(C4L) – What started as an intervention of gargantuan proportions has now led to permanent changes in government policy that ushers in a new era of public-private partnerships, or what some call fascism.

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Since the Panic of 2008 reached its climax in September of that year, the U.S. government has done many things to further devastate the economy — the partial nationalization of financial institutions, which prompted Hugo Chavez to declare that “Bush is to the left of me now,” the bailout of AIG, the $787 billion stimulus package, the public-private investment program, and the government takeover of General Motors and Chrysler. More troubling than the endless bailouts and stimulus packages (which are already terrible in that they create even more misallocation of resources and worsen the fundamentals of the economy) is the expansion of government control over businesses that accepted bailout funds. Using the fact that these businesses received taxpayer dollars as an excuse, the U.S. government stepped up its interventionist economic policy to the detriment of property rights and the rule of law.

In March of this year, the Obama administration, Congress, and public opinion descended on AIG executives who received bonuses that totaled $165 million, less than 0.1% of the bailout that AIG received. The American public, sensing that something was wrong with all the bailouts and confused about the causes of the economic crises, pounced on an easy target at which to direct its anger. Members of Congress jumped at the opportunity to act as champions of taxpayer interests and put up a show of moral outrage. The House of Representatives rushed to pass a bill that would impose a 90% tax, ex post facto, on the executive bonuses, but the Obama administration backed down, citing the dubious constitutionality of the House bill. The message, however, was clear: legislators stand ready to throw the Constitution and the rule of law out the window, as long as it is politically expedient to do so.

Now, the Obama administration is proposing a new set of regulations that will limit executive compensation. These regulations will apply to the entire financial industry and not just the institutions that have received TARP money. The purported goal of these regulations is to alter the compensation structure in such as way as to discourage excessive risk-taking. This ridiculous idea that, after creating moral hazard with the great Bailouts of 2008, the government is going to discourage excessive risk-taking by limiting executive compensation underscores the government’s self-aggrandizing tendencies — the government creates a problem, then prescribes an ineffective “fix” that fails to solve the problem but succeeds in making the government bigger and more powerful.

Although financial institutions are at fault for taking government bailouts, giving the government more regulatory power over the financial industry hardly improves the situation. Many people believe that executives who ran their companies into the ground should be punished and not rewarded with bonuses. This is true, and they would have been punished had the government not bailed them out. The market mechanism rewards the competent and prudent with profits and success and punishes the incompetent and imprudent with losses and failure. Government intervention destroys this market mechanism, and to try to replace this with government will only make matters worse.

It is important to remember that the government is not the people; it does not even represent the people. (Recall that Congress passed the bank bailout bill in October of last year despite the fact that Congressmen were getting phone calls and emails from constituents that were overwhelmingly against the bailout.) Thus, allowing the government, the entity that has taken taxpayers’ money against their will and given it to financial institutions, to regulate and even punish these same institutions does not represent a victory for the American taxpayers. It is a victory for the government only.

Critics say that executive bonuses that reward short-term performance create incentives for excessive risk-taking. This may be true. In any case, it does appear that Wall Street, drunk on the easy credit poured forth by the Fed during the boom phase, acted with imprudence. However, this by no means implies either market failure or the need for government regulation. History and economic theory both indicate that the artificial lowering of interest rates by the central bank sends incorrect signals to businessmen, causing what economist Murray Rothbard calls a “cluster of errors” (a multitude of firms and businessmen making mistakes in the same time period). The specific nature of the errors depends on the exact situation, but the underlying principle is the same. Thus it is clear that the culprit of the current crisis is the Federal Reserve and not the executive pay structure, predatory lending, or the Asian savings glut. (For a more detailed explanation of the current crisis, read Thomas Woods’s Meltdown.)

The point is, if the government had not intervened to bail out financial institutions that took too much risk, the market’s regulatory mechanism would have kicked in and made the necessary corrections. Institutions that needed to fail would have failed, and those who placed short-term profits before the long-term health of their organizations would have lost their jobs. Institutions that were cautious and did not buy into the boom-phase frenzy would have been duly rewarded for their foresight. And if it were determined that the existing executive bonus structure incentivizes excessive risk-taking, firms would make the necessary changes on their own. Firms that do not make these changes would not be able to compete with those that do take more prudent measures in the long run.

But the government did intervene. Now firms that did not make the wrong bets are forced to compete with those that are being propped up by the government. And the government, having destroyed the market’s self-regulatory mechanism, is going to give itself more regulatory powers to fill the void. We are confronted, yet again, with the fatal fallacy that government central planning is an adequate replacement for the free market.

During the recent Chrysler bankruptcy, the Obama administration stepped in and subordinated Chrysler’s bondholders, secured creditors who were contractually guaranteed first dibs in the case that the company fails, to the United Auto Workers union (unsecured creditors). Bondholders who were also TARP recipients agreed to the government’s plan, but when non-TARP bondholders threatened to take the case to bankruptcy court, President Obama publicly vilified them. Car czar Steven Rattner reportedly threatened to destroy the reputation of one of the firms if it did not cease and desist. (The administration denies this, but anyone who doubts that the government employs retaliatory measures against non-cooperative persons only has to look at the case of Qwest, the only telecommunications company that refused to participate in the NSA’s warrantless wiretapping program.)

Three Indiana pension funds that hold $42.5 million in Chrysler secured loans asked the Supreme Court to stop the sale of Chrysler’s assets to Fiat. But the Supreme Court allowed the deal to go forward.

The administration intervened in a similar manner in the General Motors bankruptcy. Actions by which the government arbitrarily alters the terms of contracts create what economic historian Robert Higgs terms “regime uncertainty.” Higgs writes:

“To narrow the concept of business confidence, I adopt the interpretation that businesspeople may be more or less ‘uncertain about the regime,’ by which I mean, distressed that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources. In any case, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.”

Regime uncertainty discourages private investment and impedes economic recovery because investors must take into account, not only the increased uncertainty due to the recession, but also uncertainty about what the government will do next. Clearly, investors would be more hesitant to purchase corporate bonds if they were uncertain about whether or not their rights as senior creditors will be recognized.

The government, having intervened in the market by bailing out failed businesses, has, unsurprisingly, used the bailouts as leverage to expand its own power to the detriment of the economy. What started as an intervention of gargantuan proportions has now led to permanent changes in government policy that ushers in a new era of public-private partnerships, or what some call fascism.

Source: Campaign for Liberty

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