Dear Members of Congress:
On September 16  I sent a letter to my congressman, and to other senior US government officials, that consisted of three sentences:
“I oppose all bailouts of financial institutions by the US government. Government regulation and meddling is solidly to blame for this crisis. We must reduce government involvement in the economy now.”
My congressman replied with a frank letter that opposed my position, and that revealed his own. Among his concerns was the inability of a local government to raise millions of dollars for the purpose of “open space acquisition.” In other words, a local government was unable to buy land, using deferred taxpayer money, in order to prevent the development of that land.
My congressman also wrote that he was opposed to “bailing out Wall Street firms and business leaders who have speculated recklessly, endangered our country’s consumers and homebuyers, and resisted regulation that would protect the public interest.” But apparently he is not opposed to simply nationalizing their property, should it serve his version of “the public interest.”
Well, I beg to differ. This crisis was not caused by financial executives who resisted the whims of regulators. Those executives spent millions of dollars trying to obey the regulations. The cause was the regulations themselves: decades of coercive government interventions in the economy, all of which distorted the markets and undercut the ability of business managers to make sound financial decisions.
I am indeed opposed to bailing out financial companies who made bad investments and must now pay the consequences. But what I am more deeply opposed to is the entire political culture of regulation–including manipulation of interest rates, Sarbanes-Oxley and similar acts, changes in accounting rules, the Community Reinvestment Act, and a scad of others–that has fostered this mess.
Attempts by politicians to address the problem have to date been extensions of the same basic approach. Two weeks ago no politician in Washington knew this crisis was coming. Suddenly, after several all-nighters, they claim to have enough knowledge to grant a quarter of a trillion dollars to a government bureaucrat, to dole out as he sees fit–and to promise him another half-trillion, should he make it worse.
These politicians are willing to destroy the free enterprise system itself rather than to challenge the culture of regulations that has distorted it.
Meanwhile, pundits and politicians focus on the allegedly evil CEOs, “speculators” (in reality, “investors”), and loan initiators who were earlier damned for NOT making loan money available to high-risk borrowers. I remind you that the Community Renewal Act penalizes firms for not making such risky loans. Firms that refused to do so were accused of racist “redlining.” Now those firms are villified for following the law. Well, that’s government–it faces no penalties for its misjudgments except a periodic popularity contest, and can contradict itself with impunity. Any financial firm that did this would be soon out of business.
To make their case, these same politicians are claiming once again to be saving “Main Street.” Well I resent their claims, contrary to evidence, that it is now “impossible to get a loan” for a home or a car. It is indeed much more difficult to borrow millions on Wall Street, or to buy a home with nothing down and cash back to boot. But many regional banks that made sound investments are solvent. They will work through this–unless the government destroys their ability to act on their best judgments.
The government is not saving Main Street–it is confiscating it and nationalizing it. Is it not true that, with the takeover of Fannie Mae and Freddie Mac, the federal government now holds paper on tens of millions of American mortgages? What does granting American citizens “equity positions” and “profits” in companies seized by the government mean, except communism? Who is to run this new communist state–“Hank” Paulson and his Legions of Morale Conditioners? My congressman thinks that this serves “the public interest,” but that private enterprise does not.
Why then do we condemn Hugo Chavez for nationalizing oil companies? Why should those companies “resist” his regulations? Is he not simply following the Paulson plan for the “public interest”?
History demonstrates the consequences of such coercions. The Great Depression that followed the stock market crash of 1929 was caused by a string of obnoxious legislation, and was then cruelly extended by massive government interference. Contrary to prevailing, but long-discredited, opinion, the government did not save us from that mess. It created, and prolonged, it. Twenty years earlier, JP Morgan had ended the panic of 1908 in a few weeks–but bankers in 1929 could not so act. Today, Morgan would have been jailed for the private pooling of assets he arranged.
Is it not true that AIG was told by the Attorney General of New York that it would not be allowed to sell sound assets in order to save the holding company? Who is to blame for the collapse of a huge, and largely sound company, excpet those who forbid its executives from acting? And if this crisis spreads, who will be to blame–those executives who were not allowed to act on their best judgments, or those politicians who wrote the regulations?
I will state plainly that I have no respect for the likes of Senator Schumer, who started a run on a bank with his irresponsible statements and then claimed virtue for them, or Senator McCain, up to his neck in the Keating scandal, or Senator Dodd, whose reputation was on the rocks until this crisis saved him, or Senator Obama, who had not a clue at a White House meeting last week, and then went on-script before the press to cover his ignorance. Promises of “oversight” by such PR men do not instill confidence.
I much more respect the CEOs who have spent their years in the financial business, and who face real consequences for their errors. They do not have access to hundreds of billions of dollars of other people’s money–and they do not expect their stockholders to approve business plans that cannot predict whether they will lose three-quarters of a trillion dollars, or get some back in five years. They do not have their hands in the pocket of every honest person who produces something and lives by means appropriate to his resources.
The truly brave politicians are those who recognize that the government is largely to blame for this mess, and should start emergency repeal of regulations now. Only this can allow responsible CEOs to start making decisions based on sound economics rather than fear of breaking a law.
Dr. John David Lewis
Visiting Associate Professor of Political Science, Duke University