwa, Lee Davison, Jack
Reidhill, Thomas Stratmann, and Vedran Vuk, as well as participants at the FDIC weekly
workshop, the 2008 Wittenberg University Law and Economics Lecture, and the
Mercatus Center at George Mason University workshop for their valuable comments and
suggestions. P articular thanks go to James Einloth and Jocelyn Grazal for their help in
obtaining some of the data underlying this project. Financial assistance from the FDIC’s
Center for Financial Research is gratefully acknowledged. The views expressed here do
not necessarily reflect the views of the FDIC or the Center for Financial Research.
A Public-Choice Interpretation
Carlos D. Ramírez*
Department of Economics
George Mason University
Fairfax, VA 22030-4444
and
Center for Financial Research
Federal Deposit Insurance Corporation
Washington, DC 20639
Abstract
On September 29, 2008, the House of Representatives voted to reject HR 3997 (known as
the original $700 Billion Bailout Bill). On October 3, the House reversed course and
voted to approve the Emergency Economic Stabilization Act of 2008 (EESA). This paper
applies a political voting model to these two House votes—the rejection of the bill on
September 29 and its passage on October 3. Both economic conditions and PAC
contributions matter in explaining the two votes, but their effect is attenuated by
legislator’s power. PAC contributions from the American Bankers Association appear to
matter for explaining the legislators who switched. The role of ideology in explaining
either the September 29 or October 3 vote is limited.
* I would like to thank, without implicating, Ed Kane, Vivian Hwa, Lee Davison, Jack
Reidhill, Thomas Stratmann, and Vedran Vuk, as well as participants at the FDIC weekly
workshop, the 2008 Wittenberg University Law and Economics Lecture, and the
Mercatus Center at George Mason University workshop for their valuable comments and
suggestions. P articular thanks go to James Einloth and Jocelyn Grazal for their help in
obtaining some of the data underlying this project. Financial assistance from the FDIC’s
Center for Financial Research is gratefully acknowledged. The views expressed here do
not necessarily reflect the views of the FDIC or the Center for Financial Research.
I. Introduction
In the United States, major pieces of legislation often are enacted during
tumultuous periods. In banking and finance, for example, the extensive New Deal
reforms were passed during the Great Depression of the 1930s. Unsurprisingly, the
severity of the current economic downturn has provided new impetus for fast and drastic
lawmaking activity. A clear example is the recently enacted Emergency Economic
Stabilization Act (EESA), more commonly known as the $700 Billion “Bailout” Act.
Although at this point it is hard to discern the act’s full consequences, one can safely
argue that this piece of legislation—which attempts to restore confidence in the banking
system and reestablish normal levels of lending activity among banks and between banks
and the general public—is one of the most far-reaching in recent U.S. history. It allows
the Treasury Secretary to take direct equity positions in financial institutions. It provides
for the Treasury Secretary to purchase “troubled assets” from financial institutions.1 And
it temporarily increased FDIC deposit insurance from $100,000 to $250,000.2
This legislation became law on October 3, 2008. However, the process of
enactment was not smooth. Four days earlier, on September 29, the House of
Representatives had voted to reject a previous version of the bill (HR 3997), and within
1 Troubled assets are assets backed by mortgages, which in recent weeks the media have
described as “toxic” assets.
2 The text of this legislation is available online: for relevant URLs, see
http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml.
In the United States, major pieces of legislation often are enacted during
tumultuous periods. In banking and finance, for example, the extensive New Deal
reforms were passed during the Great Depression of the 1930s. Unsurprisingly, the
severity of the current economic downturn has provided new impetus for fast and drastic
lawmaking activity. A clear example is the recently enacted Emergency Economic
Stabilization Act (EESA), more commonly known as the $700 Billion “Bailout” Act.
Although at this point it is hard to discern the act’s full consequences, one can safely
argue that this piece of legislation—which attempts to restore confidence in the banking
system and reestablish normal levels of lending activity among banks and between banks
and the general public—is one of the most far-reaching in recent U.S. history. It allows
the Treasury Secretary to take direct equity positions in financial institutions. It provides
for the Treasury Secretary to purchase “troubled assets” from financial institutions.1 And
it temporarily increased FDIC deposit insurance from $100,000 to $250,000.2
This legislation became law on October 3, 2008. However, the process of
enactment was not smooth. Four days earlier, on September 29, the House of
Representatives had voted to reject a previous version of the bill (HR 3997), and within
1 Troubled assets are assets backed by mortgages, which in recent weeks the media have
described as “toxic” assets.
2 The text of this legislation is available online: for relevant URLs, see
http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml.