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