The Size of the Incentive
A couple of things that I’ve read, recently, reinforce a healthy concern about the sheer size of the aggregated pool of power that a growing government creates and the incentives that it generates. The first example comes from an article by Kevin Williamson in National Review about Congressman Barney Frank (subscription required):
Fannie Mae and Freddie Mac thought they had a shot at becoming the bond market. It was not long ago that the U.S. government was expected to be running surpluses, or near-surpluses, for the indefinite future. The folks at Fannie and Freddie calculated that this meant that Washington was going to be selling fewer Treasury bonds than it had been, and that the GSEs’ bonds, with their implicit federal backing, would be able to fill the void, in effect displacing Treasuries as the new benchmark for the bond market. Issuing the benchmark bond, the GSEs would be able to borrow at the “risk free” rate, i.e. what the U.S. government pays to borrow. With a line of credit at the Treasury, the implicit backing of Uncle Sam, and the power that comes from issuing the benchmark in the all-powerful bond market, the GSEs — privately owned corporations, bear in mind — would have enjoyed a combination of political and economic power normally reserved for entities that have armies and navies. Fannie and Freddie were so sure that they’d end up stealing Treasuries’ pride of place that they trademarked the name “Benchmark Bonds” and began issuing them.
It was the implicit government backing — which has the implicit power to take resources by military force — that made those dreams conceivable.
The second example comes from a First Things piece in which Reuven Brenner argues that government negligence facilitated the financial collapse. For one thing:
By accepting the rating agencies’ opinions as the criteria for the amount of leverage that banks could apply, the Federal Reserve turned the ratings agencies into a quasi-official monopoly. And by securitizing trillions of dollars of structured bonds on the strength of these ratings, the financial system put the ratings agencies into a pivotal position in the economy. The ratings agencies never grasped their new roles. On the contrary, they saw their monopoly position as a license to print money by issuing rubber-stamp opinions about structured product that they neither understood nor cared to understand. Meanwhile, in the case of the federally sponsored mortgage corporations Fannie Mae and Freddie Mac, the government made it cheaper for a while for anyone to speculate in the housing market.
With the housing-related organizations, the federal government lost sight of its role by behaving as a social engineer dabbling in home ownership. In the case of the ratings agencies, the government took its eye off plain principles of economics that it ought to guard because of its belief in regulators’ ability to comprehend and manipulate minute trends. The pool of power is there, glittering with the reflected light of prosperity, and is simply too much for human beings to guard, even if they are nominally accountable to voters. With all of that money and influence at stake, there’s further incentive for distortion and political theater to leave others with the blame:
… relying on government and the Federal Reserve to access capital is not the same as relying on banks and other financial institutions. Bankers make decisions about who gets the loans, and on what terms, based on the ability of entrepreneurs and managements to carry on successfully. But a government’s decision to finance ventures—as in the case of the auto industry—is based on political clout.
Of course, political clout sometimes passes under the name of national interest, a phrase that bankruptcy judge Arthur Gonzalez used in his opinion concerning the objection of investors challenging the administration’s use of TARP money for Chrysler: He wrote that the U.S. government “made the determination” that it is in the “national interest to save the automobile industry, in the same way that the U.S. Treasury concluded that it was in the national interest to protect financial institutions.”
Using national interest as a criterion for financing has allowed politicians at all times and in every country to usurp the responsibilities of the private sector. It is happening again in the United States, and without much resistance, since the public’s attention has been focused on the failure of private financial institutions to correct their mistakes. This failure destroyed public trust in these institutions, especially since their mistakes were visible, whereas the mistakes of the government—without which the private sector could not have carried on with its own—were less visible.
We can and should hold private institutions accountable (in part, ahem, by enabling competition and allowing them to fail), but we also shouldn’t neglect the questions of whether our rule-keeper is competent and whether it’s even possible for any person or group to be up to the task of keeping rules in proximity to the lure of combined governmental and economic power.