Bailout Plan Splits Free-Market Backers

A furious family squabble is raging among free-market advocates over the Bush administration’s economic-rescue plan, between those who say let debt-ridden businesses fail and those who warn of a deep recession if government doesn’t bail them out.

The fight has divided conservatives as well their grass-roots supporters, who make up a large part of the Republicans’ political base and threaten to undermine party unity in the middle of a close presidential election. That grass-roots backlash has to a large degree fueled House Republican opposition to the Treasury’s bailout plan.

Lawmakers say they have been inundated by a wave of voter anger to the proposed bailout of troubled banks and other financial institutions. Republican Sen. John Cornyn of Texas says his offices “have received more calls and e-mails on this issue in a short period of time than were logged even on the contentious immigration issue in 2007.”

The battle among free-market groups is largely between the more establishment conservative think tanks such as the Heritage Foundation and the American Enterprise Institute, among other well-heeled organizations, and smaller, lesser-known groups who blame the economic turmoil on too much government intervention in the marketplace. Some groups, such as Heritage, admit to deep division within their own ranks.

“There’s enormous division in our community. All free-market people share the belief that the current circumstances are atrocious. The debate is over what should be done about it,” said J.D. Foster, senior economist at Heritage and a former Bush administration official.

After much internal debate among Heritage officials, which one participant called “spirited,” Mr. Foster wrote a memo for the foundation’s Web site that said Treasury Secretary Henry M. Paulson Jr.’s bailout plan “could be justified only if the United States financial system is at risk and the broader economy is under threat of a deep recession. The current situation appears to meet this test.”

Mr. Foster notes that the plan was also being supported by a bevy of free-market economists, including Kevin Hassett at AEI, Wall Street adviser and CNBC host Larry Kudlow, and former Bush White House economic adviser Larry Lindsey.

However, in a sign of division within his own ranks, Mr. Foster’s views were challenged by his boss, Heritage President Edwin Feulner, who in an op-ed column in The Washington Times last week called the White House plan to buy up hundreds of billions of dollars in unmarketable financial assets “a massive overreaction,” adding that “the government’s aggressive meddling in financial decision-making is what got our economy into the mess in the first place.”

But free-market economist Bruce Bartlett, who wrote a scathing book critical of what he called Mr. Bush’s “betrayal” of conservative principles, nonetheless supports Mr. Paulson’s plan.

“I honestly think we are facing 1929, and we’ve got to do what we got to do. I don’t like it. I think it could have been handled differently, but at this moment in time, the risks of doing nothing are much worse than the risks of going through with the bailout,” he said.

But outside these establishment think tanks, opposition among many other groups appears to be more widespread. “There’s an intellectual debate going on among some of the free-market think tanks, but I don’t think the grass roots is divided on this. They are united against the bailout,” said Matt Kibbe, president of FreedomWorks.

“As far as the limited-government, free-market activists are concerned, this is a black-and-white issue. The administration is trying to socialize a big chunk of failed Wall Street firms, and people have no faith that the same government that ignored all the warning signs, particularly mortgage giants Fannie Mae and Freddie Mac, have any ability to fix the problem they created,” Mr. Kibbe said.

“There is a spontaneous grass-roots uprising against this plan. Doing nothing is better than what the administration is proposing,” he said.

At Americans for Tax Reform, headed by tax-cut crusader Grover Norquist, last week’s regular gathering of conservative leaders heard an outpouring of opposition to the Bush plan. “There was incredulity in the room,” a participant said.

“You have the National Taxpayers Union against it, Americans for Prosperity and many others opposed. I haven’t talked to too many people who are for it,” said Ryan Ellis, ATR’s director of tax policy.

“Some think the bailout is necessary, but a lot of us do not think that giving taxpayers’ money to bail out these companies is the right answer. It comes down to why we believe in free markets and conservatism in the first place,” he said.

Division over the bailout is not limited to conservative, free-market groups and their advocates. Liberals are divided, too, with housing and civil rights groups and unions joining in opposition.

While House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have accepted the outlines of the bailout if it includes amendments Democrats are seeking, Sen. Bernie Sanders, Vermont independent and a self-described socialist, called it “an unacceptable attempt to force middle-income families (and our children) to pick up the cost of fixing the horrendous economic mess that is the product of the Bush administration’s deregulatory fever and Wall Street’s insatiable greed.”