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Believe it or not, it has only been a few weeks since the Administration and Congress created the Office of Financial Stability to manage the Troubled Asset Relief Program, or what normal people just call the “bailout.”
In the intervening 6 or so weeks, Treasury Secretary Paulson and his crack staff have spent not one dime—not one—doing what Congress authorized: the purchase of “toxic assets” from financial institutions. Instead they have spent the staggering sum of $290 billion injecting capital into banks and other financial institutions, triggering a cascade of companies to transform themselves into banks to get their hands on the freely flowing federal dollars.
This turnabout—and economists are divided on its wisdom—is unfortunately just the first in what will prove to be a long series of redefinitions of what it means to bring “financial stability” to our sputtering economy. The current economic crisis which started in the financial industry is quickly metastasizing into a full-blown recession that will undoubtedly trigger a painful restructuring of the American economy.
Unfortunately, the impulse to fight that restructuring is going to impose huge costs on both the American taxpayer and in the long run the American worker. Whatever the merits of massive government intervention to prevent the breakdown in the financial structure that undergirds our capitalist system, what is happening now is nothing less than an attempt to usurp the enormous powers of the US government to pick winners and losers in the American economy.
The program to save the financial sector from implosion has quickly transformed into grand plans to restructure the American economy.
There is no pretense anymore that the government is desperately trying to save capitalism from a once in a century crisis; what is happening right before our eyes is an attempt to hijack the US government to save companies from their own bad judgments.
Already we see the car companies lining up for their share of the “Financial Stability” pie. American Express has turned itself into a bank to get into the action. States and local governments are lining up for their piece of the pie. And Lord knows what other businesses and industries will soon be lining up in Washington DC to get their cut of the bailout cash.
Few policymakers doubt that the government has an interest in helping avert the worst effects of a deep recession. The Federal Reserve has massive powers to inject liquidity into the financial system to juice up the economy when things slow down too much, and Congress has already spent billions of dollars this year on a “stimulus package” to jump-start the economy. There is lots of argument about the optimal monetary and fiscal policies, but most mainstream economists recognize that government plays a big role in shaping the economic landscape.
But bailouts are not just another policy tool in the economic toolkit. Rather than being a form of economic medicine, bailouts are more like life support for failing corporations.
By picking winners and losers, and not just shaping the playing field and the rules of the game, government officials distort economic outcomes in an especially damaging way.
Bailing out the car companies, for instance, will simply put off the day of reckoning when the Big 3 will have to restructure their business arrangements and labor contracts that are at the root of their current distress.
Government money will not make the Big 3 competitive with their nimbler competitors. What it will do is put the auto companies under the thumb of government regulations even more than they already are. And the same will be true for the growing list of industries that could soon be lining up in Washington DC for their piece of the bailout pie.
Recessions are never welcome and it’s inevitable that policymakers put a lot of effort into avoiding their worst effects—severe declines in GDP and upticks in unemployment—but bailouts take away the one truly positive effect that recessions do have: wringing out the inefficiencies and misallocations of capital that build up in the good times.
If the new majority in Washington goes down the path they seem determined to follow—using the power of the federal government to prop up companies that desperately need new management and restructuring—the only return we will get on our investment will be a longer recession and even more corporate welfare in our economic life. Europe went down this path in the 1970s and it almost broke their economies.
What we are witnessing today is the rapid development of a bailout culture. The Democratic Congress and its allies in the incoming Obama Administration appear to be living up to Ronald Reagan’s description of liberal economic policy: “If it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it.”
Unfortunately for Republicans, it was George W. Bush who starting moving the economy down this path.
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David Strom is a Senior Fellow at the Minnesota Free Market Institute |
