Last fall, as the U.S. economy seemed to be issuing its death rattle, a representative from Credit Suisse received a call from the Federal Reserve. The Fed, the voice on the other end chirped, was calling to congratulate the international financial giant on its prudence, Credit Suisse having admirably avoided becoming enmeshed in the subprime mortgage debacle. Bureaucracies not typically being in the business of issuing gold stars, the call was out of character.
The Fed’s representative continued, “Now we’ll need you to buy up some of the toxic assets”. But why would Credit Suisse do that, their employee asked, when they were one of the few major financial firms wise enough to avoid the investments in the first place? The Fed’s response was chilling: “Because someday you’ll need us”.
In testimony made public last week, Bank of America CEO Ken Lewis alleged that the government’s ultimatum to his company was even more menacing than the Credit Suisse shakedown. Lewis claims that then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke pressured Bank of America into buying the distressed financial firm Merrill Lynch, even after it became apparent that Merrill was set to post massive losses (the eventual total was over $15 billion) in the fourth quarter. When Lewis raised the prospect of BofA cancelling the deal, Paulson reportedly told him that the acquisition would continue apace and Bank of America shareholders would be kept in the dark about Merrill’s cratering value … or the federal government would fire Lewis and his entire board of directors.
Of course, a “crisis” generally gives Washington carte blanche to indulge in “emergency measures” that stop just short of ritualized human sacrifice. And indeed, those who were on the front lines last autumn claim that any overreach on behalf of the federal government stemmed from a good-faith effort to prevent the nation from economic disaster. But long after the prospect of a complete meltdown has passed, the government’s pistol-to-the-ribs style remains.
Just last week, for instance, Treasury Secretary Timothy Geithner put up roadblocks to responsible banks that want to pay back their TARP debts and free themselves from government control. Geithner told a congressional committee that while he welcomed repayment from TARP-weary institutions like Goldman Sachs and J.P. Morgan Chase (two firms that would have never been brought into the program if it wasn’t for government strong-arming in the first place), releasing them would be contingent on the health of “the system as a whole”. In other words, successful firms will remain indentured to Washington as long as necessary to obscure the failures of their wayward counterparts.
Not content to limit the thumbscrews to the banking sector, the Obama administration – following what is apparently its default urge – is socializing the pain across American industry.
Last week, news leaked that the President’s Auto Task Force was pressuring General Motors to jettison its popular GMC truck line – an unintelligible decision given that GMC is one aspect of GM’s business that is actually profitable. What GMC’s heavy-duty trucks are not, however, is “green”. In the new Democratic zeitgeist, that tends to be a capital offense.
Accordingly, Obama’s Environmental Protection Agency announced in the same period that it is assuming new powers to regulate greenhouse gases. The Administration hopes it can use the specter of crushing EPA regulations to get businesses to knuckle under to Obama’s ambitious program to cap and trade carbon emissions. Given the choice between erratic regulatory pain and predictable statutory pain, their bet is that industry will pick the more digestible poison.
Having already hamstringed the banking, automobile, and energy industries, Obama concluded last week with a Roosevelt Room meeting with executives from the nation’s credit card companies. As the President outlined his support for legislation that would limit the card issuers’ ability to change interest rates or set credit limits, one of the guests boldly ventured to challenge the push for greater regulation. Obama’s glib response was “[you are] talking to a president who still has a very fresh memory of relying on credit cards”. Given the math involved in his current budget, this may be the least revelatory bit of autobiography in presidential history.
Obama’s attempt to run the credit card industry from the West Wing is illustrative of the practical drawbacks of such massive government intervention. Though it may be difficult to convince a public that believes he can multiply loaves and fishes, President Obama cannot change the laws of the marketplace. If he robs credit card companies of the ability to price risk through interest rates, he will see the supply of available credit dry. If he attempts to build a “green economy” by taxing current energy suppliers into penury, he will eliminate more wealth than he creates. And if he forces Detroit to make vehicles that are designed for the preferences of Al Gore rather than the tastes of the market, he will make an already fading industry comatose.
There is a greater risk, however, in this age of burgeoning industrial policy and it is a moral one. By severing the free market’s link between performance and reward, the federal government has totally undercut the ethical rationale of capitalism. For all the recent talk of “greed”, the greatest stain on our economy comes not from the imprudent executive. His fate awaits him in the marketplace. Rather, the real shame comes when the state saves the reckless and the venal at the expense of the upright and the decent.
Economists tell us you get more of what you subsidize. Perhaps that is why wholesale failure is quickly becoming America’s biggest growth industry.
Troy Senik is a former presidential speechwriter and a contributor to the Center for Individual Freedom.