At the 1986 White House Conference on Small Business,
President Ronald Reagan offered these famous remarks about
politicians’ views on business in the 1970s. Reagan
said, “Back then, government’s view of the economy could be
summed up in a few short phrases: If it moves, tax it. If it
keeps moving, regulate it. And if it stops moving, subsidize it.”
Amazingly, in that speech nearly 25 years ago, Reagan also
summed up perfectly the Obama administration’s view of the
economy in the present. On Thursday, President Obama
announced that the government is providing a loan guarantee
of $250 million to Ford Motor Co. from the Export-Import Bank. In
making the announcement, at a Ford assembly plant in Chicago,
Obama also defended billions of dollars in TARP bailouts to
Ford rivals, General Motors and Chrysler, that he continued from
the Bush administration.
Not mentioned by Obama, and not picked up in media coverage
of the new $250 million loan, is a new regulatory measure signed
into law by Obama just three weeks ago, which nearly stopped a $1
billion bond offering by Ford
Just days after Obama signed the Dodd-Frank so-called
financial reform bill (here is my
general overview for TAS of the Dodd-Frank
monstrosity), Ford found that it couldn’t issue a bond to allow
it to finance more credit for its customers. The reason, as
reported by
AOL Daily Finance, is that Dodd-Frank “fixed” the
problem of poorly researched credit ratings by designating the
three big rating agencies as “experts” subject to the same
liability as professionals such as auditors. Since the Securities
and Exchange Commission requires that bond offerings have a
credit rating, Ford’s venture became a no-go.
The SEC fixed this problem temporarily by allowing Ford and
other companies to issue bonds without rating for six months. But
after that, according to experts quoted in the article, the
trouble will resume unless there is a permanent fix to
Dodd-Frank’s “fixing” of the credit rating system.
It is not known if Ford’s decision to take this government
money — after honorably refusing a TARP bailout when it was
offered two years ago — is related to expected regulatory
troubles in the bond market.
But what is predictable is that the more frustrating the
obstacles the government puts in front of businesses, the
more some firms will come crawling to the government for bailouts
— and the more that firms will kowtow to the prevailing
government’s agenda and be politically connected, should
they ever need this lifeline.
The Dodd-Frank provisions were only the latest of
government regulations that have needlessly damaged the American
auto industry. In December 2008, around the time GM and Chrysler
received the first of the bailouts, the Competitive Enterprise
Institute’s Iain Murray wrote a six-point
plan for relief from regulations holding the auto industry
back, including Corporate Average Fuel Economy (CAFE) standards
and anti-trust rules that prevent beneficial mergers and joint
ventures among the auto companies.
As for the credit rating agencies, one good solution would
be to make the SEC’s waiver allowing companies to issue bonds
without a credit rating permanent. That would give more
flexibility to companies seeking credit and large investors
seeking a return, as well as send a message that investors must
do the due diligence they failed to perform on mortgage
securities, and not use credit ratings as a crutch.
As I wrote in
an overview of the mortgage bubble in Stock, Futures and
Options magazine, “rather than existing as one of many tools
to evaluate the creditworthiness of a security, credit ratings
today — because they are embedded in regulatory capital
requirements — serve as a barrier to independent financial
judgment.”
But don’t expect this administration or this Congress to
make this liberalizing legislative fix or any other ones that
would reduce the government’s role in the economy. The tax-it,
regulate-it, then-subsidize-it system that Reagan
described pays too many political dividends for them.
John Berlau is director of the Center for Investors and
Entrepreneurs at the Competitive Enterprise Institute. Andrew
Kwiatkowski is a research associate at CEI
