The Fatal Conceit of Congress
September 30, 2008
Michael Reksulak
On Monday, the House of Representatives narrowly rejected the ballyhooed “Emergency Economic Stabilization Act of 2008” which would have funneled $700 billion of taxpayer money to bolster the stumbling American financial sector. Figureheads from both major parties immediately vowed commitment to revised bipartisan legislation. However the bill is tweaked to placate feuding Democrats and Republicans, though, its passage is liable to bury years of dirty financial secrets under politicians’ largess at taxpayer expense.
Of course, we may have to wait until after the general election to learn just what any adopted bailout entails. The current bill, obligingly, gives all who would support the plan great cover since the Treasury has 45 days to “publish program guidelines” explaining how the distressed assets in this bailout will be priced and valued.
In his inaugural lecture delivered at the London School of Economics on March 1, 1933, Friedrich A. Hayek warned about government planning in markets: “… the belief in the inevitability of the ultimate victory of planning, the conviction that, since where there is no directing Will there must be chaos, deliberate planning will necessarily mean an improvement on existing conditions, is more and more recognized to be the result of our insufficient understanding of the existing system.”
Congress’s rush to action invites us to review the writings by this Nobel Laureate and author of “The Fatal Conceit: The Errors of Socialism.” Given the dearth of reliable data on the number of “toxic” assets on the books of many financial institutions and the admitted ignorance by policymakers about whether or not $700,000,000,000 will actually be enough to “unfreeze” certain credit markets, caution may very well be the prudent course of action.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson appear to have learned nothing from what the latter has called a “humbling, humbling experience.” Together with Congressional leaders, they seem to suffer from a “Goldilocks fallacy”—the assumption that they will get it “just right” when they use taxpayer money to purchase assets which cannot be traded or which nobody will purchase at current market prices.
Ominously, the two objectives supposedly at the heart of this bailout—providing liquidity and protecting taxpayer interests—are not compatible. A last-minute provision in Monday’s failed bill that five years from now the president will propose legislation to recoup any losses is right out of Brothers Grimm. Five years from now, only historians and economists will still study the exact outcome of this Washington takeover of the financial industry.
Having bullied Congress into immediate voting by fanning the flames of public fear, the current administration and its Treasury Secretary are hoping to add a battle-tank to their arsenal to plow through the free enterprise system with the very visible hand of government. Paulson’s earlier assurances (when asking Congress for the authority to, perhaps, bail out Fannie Mae and Freddie Mac) that having a bazooka will make it less likely that one would have to use it, have long been relegated to the dustbin of financial history.
The Congressional assumption that this Pandora’s Box of government interventionism can be closed again on a second’s notice will eventually be exposed as a fatal conceit. This socializing of losses is bound to increase moral hazard in financial markets in the long run and to foster new desires for government handouts.
Consequently, Saturday’s $25 billion in loan guarantees for the US auto industry may only be the beginning of a long list of corporate welfare projects that the nation cannot afford. After all, not many requests on the lobbyists’ wish lists will look so big anymore in the wake of what soon may add up to more than 1 trillion dollars in bailouts.
Michael Reksulak is a Research Fellow at the Independent Institute and an Assistant Professor of Economics at Georgia Southern University.