As the financial crisis deepens and widens, a horde of supplicants is converging on the Treasury. Each of them has a story to tell, and although the details differ from one upscale beggar to the next, each ones tale of woe shares a common theme: help me or systemic risk will bring down the whole economy, with painful losses and injuries to one and all.
Until recently, most people had never heard of systemic risk. It was a term of art for economists and financial theorists. Now every lobbyist in Washington knows how to link his special pleading to the claim that unless he extracts his own pound of flesh from the taxpayer, the entire world will have hell to pay. This not-so-thinly-veiled threat verges on extortion.
Commercial bankers have long practiced this rock-bottom-low form of politics, relying on the undeniable fragility of fractional-reserve banking to justify their appeals for public succor during a financial crisis. Lately, however, various newcomers have joined the bankers in playing this con game. In March, the Fed opened its credit window for the first time to investment banks. In September, it ponied up $85 billion to rescue AIG in a de facto government takeover of the insurance giant and took control of Fannie Mae and Freddie Mac, committing up to $100 billion to each company to augment its capital. A little later it announced that it would buy massive amounts of commercial paper―thousands of firms in all sorts of industries potentially stand to benefit from that intervention. Most recently, it has undertaken to prop up money market mutual funds.
The Emergency Economic Stabilization (Bailout) Act of 2008 makes eligible for its $700 billion of largess, not only banks, but also savings associations, credit unions, security brokers and dealers, and insurance companies. As if this scope of engagement were not sufficiently outrageous, the act stipulates that the eligible financial institutions include, but are not limited to the ones named. Will pawn shops be the next ones permitted to join the queue?
Exactly why security brokers and dealers have been invited into the governments charmed circle might seem problematic, if systemic risk must be invoked as the rationale, but their inclusion makes perfect sense in the light of public-choice analysis once you have become aware of who the primary dealers are. These institutions, a handful of companies authorized to trade directly with the Federal Reserve System, include:
- BNP Paribas Securities Corp
- Bank of America Securities LLC
- Barclays Capital Inc.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Daiwa Securities America Inc.
- Deutsche Bank Securities Inc.
- Dresdner Kleinwort Securities LLC
- Goldman, Sachs & Co.
- HSBC Securities (USA) Inc.
- J. P. Morgan Securities Inc.
- Merrill Lynch Government Securities Inc.
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. Incorporated
- UBS Securities LLC
If you dont see any likely suspects in the recent string of taxpayer robberies on this list, then its time you had your eyes checked.
As the recession worsens, we can expect more and more firms and industries to plead for a rescue operation at taxpayer expense. The auto companies have already received a promise of $25 billion from a compassionate Congress, whose members are ever ready to injure the general public interest in the service of a well-healed campaign contributor, especially if the beneficiary can demonstrate that he has dreadfully mismanaged a big business. Now that corn and soybean prices have retreated from their recent extraordinary heights, the farmers are sure to demand that a national farm emergency be declared so that the 17-room additions and new tennis courts they have planned for their rural palaces can proceed on schedule. Other interest groups will troop toward Washington in tight formations, each with a claim that unless its demands are met, the Good Life and the American Way will go up in flames.
Hundreds of billions here, hundreds of billions there―pretty soon youre talking about real money. It will be highly depreciated money, however, because the governments bailout commitments to date, along with its already huge budget deficit, ensure that the Fed will be flooding the world with newly created dollars, and, other things being equal, each ones creation reduces the purchasing power of every existing one. So far we must contend with $700 billion authorized by the big bailout law enacted on October 3; $85 billion for the AIG loan; $100 billion each for Fannie and Freddie; an undetermined amount, but potentially as much as $1,300 billion for the Commercial Paper Funding Facility; $25 billion for the auto companies; and $540 billion for the money market mutual funds. Together, these giveaways, all ultimately taken out of the taxpayers hide, amount to an astonishing $2,850 billion―a sum almost equal to total federal government spending in the fiscal year just completed.
Of course, most of these outlays nominally take the form of loans, and much of the money probably will be repaid eventually. Nevertheless, extension of the loans must be financed in any event, and in the present circumstances, such financing is inconceivable without gigantic expansions of central-bank credit, which require nothing but a snap of the Feds electronic finger. If you are not expecting a surge in price inflation, then you need to review your economics notes. Already we have seen an extraordinary spike in the monetary base. After increasing fairly steadily in recent years, the reported monthly average base leaped from $847 billion in August to $908 billion in September―a 7.2 percent increase in a single month! If the Fed continues to increase the monetary base at anything near this rate for more than a few months, hyperinflation is virtually certain to result. Yet, in view of the lending commitments already made in the various bailout schemes, it seems likely that the Fed will have to continue to increase the monetary base rapidly. We therefore face the prospect of stagflation the likes of which we have never seen before, with real output falling, unemployment rising, and prices increasing rapidly. All of this ruin is brought to us courtesy of the economic czars who presume to know how to manage the economy.
Notwithstanding this frightening prospect, we can be certain that still more interest groups will be pressing the Treasury for their fair share of the plunder, even as the economic ship continues to sink. Members of Congress are already touting the desirability of another stimulus program like the one that sent checks for as much as $1,200 to most American families a few months ago. Somewhere in hell, John Maynard Keynes is laughing maniacally and dancing a jig.
Robert Higgs is Senior Fellow in Political Economy at The Independent Institute and Editor at Large of the Institutes 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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