JEFFREY: Banking on government

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By Terence Jeffrey

COMMENTARY:

There was instructive value even in the language that The Washington Post and the New York Times used to describe the Monday meeting at which nine large banks agreed to surrender part ownership to the government.

In describing how it came about, The Post said, "The government ordered the chief executives of nine prominent banks to attend a meeting yesterday at the imposing offices of the Treasury Department." In describing the outcome, the Times said, "Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment."

The bankers were "ordered" to come to Washington and "directed" to surrender an ownership interest to the state.

Treasury Secretary Henry Paulson emerged from the meeting looking and talking like Shakespeare's Macbeth when that woeful character emerged from the room where he had just slain the king of Scotland.

"We regret having to take these actions," said the remorseful former Wall Street banker. "Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence to our financial system. Government owning a stake in any private U.S. company is objectionable to most Americans - me included," said Mr. Paulson.

He then went on to explain that the government intended to buy an interest not only in nine big banks but also in hundreds of smaller - financially healthy - banks all across the country.

"Today I am announcing that the Treasury will purchase equity stakes in a wide array of banks and thrifts," Mr. Paulson said. "While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period. ... Our goal is to see a wide array of healthy institutions sell preferred shares to the Treasury and raise additional private capital so that they can make more loans to businesses and consumers across the nation."

The New York Times reported there are about 8,500 smaller banks in the United States and that, according to the American Bankers Association, 95 percent of U.S. banks are well-capitalized.

In other words: The government is seeking to buy up shares in healthy, well-run small businesses all across America so it can get those businesses to behave as the government wants them to behave - which, as Mr. Paulson put it, is to "make more loans to businesses and consumers."

But isn't that how we go into this mess - with the government trying to get banks to make more loans?

Just as one lie leads to another, imprudent government intervention in the free market leads to further imprudent government intervention in the free market. Each step of the way, we are told we have no choice but to do what the government wants us to do.

The original transgression that led us to the current crisis was committed by elected officials in Washington who wanted to buy additional incumbency insurance for themselves by saying to voters: We will help you buy a house.

They worked to accomplish this through legislation (such as the Community Reinvestment Act) that pressured banks to make riskier loans and through tax-exempt government-sponsored enterprises Fannie Mae and Freddie Mac, which started buying up riskier loans (so the original lenders did not have to carry the risk) and wrapping them into mortgage-backed securities (which mixed bad loans with good loans).

"Because these two companies were chartered by Congress, many believed they were guaranteed by the federal government," President Bush said when he first announced his plan for a $700 billion bailout of the financial industry. "This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk." Right. Then President Bush did guarantee them.

So we have gone from government pressuring banks to make riskier mortgages, to government-sponsored enterprises buying riskier loans from banks to facilitate even more risky lending, to government buying stakes in the banks themselves.

"We are acting with unprecedented speed, taking unprecedented measures that we never thought would be necessary," Mr. Paulson said at the end of his announcement. What will be the next unprecedented measure government officials never thought would be necessary?

Having murdered his king and then his friend Banquo, Shakespeare's Macbeth, abandoning all consideration of right and wrong, decides: "I am in blood / Stepp'd in so far, that, should I wade no more, / Returning were as tedious as go o'er." He learns - in the end - he made the wrong decision.

Americans have a decision to make, too. Do we want to wade further into government dependency and government intervention in our economy? Or do we want to turn back now to the shores of individual responsibility and freedom?

Terence P. Jeffrey is a nationally syndicated columnist.