The American Spectator : Standing Athwart Nationalization

The Public Policy

Standing Athwart Nationalization

By John Berlau on 6.25.09 @ 6:06AM

My organization, the Competitive Enterprise Institute, has frequently been accused of being "in denial" regarding important issues. It's a charge we most often wear as a badge of honor, because most often, our accusers are too quick to jettison important facts and/or principles that we feel must shape the public policy debate.

The latest accusation of "denial" is on a different issue -- bailouts and government takeovers -- and targeted at a different CEI scholar -- me. The accuser is also different from usual: National Review. But like the other "denier" charges leveled against us through the years, the NR broadside scuttles principles that should be at the forefront of the policy discussion. These are the principles of property rights, private ownership, and the rule of law that all libertarians and conservatives -- and especially NR -- should hold dear.

On Tuesday, I had criticized here an unsigned NR editorial supporting President Obama's call for a "resolution authority" that would give the government broad powers to seize nonbank firms deemed a threat to "financial stability." I wrote that "conservatives' only choice in responding to Obama's 'resolution regime' to follow National Review's onetime motto of 'standing athwart" and 'yelling stop,'" even if NR was on board Obama's train pushing for these expanded powers.

NR staff reporter Stephen Spruiell responded to my piece one day later. Spruiell states kindly that he "like[s"] and "agree[s] with me [90] percent of the time," and I should say this respect is reciprocal, as Spruiell has written some perceptive pieces on housing policy. But he then asserts that I seem "to be in denial about the degree to which government guarantees have mad the market profoundly less sensitive to credit risk." He also charges that I fail "to address the magazine's argument, which is that the creation of a well-designed [emphasis in Spruiell's piece] resolution authority might be the best way to counteract the moral hazard created by the bailouts."

Actually, that was not really the magazine's argument in the original unsigned editorial. Then, the editorialists unambiguously praised the Obama plan, concluding that "the administration's approach gets at least one big thing right." This statement implied strongly that Obama's initiative on this matter was well designed. It's all to the good if NR is now backing away from its original stance, and is giving the actual details of the plan more scrutiny, but Spruiell and the other editors should admit this change in position.

And the Obama proposal definitely deserves more scrutiny. As I noted previously in the Spectator, the administration's white paper puts no limits on the type of firm the government could seize. On page 19, the paper defines a "Tier I financial holding company" that would be subject to seizure as "any firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed."

This is eminent domain on steroids. It would be the arbitrary decision of politicians as to what businesses pose a "threat to financial stability." Already, parties scrutinizing the Obama proposals are circulating such as, "How widespread must the potential threat be to be considered a Tier 1 FHC [subject to seizure]? Is it sufficient to pose a threat only to a region of the country?"

Spruiell writes that I "should acknowledge" that "too big to fail" and "moral hazard" "is a problem." But I and my colleagues already have said this since the bailouts were first proposed. Unlike NR, I opposed the first rounds of bailouts here in the Spectator in September, and I proposed suspending mark-to-market accounting as an alternative (which was partially done in April and has coincided with a slight but significant recovery in the banking sector that the billions in bailouts never achieved previously).

What Spruiell and the other NR editors need to acknowledge is what should be the fairly obvious point that broad government power to nationalize industries is a separate and distinct "problem," no matter how much money it could conceivably save taxpayers. I actually don't think the resolution authority will save taxpayers any money; in fact it will end up costing them, given the additional billions the government has put into Fannie Mae, Freddie Mac, and American International Group since it took ownership in these entities. (The NR editorial made much of the distinction between conservatorship, which the Bush administration practiced in taking over Fannie and Freddie, and receivership, in which the government actually sells of an entity's assets to the private sector. The Obama white paper, however, makes this a moot point on page 77, when it explicitly gives the Treasury Department the choice "to establish conservatorship or receivership. [emphasis added].")

But even if the nationalization authority could save taxpayers $1 billion or even $1 trillion dollars, it is still a terrible idea. One destructive act cannot be fixed by another act that is equally if not more destructive. A doctor could remove the pain of an ingrown toenail by simply amputating the foot, but this would cause much more long-term problems. And if we give to the Obama administration or any administration this power to seize firms where, unlike with banks, there is no nexus to an insurance program the government provides, it will be the equivalent of cutting off a "foot" or even a limb of the American free enterprise system. Why should we think nationalization should work out here better than any place else where it has been tried?

Indeed, the nationalization of AIG, which came two days after the bankruptcy of Lehman Brothers, now appears to be a bigger factor in the meltdown than the Lehman bankruptcy was. As Cato Institute economist Alan Reynolds wrote in NR: "Financial stock prices fell dramatically as soon as it became known that the loan to AIG … would be tied to expropriation of 80 percent of equity. Share prices [collapsed] for financial firms that seemed vulnerable to that sort of government help."

Finally, contrary to Spruiell's assertions, my suggestions of revisions to the bankruptcy code for financial firms is neither "backing away" nor a "third way" from my opposition to both nationalization and bailouts. It's what Congress has always done in light of new circumstances among businesses and is explicitly empowered to do by the Constitution's providing for it to write "uniform laws on the subject of bankruptcy."

The differences between judicial bankruptcies and "resolutions" organized by the president, such as Chrysler and General Motors, are manifold. The bankruptcy court does not carry ownership stakes in the bankrupt entities, just as the courts do not now own retailers Eddie Bauer and Circuit City and other firms in traditional bankruptcy. Decisions are made by federal judges who, while not perfect, do not have to worry about pleasing constituencies for re-election.

As for Spruiell's concern that "enhancing the bankruptcy code won't do much good if market players remain convinced that government will always save large firms from bankruptcy," conservatives just have to mobilize the public to tell their congressmen "no more bailouts" at tea parties and other events. Indeed, "bailout fatigue" may have stopped planned "rescues" of commercial real estate firms, who are discovering that traditional bankruptcy still works. As I wrote here, the orderly April bankruptcy of General Growth Properties, the second largest mall owner in the country, shows that traditional bankruptcy proceedings even for large firms still work out better for taxpayers and the economy than bailouts do.

Letter to the Editor

topics:
Conservatism, Bailout

Baisden Heys| 6.25.09 @ 8:03AM

The simple fact is, NR can no longer be trusted. Tragedy.

S.L. Toddard| 6.25.09 @ 8:13AM

Hear hear! Buckley sold out NR long ago to Big Gov't neoliberal globalist hawks of the same species that currently dominate AmSpec. Here's hoping AmSpec prints more pieces like this, that argue both against the leftist nature of the neoconservatives and the leftist policies of our federal government from a *conservative*, rather than a Republican Party perspective.

Ran| 6.25.09 @ 8:35AM

Conservatives and Libertarians should rather be standing athwart History and screaming Back! Government has become an ever more Progressive cancer that must be pushed-back hard.

Thank you Mr. Berlau, CEI and TAS for standing in the way.

We must stand with you and give robust voice to the call. We can make polite, informed but impassioned calls to legislative reps at State and Federal levels and write letters. We must seek-out and support local Conservative and Libertarian candidates, especially those who would work to roll-back the size and power of Government.

I'll be talking to neighbors, emailing TAS links... The original "well-designed resolution authority" is an informed electorate.

Ran| 6.25.09 @ 8:44AM

"neoliberal globalist hawks of the same species that currently dominate AmSpec." Really, S.L.?

Care to name one for us, say, a "dominant" one? While you're at it, care to define "neoliberal" and "neoconservative"?

Tim| 6.25.09 @ 8:47AM

I see we have formed a circular firing squad...this should help.

Teflon93| 6.25.09 @ 9:09AM

Funny how the "circular firing squad" comments crop up whenever conservatives take neocons to task for abandoning the principles of the nation's founding.

There is no Constitutional authority for doing what Obama has done by nationalizing banks and the auto industry. None.

Related bursts of socialism such as "pay czars" are similarly unconstitutional. Hint: whenever the "czar" term is employed, it points to an act of violence against our republic.

What does NOT help is when muddled, diffident gladhanders seize control of conservative institutions without criticism or response.

Conservatives stand for a defined set of time-honored principles embodied within the Declaration of Independence and the Constitution of the United States.

What National Review now stands for, I have no idea.

R. David Reilly| 6.25.09 @ 9:37AM

John Berlau's ideological position may excite many on the right, but it is grossly insufficient in the real world. While Mr. Berlau's instincts are fine, he clearly does not live in the world of economics and finance. Alas, in the real world, things are not as simple as Mr. Berlau suggests.

Tripp| 6.25.09 @ 9:40AM

Don't give up on NR just yet- still plenty of great conservative minds over there, IE: Mark Steyn, Jay Nordlinger, John Derbyshire (read his piece in TAC about radio!) Richard Brookhiser, not to mention the plethora of Cato Institute scholars that contribute. Just leave out Rich Lowry and Ramesh Ponnuru's stuff, and you've still got a heck of a conservative powerhouse. Listen, I stand athwart movement conservatism yelling "liberty!" as much as the next libertarian, and I subscribe to NR. I just happen to be well rounded and also read TAS, TAC, Reason, Cato briefs, and Policy Review. NR ain't dead yet, folks.

L. Ross| 6.25.09 @ 12:24PM

The problem with free market capitalism in the United States is that we have so much regulation, there is no "free market" anymore. Just as there is a military-industrial complex, there is a financial-regulatory complex. For Pete's sake, when you have Fannie and Freddie (governmental surrogates) guaranteeing 50% of the U.S. mortgage market, that market is not a free one. There is no free market in automobiles. Government regulations cover emissions, mileage, safety, window tint color and transmissivity, the list goes on and on and on. I think that maybe, just maybe, the onerous regulations in the automotive industry have stiffled some relevant innovation, and maybe a startup or two.

I could go on and on giving examples from aviation, power generation, forestry, farming, oil refining, the list is virtually endless. The point is, while it is attractive to consider the wonders of a free market (and it is an amazing, earth shaking economic discovery) the U.S. doesn't have free markets anymore, and near as I can tell, it doesn't want them. Go look at the manufacturing towns in China. That is what happens in an unregulated free market. Crowded, polluted, unsafe. Americans want the benefits of a free market, and we want the benefits of regulations (safety, anti-pollution, etc.) We have made a deal with the devil, and it seems to suit us. But don't pretend that our markets are free or that competition and innovation will cure all our ills. We gave up our free markets decades ago, and we have been reaping the benefits and the problems for decades. When you get right down to it, government interference in the marketplace largely got us into our current mess, and I don't know how we will get out without some big government input. All our big economic players have been castrated by government regulations and favors. We don't have any lions of free enterprise roaming these plains anymore. Instead, we have rats nibbling at government cheese.

Steve| 6.25.09 @ 12:48PM

With terms like "resolution authority" and seizing firms deemed a threat to "financial stability" will John Galt be disappearing shortly?

S.L. Toddard| 6.25.09 @ 1:00PM

"Care to name one for us, say, a "dominant" one? While you're at it, care to define "neoliberal" and "neoconservative"?"

Not particularly, but can you tell me how you italicize?

Al Adab| 6.25.09 @ 2:56PM

Neocons, paleocons, social cons, fiscal cons, movement cons, libertarians, what else? Is it any wonder Conservatives are less effective than earlier in our history. The question at this point in history is not Buckley's famous "Stop", but rather how do we, citizens, voters and taxpayers defend our Constitution against our Government?
If we follow Jefferson we understand that people are able to suffer "while evils are sufferable" but will not the day come when that is no longer the case? At that time "it is their duty to alter or abolish". What might we find more conducive to our happiness? At the cost of what upheavels and pains?
These are no longer small matters of particular policy but seem to represent a continuing series of "usurpations" covering vvast policy ranges. Is there no author or political theorist to give us guidance in these critical times? Where is Tom Paine, where is Franklin or Jefferson when we need them?

Ran| 6.25.09 @ 5:02PM

Hey S.L....
HTML Dog is a decent site.

Not all the tags work here in TAS comments, mind, but enough to make it fun.

Old Texican| 6.25.09 @ 6:30PM

AL ADAB!
Here I are!

As you might see on other threads on the Spectator, I have already hung my hiney out over the "barricades". I have no doubt that I shall be disappeared thereby one day soon. I hope that some of you will take a moment and set up a document on your computers entitled: "Old Texican's Words" in my memory.
Please, copy and paste there. Sometimes I get silly and have a little fun, but I have bet the farm...and my life and my loved ones' lives on the TRUTH winning out.
I personally estimate that there are some twenty million Americans who believe more or less as I do...and have the courage to pay the price...but!

As I have stated here before, we have to start the war with empty hands...just like the kids in Iran.

If Obama in fact builds his own private army, and we start getting shot and/or disappeared...then and only then ...it will be time to lock and load, AND KILL ALL THEIR BASTARDS!

I'm just over 60 years old. I remember during the cold war, our "significant adults" whispering...and us kids over-hearing..."what if the communists try to invade?"
It always got quiet for a moment...before the "belly laughter" began.

...(See, they understood that NO government could field an invasion army...5 TIMES the size of twenty million American patriots with guts and a shotgun.)

...Uh...that is a 100 million "drafted" invaders, and is the MINIMUM ratio to armed "commited insurgents (us)" required to even stay even...

Mr. Obama and our traitor Republican "Princes" in DC believe we will wilt. (Heh!)

...Texas will not! New Hampshire will not! The rocky mountain States will not! Damned sure Utah will not, and some old south States will not.

The midwest is still living in the 60s...but they just might catch up when their lights go out...

OK, My Jefferson/Washington ,Paine impersonation:

""MY DEAR GOD-FEARING FELLOW AMERICANS, I SPEAK TO YOUR HEARTS TODAY.
WE AMERICANS HAVE FACED MANY MURDEROUS ENEMIES OVER THE LAST TWO HUNDRED PLUS YEARS, BUT never...never...IN OUR PRESIDENCY AND SENATE!
IN THESE DAYS OUR WORST ENEMIES SIT ON THEIR VELVET CHAIRS IN OUR OWN NATION'S CAPITOL.

THEY HATE YOU AND I!

THEY THINK THEY "KNOW BETTER" THAN YOU AND I, AND THEY GET MURDEROUS WHEN WE SAY WAIT A MINUTE.

EACH OF YOU READING THIS NEED TO GO TO A TEA PARTY ON OR ABOUT THE 4TH OF JULY...JUST SO THE MURDERERS CAN SEE WHO THEY ARE UP AGAINST.

jUST SHOW YOUR FACE, WITH A SMILE, AND DARE THE MURDERERS!

WE HAVE HERE A UNIQUE OPPORTUNITY TO TELL THE MURDERERS OF THE WORLD...UH...NO!

YOU CANNOT KILL OUR BABIES AND OUR GRANDPARENTS! WE WILL INSTEAD PUT YOU IN JAIL....FOREVER!
HEH!
THINK ABOUT IT FELLOW GOD FEARING AMERICANS...

SO NOW...WE WAIT...WITH EMPTY HANDS!

SHOOT A COUPLE OF US AND INHERIT THE WHIRLWIND OF ...HIS TRUTH IS MARCHING ON!

SOME OF US WILL GET SHOT...OR DISAPPEARED.

Another cowboy| 6.25.09 @ 6:59PM

Adab, Texican
Here's hoping that every 4th of July parade has a TEA entry. Might be a good idea for the crowd to stand and join the march as it goes by. Stand up and be counted together or as Franklin said, "we shall all hang seperately".

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Marc Jeric| 6.26.09 @ 4:46AM

Amidst so many new czars (that is our way to say Caesar) there is one who really thinks of himself as the true modern-day Caesar: Abu Hussein from Kenya. Have you observed how he comes out into the public? His raised head, leaning backwards? His smirk of a smile? His condencending looks? He really is convinced of his superior intelligence, the little affirmative action creep, our Community Organizer-in-Chief.
To understand better what is going on, one should translate "community organization" into Russian in which language it means "soviet".

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john2| 6.28.09 @ 3:19PM

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john2| 6.28.09 @ 3:44PM

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They distract me and then, here come the typos.

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The American Spectator

Comments

Baisden Heys| 6.25.09 @ 8:03AM

S.L. Toddard| 6.25.09 @ 8:13AM

Ran| 6.25.09 @ 8:35AM

Ran| 6.25.09 @ 8:44AM

Tim| 6.25.09 @ 8:47AM

Teflon93| 6.25.09 @ 9:09AM

R. David Reilly| 6.25.09 @ 9:37AM

Tripp| 6.25.09 @ 9:40AM

L. Ross| 6.25.09 @ 12:24PM

Steve| 6.25.09 @ 12:48PM

S.L. Toddard| 6.25.09 @ 1:00PM

Al Adab| 6.25.09 @ 2:56PM

Ran| 6.25.09 @ 5:02PM

Old Texican| 6.25.09 @ 6:30PM

Another cowboy| 6.25.09 @ 6:59PM

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Marc Jeric| 6.26.09 @ 4:46AM

www.onnhl.com| 6.27.09 @ 2:44AM

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