Give Us Liberty (5 page)

Rather than address the problem, Congress asked the American people to fund the largest bailout of Wall Street in American history. The proposed solution to a problem created by easy money and easy mortgages was $700 billion in borrowed (or created) money to allow the government to buy dodgy mortgage-backed securities from failing Wall Street firms, the correct price of which Wall Street's best minds could not calculate. The bailout socialized a big piece of our private financial system, granting the U.S. Treasury secretary full discretion to dictate winners and losers in this reshuffling of assets. Rather than addressing the underlying problems, the legislation simply allowed the Treasury to prop up failing investment houses that took on risks they should have avoided and investments they should not have made.

THE PANIC BUTTON

I
T IS REMARKABLE HOW
quickly both the formal and the informal constraints on government action either unravel or are simply ignored during times of crisis. Or, as Federal Reserve chairman Ben Bernanke so indelicately said during the height of the panic, “there are no atheists in foxholes
¹³
and no ideologues in financial crises.” Principle was replaced with the need to do something—anything—to respond to the economic emergency.

Who would have thought that a Republican president (claiming that he had “abandoned free market principles
¹⁴
to save the free market system”) would push for an unprecedented $700 billion bailout of Wall Street and later, Detroit? Who could have guessed that this wholesale abandonment of constitutional restrictions on the power of unelected bureaucrats would receive such a tepid response from a Beltway policy community that ostensibly existed to boldly challenge such bad ideas? Who might have imagined that a Democratic president, having voted for the same said bailout as a U.S. senator, would seek to institutionalize the practice of private profit-seeking and socialized (i.e., taxpayer-funded) risk, in the process guaranteeing future bailouts and bolstering the political culture of “too big to fail”?

This story has all the makings of a classic Greek tragedy, doomed to be repeated again and again. The lessons of the great financial meltdown of 2008 continue to be ignored by federal policymakers. Unabated, the unrelenting pursuit of these policies will create the conditions for another, bigger inflationary bubble that will continue to disrupt our economy, degrade the purchasing power of our currency, and subversively erode the wealth of working Americans.

On September 20, 2008, Treasury Secretary Hank Paulson released his department's “Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets.” Official Washington had joined the fray in full bipartisan panic over the collapse of residential housing prices, and with it, the potential meltdown of certain massive investment banks overleveraged with toxic mortgage-backed securities. Because of these events, the economy faced real and painful readjustments. But the real meltdown was actually happening in the government itself, where just about everyone in and around the levers of power, many of them culpable in the creation of the financial crisis, threw out any notion of constitutional restraint of government power and proceeded to make an unelected bureaucrat the de facto czar of the entire economy.

The Democrats who controlled Congress quickly embraced Paulson's idea of giving an unelected official with close ties to Wall Street complete, unchecked power and $700 billion to take charge of the situation. The original draft, only slightly modified in the final legislation, said that “the Secretary is authorized to take such actions
¹⁵
as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation . . .”

Bailing out bad actors who took too many risks was exactly the wrong approach. The media's story line coalesced around a tale of Wall Street greed, unfettered profits, and a lack of regulation that ultimately brought the nation to its knees. Unfortunately, this version ignored the key players responsible for the financial meltdown, including politicians, the Fed, and the politically well-connected investment houses on Wall Street that would ultimately reap the benefits of a $700 billion taxpayer bailout. Perhaps the victors do write history, but ignoring the lessons of the last speculative bubble comes at a steep price. One outcome may be institutionalized bailouts going forward and a continuation of “too big to fail.”

TOO LITTLE, TOO LATE

W
HEN JOHN MCCAIN “SUSPENDED”
his presidential campaign to come back to Washington in the midst of the crisis, he could have single-handedly killed the bailout and offered an alternative that focused on the bad actors, including Fannie Mae and Freddie Mac, and securing an unstable banking system, unwinding the bad institutions, and ending the massive wealth transfers of taxpayer dollars under policies of “too big to fail.”

“I do not believe that the plan on the table will pass as it currently stands, and we are running out of time,” McCain told the press. “We must meet as Americans, not as Democrats or Republicans, and we must meet until this crisis is resolved
¹⁶
.”

Instead, both he and Democrat nominee Barack Obama essentially rubber-stamped the wishes of Congress and the White House.

It was an opportunity tailor-made for the Maverick to stand on good policy and political ground by taking on both Wall Street's bad actors and the political corruption of the housing market. It was, we believe, a unique opportunity for the sinking Republican ticket to revive its standing with the American people and distinguish itself from a discredited Republican establishment. But that didn't happen, and the McCain campaign never recovered. Republicans were tarred with TARP, even though the entire Democratic leadership had carried the legislation, on their terms, to President Bush's desk.

This unconstitutional abomination has since morphed into a many-tentacled monster, devouring two of the big three American automotive companies and blurring the once bright line between good and bad financial institutions. TARP socialized risk and enshrined “too big to fail” by propping up bad institutions, and even forcing sound banks into the same shamed status of a TARP recipient in order to protect the bad actors.

Every major policy proposal since, from the government “stimulus” spending bill (official estimate: $787 billion) to Obama's hostile takeover of our health care system (official estimate: $940 billion), has been built from a spending baseline of $700 billion. Nothing less than that is considered “serious” public policy. Any attempts to restrain the natural desire of legislators to spend, the last pretense of fiscal restraint, died on the day TARP was signed into law.

Personally, we find it hard not to blame Republicans for much of our current predicament. The Bush administration, aided and abetted by many Republicans in the House and Senate, virtually erased any practical or philosophical distinction between the two parties. Excessive spending, a new Medicare prescription drug entitlement, and a culture of earmarks—and the personal corruptions that naturally flowed from these addictions—destroyed the Republican Party's standing with the American people. This left many voters disillusioned and unmotivated, helping pave the way for the dramatic Democratic gains in November 2008.

The political response to the housing crisis and pursuant financial meltdown had a fundamental and irrevocable impact on the American economy, with politics and Washington advancing as markets retreated. Indeed, the massive government bailout turned the workings of the market upside down, transferring risk from Wall Street to the taxpayer. While doling out more than $700 billion to banks and investment firms, Congress has done little to avoid future financial meltdowns. The new mantra, “too big to fail,” has effectively ensured the banks and Wall Street that the government will be there for future bailouts. More than ever, taxpayers are at risk, faced with trillion-dollar deficits, trillions in liabilities, and implicit and explicit guarantees.

We argued then and still believe that TARP gives unprecedented and unconstitutional powers to the secretary of the treasury with little to no checks or oversight. This concern has been confirmed, again and again, by TARP's brief, erratic path since enactment. “Rather than making the policy choices necessary to guide the Secretary's discretion,” a legal analysis prepared for FreedomWorks notes, “Congress has given the Secretary far-reaching power
¹⁷
to intervene in the nation's economy and effectively to nationalize American businesses—upon the thinnest reed of statutory constraints. And in doing so, Congress has effectively chosen not to make law, but rather to make the Treasury Secretary the lawmaker.”

C
ONCEIVED IN
L
IBERTY
, I
GNORED IN
W
ASHINGTON

S
OME ARGUE THAT THE
Constitution is a “living document” and binding government action to its literal words is a quaint idea. Resolving the financial crisis supersedes any constitutional concerns, it was argued during the legislative debate over TARP. But the constitutional constraints placed on government power are particularly relevant during times of crisis. Once liberty is taken, it is seldom returned. Drawing on their firsthand experience with King George, the framers made the exercise of power difficult by design to protect liberty, to force deliberation, and to ensure accountability.

To protect individuals from an encroaching state, the framers drew upon the ideas of John Locke and Baron de Montesquieu—the chief intellectual fathers of the separation of powers
¹⁸
. The danger of a powerful executive is what led James Madison to warn in Federalist Paper 47 that the “accumulation of all powers . . . in the same hands
¹⁹
. . . may justly be pronounced the very definition of tyranny.”

It took then secretary Paulson just three months to remind us of the timelessness of this wisdom. With the $700 billion bailout, Congress gave him the authority to spend up to a quarter of the government's budget with virtually no oversight. And with blank check in hand, Secretary Paulson almost immediately began to spend our taxpayer dollars differently than he originally said he would. Indeed, the TARP Congressional Oversight panel has been severely critical
²⁰
about the lack of transparency and unwillingness of the Treasury to provide more information with respect to the allocation of funds, with Elizabeth Warren, chair of the panel commenting, “The American people have a right to know how their taxpayer dollars are being used, and so far, they have not gotten the transparency and accountability they deserve.”

The treasury secretary first funneled money directly to small and large banks and other institutions such as insurers and consumer lenders. Then he shifted the bailout's entire approach from purchasing assets to purchasing equity ownership stakes in troubled institutions. And in the most dramatic shift yet, with unambiguous disregard for congressional intent, the White House used over $17 billion of the funds to prop up failed Detroit automakers—after Congress voted against doing so. Paulson, upon changing his mind again, was blunt about his new czarlike powers. “While the purpose of [the TARP legislation] is to stabilize
²¹
our financial sector, the authority allows us to take this action.”

This is precisely the sort of action the framers intended to prevent when they deliberately separated powers between the branches of government: keeping the executive from exercising authority that runs contrary to the will of Congress. They intentionally gave the elected branch of government—Congress—the power of the purse and the power to write the laws. The executive branch is only supposed to execute those laws. They did this because, being elected, the legislature could be held more accountable by the voters, helping ensure it remained a government of, by, and for the people. We can kick a congressperson out of office every two years. We can't do anything about an unelected bureaucrat. Having lived under the rule of a monarch, the founders were all too familiar with the tyranny of the unelected.

In fact, the idea that the legislature could not simply give another branch its core responsibility of legislating was so foundational it was known by its own name: the nondelegation doctrine. The Founding Fathers knew they had to make this division of labor explicit because, being accountable to the people, legislatures would tend to want to hand off as many difficult and potentially controversial decisions as possible. And unelected bureaucrats, being human, would be happy to take as much power as others were willing to give them.

C
UTTING
O
FF THE
I
NVISIBLE
H
AND

A
S FOR THE TREASURY
secretary's desired role to become economic czar and CEO of the American economy, Nobel laureate F. A. Hayek's famous essay “The Use of Knowledge in Society” offers the best rebuttal. “
If
we possess all the relevant information
²²
,
if
we can start out from a given system of preferences, and
if
we command complete knowledge of available means, the problem which remains is purely one of logic,” Hayek argued. “This, however, is emphatically
not
the economic problem which society faces. . . . The reason for this is that the ‘data' from which the economic calculus starts are never for the whole society ‘given' to a single mind which could work out the implications and can never be so given.”

Hayek used this argument to dismantle the idea that socialist systems could supplant price discovery through the market process with well-meaning, smart bureaucrats. Markets, through their decentralized nature and their ability to incorporate the individual knowledge of time and circumstance, provide a far superior approach for coordinating the individual plans that drive economic growth.