Monday, October 20, 2008

In 2004, President Bush spoke eloquently about his vision of creating an “ownership society” - consisting in large measure of free-market ideas, such as Social Security private accounts and health-savings accounts. Those ideas, vigorously opposed by liberal Democrats, died in Congress. Fast forward to today, Mr. Bush’s final months in the White House. He has joined with Treasury Secretary Henry Paulson in instituting a neo-socialist version of the “ownership society” - using powers contained in the just-passed $700 billion mortgage-bailout bill to buy a stake in American banks regardless of whether they want it or need it.

The Paulson plan, purportedly crafted in order to “save” capitalism, is one of the most massive expansions of federal power over the economy since President Franklin Delano Roosevelt and the New Deal. Mr. Bush says the massive market intervention would be “limited and temporary,” and Treasury Department officials say the plan includes features to encourage banks to buy out Uncle Sam’s share as quickly as possible. But there is plenty of reason to be skeptical of such assertions, particularly given the degree of enthusiasm both Democrats and Republicans have shown for such intervention.

Congressional Republican leaders (showing the political skills that have put their party in a position to lose significant numbers of seats in both houses of Congress for the second consecutive time) were praising the new federal powers over the banking system. So, too, were prominent Democrats, including Sen. Barack Obama, Sen. Charles Schumer and Senate Banking Committee Chairman Chris Dodd - all of whom endorsed the plan Mr. Paulson apparently strongarmed banks into accepting last Monday. To his credit, Sen. John McCain opposes this monstrosity - although he voted for the bailout bill that made the bank-buyout plan possible.

To anyone who believes in safeguarding our economic freedoms, what happened with Mr. Paulson’s “investment” scheme should serve as a cautionary tale about what occurs when legislators give sweeping new powers to government bureaucrats: They use them. During congressional debate over the bailout, Mr. Paulson told lawmakers that the administration did not want to put government capital into banks because it seemed too much like nationalization and he was a believer in the “free market.” Moreover, as The Washington Post noted, “if he had called attention to the provisions in the bill that made cash injections an option, stockholders in banks could have concluded that the government was about to wipe them out, as it had investors in mortgage firms Fannie Mae and Freddie Mac and insurance giant American International Group, driving stock prices down and making the need for a bailout all the more urgent.” So, Mr. Paulson swallowed hard and avoided reminding Congress of what was in the bill it was debating.

But Mr. Paulson displayed no such ambiguity one week ago, when he addressed a group of nine banking executives whom he had summoned to Washington. The executives thought that the Treasury secretary had invited them for a discussion of what steps the government should take next. But when they sat down with Mr. Paulson, they were presented with a take-it-or-leave-it offer for Washington to spend up to $250 billion to subsidize the banking industry. Although it was technically “voluntary,” Mr. Paulson and other federal officials were planning to hold a press conference the following morning to announce it, and the plan was presented to banking executives as a fait accompli. Within hours, all nine companies (after some grumbling) had acquiesced.

But outside that Treasury Department conference room, many well-capitalized small banks are furious about the possibility that they will be forced to accept government funds they do not need or want. The American Bankers Association, which represents many smaller banks, maintains that 95 percent of its institutions are well capitalized and do not need the money, and representatives of individual banks expressed displeasure over the fact that they will soon be competing with irresponsible firms that are being subsidized with tax dollars. Federal regulators said they would not rely on voluntary participation in the program, and the Treasury Department said it would decide who to help and who would not receive federal “investments” - a brave new world of federal industrial policy for the banking industry.

If there is any doubt why the Republican “brand” is so unpopular these days, look no further than Republicans themselves. For example, House Minority Whip Roy Blunt of Missouri expressed support for Mr. Paulson’s investment scheme and Rep. Spencer Bachus of Alabama pronounced himself “vindicated” by Mr. Paulson’s decision to embrace this plan, which he first suggested. This kind of government intervention makes fiscal conservatism sound like a four-letter word.

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