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Commentary

The Bailout of Abominations


     
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As a rule, we may assume that any statute containing the word “emergency” in its title, preamble, or statement of purposes is a bad law. If you want an apt example, consider the Emergency Economic Stabilization Act of 2008, which the president signed into law on Friday, October 3, 2008, soon after its approval by the House of Representatives. Back in 1828, opponents of the tariff bill enacted in that year felt such outrage that they dubbed the law the Tariff of Abominations. With this precedent in mind, we might well refer to the bill just enacted as the Bailout of Abominations.

Only four days earlier, the House had decisively voted down a proposed bailout bill put forward by the administration and congressional leaders of both parties. It seems that the people’s denunciations of this bill had got their representatives’ attention, at least for a day. The flood of phone calls and e-mails to congressional offices was said to have run more than 90 percent in opposition to a financial bailout. Never let it be said, however, that a bad bill―a bill so egregious that even the general public sees through its flimflam―can’t be made worse.

Sure enough, in the days after the bill’s initial defeat, its managers took the monstrosity that had failed on Monday and made it even uglier. Their purpose, of course, was to buy off the bill’s opponents in Congress by sweetening it with all sorts of more or less unrelated provisions intended to channel benefits to the opponents’ constituents and supporters. In short, in Washington last week, business went on as usual: Congress is the name; corruption is the game.

So, when this granddaddy of all bailouts was put up for a vote on Friday, many members of Congress suddenly realized how desperately the public interest required its passage, and it was passed by a wide margin. In the future, when you want to use that famous quotation “the public be damned,” you can forget about citing William Vanderbilt and substitute the 110th Congress, which will go down in history as a gang that looked the people squarely in the eyes and said “screw you.”

On Tuesday, September 30, the day after the first attempt to pass a bailout bill failed in the House, the Gallup Organization conducted a national opinion survey in which people were asked: “What do you think Congress should do now?” Of the 1,021 adult respondents, 14 percent selected “not pass any bill addressing this matter,” 57 percent selected “start over and come up with a new plan,” and 10 percent had no opinion. Only 20 percent preferred that Congress “pass a bill similar to the one that was defeated.” Democrats and Republicans in the poll expressed almost identical views on this matter. Naturally, Congress quickly decided to do what only 20 percent of the people preferred.

In the two weeks from the bill’s initial formulation to its ultimate enactment, it grew from three pages to 451 pages. Such statutes are difficult to comprehend in any event, but this one is so extensive that one would have to spend a long time studying it in order to gain a full understanding of its provisions. Certain things are clear, however. First, the amount of money involved is huge: $700 billion for the purchase of private assets in the Troubled Assets Relief Program (TARP). Second, the discretion granted the secretary of the Treasury in his implementation of the statutory provisions is extraordinarily unrestrained. The secretary has effectively been transformed into a financial czar with authority that would have made the old Soviet commissars pale with envy.

You can learn a great deal by pausing to read the definitions at the beginning of a statute. Thus, in this case, Section 3(9) states:

The term ‘‘troubled assets’’ means—(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

Forgive me if I read this passage to mean that under the TARP, the secretary may buy any financial asset whatsoever, regardless of whether it is a mortgage or a mortgage-related security, as signified by the words “any other financial instrument.” And he may purchase the asset from any financial firm operating in the United States.

Which firms are eligible to participate in the bailout? Section 3(5) tells us:

The term ‘‘financial institution’’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.

If the secretary can’t find all of his friends, relatives, former colleagues, and political co-conspirators among the managers and owners of this expansively defined class of firms, then he’s not looking very hard. Whoopee! Hank Paulson’s ship has finally come in, as no man’s ship has ever come in before. Now he really is the Master of the Universe. Take heart, though, because Section 108 provides: “The Secretary shall issue regulations or guidelines necessary to address and manage or to prohibit conflicts of interest that may arise in connection with the administration and execution of the authorities provided under this Act.” There’ll be no Teapot Dome scandals here, my friends. None at all. After firms have been lined up to administer the TARP, Old Hank will be watching those contractors like a hawk.

Even if Paulson unexpectedly turns out to be as pure as driven snow, however, the amount of confusion that he has been empowered to inject into the world’s financial markets defies comprehension. With $700 billion to throw here, there, and everywhere, for good reason or no reason, with no real accountability and no bottom line―if he can’t make himself the God of Chaos by exercising these powers, then nobody on this planet can create chaos. The potential for malinvestments, general misallocation of resources, and sheer financial tomfoolery confounds the mind. Not even the Archangel Gabriel deserves to have so much power placed at his disposal.

But not to worry. The statute also provides for creation of a Financial Stability Oversight Board to oversee the secretary as he exercises his new authority. And who, you ask, will compose this board? It will include the chairman of the Fed, the director of the Federal Home Finance Agency, the chairman of the SEC, the secretary of Housing and Urban Development, and―mirabile dictu―the Treasury secretary himself. Bully. If a man can’t effectively monitor himself, whom can he monitor? (Freudians will have a field day with this provision.) Of course, we can count on Ben Bernanke and the other members of the oversight board to make certain that everything is on the up and up. After all, the idea that a HUD secretary, an official widely recognized as the Sultan of Real-Estate Swindles, might compromise himself―well, it’s simply unthinkable.

Besides, the law also provides for more oversight and audits (Section 116), studies and reports (Section 117), judicial reviews (Section 119), special inspectors general (Section 121), congressional oversight (Section 125), terminations of authority (Section 120), and so forth than you can shake a stick at. So we can be certain that the entire program will be cleaner than squeaky clean from its alpha to its omega. How could politics possibly intrude? We all know, for example, that the Department of Defense, whose dealings are replete with the same sorts of oversight, inspections, reports, audits, and so forth, has never been known to engage in any shady deals or political skulduggery.

By the bye, the law also provides for raising the national debt ceiling from $10 trillion to $11.3 trillion. That’s okay, though, because many of us will be dead before the full weight of this enormous additional burden drops on the taxpayers. As I always advise elderly farmers: “Hell’s bells, Farmer John, just eat the damned seed corn. You ain’t gonna live long enough to see next year’s harvest anyhow.”

As if we weren’t already more than enamored with this bailout legislation, Congress has taken pains to assure us that the whole business is a sure winner for us taxpayers. Section 134 of the act states:

Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of the Office of Management and Budget, in consultation with the Director of the Congressional Budget Office, shall submit a report to the Congress on the net amount within the Troubled Asset Relief Program under this Act. In any case where there is a shortfall, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt.

So you see: this bailout won’t cost you a dime in the long run. Unless, that is, the bankers and other looters have enough clout with Congress in five years to have this provision overturned. But who can imagine that these ne’er-do-wells will ever have that much influence?

Moreover, to make sure that your interests are fully protected, the government will take an ownership position in every financial firm that sells “troubled assets” to the government under the TARP. The act’s Section 113, engagingly titled “Minimization of Long-Term Costs and Maximization of Benefits for Taxpayers,” provides, subject to certain stated exceptions:

The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives from the financial institution from which such assets are to be purchased—(A) in the case of a financial institution, the securities of which are traded on a national securities exchange, a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate; or (B) in the case of any financial institution other than one described in subparagraph (A), a warrant for common or preferred stock, or a senior debt instrument from such financial institution.

Therefore, you can’t lose, because you are a citizen or legal resident of this great country, whose government is poised to become the owner of a substantial part of its formerly private financial industry. Yes, my friends, full-fledged socialism has finally arrived, not with the bloody violence that some commies hoped for, but with the shameful collaboration of the people’s elected representatives, under the guise of saving one and all from an impending financial and economic catastrophe too horrible to contemplate. Never mind that this whole rationale was little more than a Chicken Little tale―it worked, didn’t it? If you have any doubts, simply have a look at the Emergency Economic Stabilization Act of 2008.


Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institute’s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation. He is the author of many books, including Depression, War, and Cold War.

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