Here in the land of the theoretically free, as Mencken called America, the central government is about to become part-owner of the nine largest banks and many smaller ones, too. It will acquire dividend-paying preferred stock in return for “injecting” cash into the allegedly seized-up capital markets. (If they’re so frozen, why does Ditech offer me low-interest loans on television every night?) The government will also guarantee bank debt for three years. All this is said to be necessary because of the current economic turmoil. Summoning his best Orwellian tone, President Bush assured the country: “These measures are not intended to take over the free market, but to preserve it.” That’s reason enough to wonder if these people know what they are doing. Even Hugo Chavez knows better.
The $250 billion required to accomplish this extraordinary feat is to come from the $700 billion the supine Congress recently gave Treasury Secretary Henry Paulson, the former CEO of Goldman Sachsone of the nine banks that will enjoy the largess. The rest of the money will be used to buy bank-held paper backed by sour mortgages and other “toxic” instruments that have stopped producing income. Congress doesn’t have $700 billion; it’s running a half-trillion-dollar deficit already. But that’s okay. The government can, presumably, borrow the moneydriving up interest rates, including for mortgages, oops!and pay the debt later in depreciated dollars. This is assured because the Federal Reserve is creating hundreds of billions of dollars out of thin air in order to rebuild confidence in the economy. Yes, you read that right.
The government will borrow a ton of money in the capital markets to give to the banks and free up the capital markets. To you and me that sounds as though the government is simply moving money from Place A to Place B in the global economy. But in the wonderland we call Washington, something magical happens when bureaucrats do that. You and I don’t understand how net wealth can come from government redistribution, but that’s why we’re not calling the shots and Paulson is.
Still, common sense suggests that if the money is there for the government to borrow, it’s there for othersso long as the government doesn’t pull rank. Economist Steve Landsburg asked why faltering banks should be saved:
Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they’ll be able to find each other. … As any user of match.com can tell you, the technology for finding partners has improved since [the 1930s]. When a firm wants to raise capital, why can’t it just sell bonds over the web? Or issue new stock? Or approach one of the hedge funds that seem to be swimming in cash? Or borrow abroad?
Besides that, if the banks were really worthy, the private investors the government will borrow from would be eager get in on the action. So the Treasury must be diverting scarce capital from more promising to less promising projects.
The government’s program has the American public on the hook in three different ways. First, if $700 billion is diverted to politically chosen recipients, it’s unavailable for investment that would benefit consumers. What we won’t have because of this intervention is what Frederic Bastiat called “what is not seen.” But the value forgone is a real cost to regular people.
Second, the new debt will eventually be repaid through taxes. Because of this new obligation, taxes either will be raised or will be harder to cut. Either way, Americans will have less of their own money, robbing them of opportunities to save for retirement, buy medical care, or invest in a better education than the government is capable of giving their kids.
Third, when the Fed monetizes the debt and inflation kicks in, our purchasing power will dissolve, with all the havoc that creates for individuals and society. This camouflaged transfer of wealth from the public to the government’s cozy clients is as much a tax as any outright levy.
In other words, the program to restore health to the economy will inevitably make us poorer.
Don’t be seduced by the nonsense that the taxpayers are protected. Paulson & Co. assure us that “we” stand to make a killing when the economy comes roaring back. The mortgage-backed securities will be sold at a profit, and the bank shares will be sold back to the banks.
Two problems: The nature of bureaucracy gives no thinking person confidence that it has the perspicacity to buy low and sell high. If it’s such a great idea, let Paulson and Bernanke resign their positions and make the killing as private entrepreneurs. The other problem is one of identity. Let’s say the bureaucrats are right and in a few years the government will get all the money back and more. Where’s the payoff for taxpayers? Does anyone think whoever is in charge will rebate it? That’s not how government works. There will be 10,000 urgent purposes for that money. The presumptuous identification of the government with the taxpayer adds insult to the injury already inflicted. We are not the state.
It’s not only wealth, moreover, that will be transferred from people to government, but power. Every intervention produces, to use Albert Jay Nock’s terms, a gain in state power at the expense of social power. Nock writes,
Just as the State has no money of its own, so it has no power of its own. All the power it has is what society gives it, plus what it confiscates from time to time on one pretext or another; there is no other source from which State power can be drawn. Therefore every assumption of State power, whether by gift or seizure, leaves society with so much less power; there is never, nor can be, any strengthening of State power without a corresponding and roughly equivalent depletion of social power.
In this transfer a pernicious alchemy occurs: social power is persuasion, but state power is brute force. It’s not usually noted in polite company, but a shift of power from civil society to the state must entail a reduction in voluntary exchange and an increase in enforced transactions.
Paulson insists that his acquisition of equity, which smacks of 1920s Italian fascism, will involve no government influence over the banks. This is hard to believe, considering that the banks were given no choice but to participate in the program. (Not that they all opposed the deal.) But even if the government’s influence is minimal, that doesn’t reduce the threat that this precedent sets. As Robert Higgs documents in Crisis and Leviathan, government always increases its power in any (real or imagined) crisis, and when the crisis subsidies, it never returns to its earlier dimensionsthe “ratchet effect.” New powers often remain on the books, ready to be dusted offusually to the cheers of the corporate eliteat the next emergency, and, the public has been softened up ideologically for the next expansion of power. By crowding out market solutions, the state leaves the impression that it is indispensable for economic well being. We’ve been ratcheted again.
Sheldon Richman is the editor of The Freeman (www.fee.org).
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