The Tea Party, with overwhelming agreement from the America people, opposes any further TARP bank bailouts. But just as with the health care bill, Washington's ruling Democrats are laughing off the Tea Party, and ignoring the American people.
President Obama's so-called Financial Regulatory Reform bill institutionalizes permanent TARP bailout authority across the entire financial sector, indeed, for any company that can be deemed involved in financial activity of any sort. Washington is operating today as if we have been conquered by a foreign power that has suspended our democracy and doesn't care what the American people think.
The bill led by Senate Banking Chairman Chris Dodd (D-CT) (not running for reelection), which President Obama supports, grants permanent bailout authority to the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Treasury. They are empowered to force into receivership any company they deem in danger of default that is "substantially engaged in activities… that are financial in nature." The Federal Reserve and the Treasury would enjoy the power to define what constitutes "financial activities." The Federal Reserve can declare any enterprise "a non-bank financial company" which can be seized and liquidated.
This takes potential bailouts and takeovers well beyond banking, even beyond the financial sector, to almost any business in the country. For who is not engaged in activities "that are financial in nature," which at least arguably includes credit cards, lending, borrowing, insurance, issuing stock, selling on time, participating in exchanges of any sort, brokerage, pensions, and buying, selling, and holding stock, securities, foreign currencies, commodities, or speculative instruments of any sort. The auto companies have had their own finance arms, and other large manufacturers facilitate financing for their customers as well.
No further Congressional authorization would be needed for firms to be seized, for unlimited funds to be spent on bailouts, and for the FDIC to impose new levies on financial institutions to get more bailout funds. The shareholders of any such seized company need not be compensated for the loss of their property, and are unlikely to be. The Dodd bill provides that the shareholders are not to receive any such compensation until all claims against the company, and the Federal bailout fund, are fully repaid.
The Feds have access to unlimited funds under the bill because it authorizes the FDIC to borrow from the Treasury "up to 90 percent of the fair value of assets" of any company it seizes. As AEI scholar Peter Wallison notes in the Wall Street Journal on Monday, "one institution alone -- Citigroup -- has assets currently valued at about $1.8 trillion." Wallison explains that one of the uses of such funds under the Dodd bill is for the FDIC to
"make additional payments" over and above what a claimant might be entitled to in bankruptcy, if these payments are necessary "to minimize losses" to the FDIC "from the orderly liquidation" of the failing firm. In other words, the agency would be able to borrow huge sums so that it could make more generous payments to creditors than they would receive in bankruptcy.
This is one form of bailout authorized under the bill, with the government smuggling funds to politically favored creditors.
The biggest problem with this is that it would encourage lenders to fund "too big to fail" institutions, enabling them to increase leverage with cheap money, and pursue riskier returns. Such moral hazard perpetuates cycles of failure, economic waste, inefficiency and bailout. It also disadvantages smaller, less politically favored banks, institutions and companies who will suffer without these competitive advantages of too big to fail.
Another possible bailout method under the Dodd bill is for the government to keep a firm in operation after seizing it, using the borrowed funds to pay off creditors. The FDIC would also have the power to keep the company operating by issuing securities of the seized firm to be sold to the Treasury, which could then keep or sell the securities. Another source of such bailout funds is the $50 billion resolution fund financed by a new tax on large financial institutions, with the FDIC authorized to charge additional assessments as necessary.
With just about any company subject to such possible seizure, and then continued operation, the potential for bailout socialism is obvious. How about using it to seize financially flagging media companies, particularly Administration critics? How about using it to seize oil companies, or coal companies, claiming they are no longer economically viable under cap and trade or other EPA global warming regulation? Then they can be used to subsidize alternative, green energy.
The Crony Capitalist Political Machine
Still another option under the Dodd bill is for the government to seize the competitors of politically favored institutions, and even to sell those seized firms to the favored too big to fail operations. All of these possible government seizures and bailouts are expressly shielded under the bill from any judicial review.
With such arbitrary government power to favor some firms and punish others, the financial community, and, indeed, business overall, will be political captives of the Obama Administration and the reigning Washington Democrats. If the permanent bailout bill passes, what financial company is going to participate in any way in a fundraiser for a 2012 Obama challenger, or even Republican Congressional or state candidates? What company will dare not pay protection money in the form of political contributions to the reigning Democrats?
Such a crony capitalist political machine is in the tradition of Argentina, or Venezuela, but not America.
Juan Peron, or Hugo Chavez?
Just as with the health care bill, this reality of the legislation President Obama is promoting is not stopping him from telling us just the opposite. Last Thursday, at Cooper Union in New York, President Obama said regarding the Dodd bill:
"Now, there's a legitimate debate taking place about how best to ensure taxpayers are held harmless.… But what's not legitimate is to suggest that somehow the legislation being proposed is going to encourage future taxpayer bailouts, as some have claimed. That makes for a good sound bite, but it's not factually accurate. It is not true…. nobody should be fooled in this debate."
The Wall Street Journal noted the bigger deceit on that same day, saying:
President Obama came to office promising an era of political comity, but…[m]ore than any President in recent memory, Mr. Obama has a tendency to vilify his opponents in personal terms and assail their arguments as dishonest, illegitimate or motivated by bad faith.
The Journal noted the President denouncing Senate Minority Leader Mitch McConnell (R-KY) as "merely a mouthpiece for the bankers" for opposing Obama's permanent TARP bailout socialism bill. The Journal continued:
Mr. Obama added that Mr. McConnell's objections to the bill were not merely "just plain false" but also "cynical" -- and then he repeated the attack on motives at another event the following evening. We can't recall anything close to this kind of language from say Ronald Reagan toward House Speaker Tip O'Neill, or even George W. Bush after Harry Reid called him a "liar." But it is an Obama staple.
The Journal recognized, "Likewise, in his September address to Congress on health care, Mr. Obama did not merely disagree with opponents but accused them of being "cynical and irresponsible," spreading "misinformation," and making "bogus," "wild" or "false" claims through "demagoguery and distortion." I have shown over and over in this column how all of this applies to President Obama's own rhetoric on health care, which never fooled the American people. Moreover, how is this consistently tawdry, misleading rhetoric advancing the supposed era of post-partisanship that candidate Obama promised us as a central theme throughout his 2008 campaign?
In a December interview, President Obama explained, regarding the "bunch of fat cat bankers on Wall Street":
"They're still puzzled why is it that people are mad at banks. Well, let's see. You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it's gone through in -- in decades, and you guys caused the problem."
But vilifying Wall Street for causing the financial crisis is just another political propaganda stunt taking advantage of the gullible to provide cover for the permanent bailout socialism power grab. While the financial community did lapse into some excesses, that was mostly in response to the incentives provided by badly misguided government policies, and by itself would not have caused much broader economic harm.
The real cause of the financial crisis was those badly misguided government policies. As Stanford economics guru John Taylor explains in his book, Getting Off Track, the crisis was rooted in the incredibly loose, cheap dollar, low interest rate monetary policies of the Fed from 2001 to 2006. Those policies were so loose that negative real interest rates were maintained for 2 ½ years, even while the economy was already expanding briskly. Such negative real rates were like payments to financial firms to take on excessive leveraging and risk, which is exactly what they did in response. The excess money poured into a hot housing market during those years, creating the housing bubble. When the inevitable bursting of that bubble came, the financial crisis was the natural result, bringing down all the overleveraged firms. The Fed's misguided policies brought back a classic boom and bust business cycle, after Reagan's strong dollar, anti-inflation monetary policies had slain the business cycle for 25 years, a generation.
Greatly exacerbating the problem was misguided, counterproductive overregulation, not deregulation or lack of regulation. It began 30 years ago with the Community Reinvestment Act, abused under President Clinton in the 1990s, along with HUD and Justice Department discrimination suits, initiating the bad loan policies of the subprime mortgage market. Banking regulators promoting cheap, easy mortgages only added to the problem. Fannie Mae and Freddie Mac then spread the problem throughout the financial community, worldwide, promoting securities based on those junk mortgages. The credit rating agencies backed by government regulation further misled everybody by granting AAA ratings to those securities. This began the housing bubble even before the Fed got going. When the bubble inevitably burst, the trillions in weak mortgages betting on ever rising housing prices naturally caused chaos in financial markets.
Common Sense, Responsible Regulation
The common sense, responsible regulation President Obama says he wants to prevent such economically destructive financial crises in the future would be the opposite of his regulatory overkill, permanent bailout socialism. The President's current course will only drive the financial community overseas, where health insurance and the world's best health care are headed, adding further to the decline of America.
Beneficial, pro-growth, financial regulatory reform would begin with repeal of the Community Reinvestment Act, along with the breakup and privatization of Fannie Mae and Freddie Mac. Fundamental reform of the Federal Reserve is also necessary, tethering it to a price rule for monetary policy focused on stable prices and a strong dollar. That will prevent financial bubbles and short circuit the boom and bust business cycle.
Then we need a permanent end to bailouts, TARP, and too big to fail, not the institutionalization of these anti-market policies. As David John explains in a recent Heritage Foundation study, Congress needs to modernize bankruptcy laws to enable the rapid, expedited closure of large, failing financial firms. Bankruptcy courts with long developed expertise and legal precedent could then act outside of political influences. Appointed receivers and conservators could continue operation of still viable components of firms until they can be sold, close and liquidate portions that are not viable, and distribute available resources to creditors under long established rules. Creditors can be given equity in place of their debts, displacing current shareholders, to the extent necessary. This would all be done without any public taxpayer funds. Creditors and buyers of the viable assets would advance any necessary capital.
Another essential reform component is stronger, enforced, capital and liquidity requirements, which would prevent overleveraging and provide a bigger cushion for financial firms. Reforms should also require legally enforceable derivatives contracts to be traded on public exchanges, where the prices, terms, and components of the derivatives would be transparent and publicly known. A truly brilliant column by Gordon Crivitz in Monday's Wall Street Journal explains the value of even "synthetic" derivatives, which are just bets on market trends with no underlying substance, in transmitting price information signaling market developments faster and sooner. Such derivatives traded on transparent public exchanges would have signaled housing bubble and financial crisis troubles much sooner.
Franklin Roosevelt Obama
But can you see what President Obama is thinking? He is patterning his presidency after Franklin Roosevelt in the 1930s, who similarly demagogued Wall Street over the Depression, and built a political machine that lasted a generation. You can see this pattern as well in the retro Keynesian stimulus, the economically counterproductive tax increases on the "rich," his health insurance company demagoguery, and elsewhere.
But as the saying goes, "History always repeats itself, the first time as tragedy, the second time as farce." And farce is where we are right now with the Obama Administration, both economically and politically. For this is a different world now from the 1930s, and the American people are far more sophisticated, with far broader media outlets for alternative opinion, and far stronger intellectual infrastructure behind that opinion in the think tanks and elsewhere. America did not vote for Obama and the Democrats because we wanted to go back to the 1930s. Rather, voters were thinking of the prosperous 1990s. And since Obama is not taking us there, America will now turn to the Republican Congressional majorities of that time to do it. Can you say President Newt Gingrich?
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