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Sunday, March 26, 2023

Too Big To Fail–Historical Revisionism, Idealism, And The Rise Of Big Government

A lot has been made lately of the idea of ‘too big to fail’.  Two large American banks – SVB and Signature - have failed through every fault of their own, but have been bailed out by the taxpayer to the tune of billions of dollars.   The banks should have known that whatever goes down must eventually go up, but they they parked their mandated reserves in treasury bills, assuming they could sell them if needs be.  Not only that but as Larry Summers has pointed out, they borrowed short term money and invested it in long term bonds.

Lo, and behold, the Fed began to raise interest rates, making the banks’ holdings worth far less than what they paid for them.  Despite the risk – treasury bills are ordinarily a safe haven, but given Fed volatility, no longer– most of the banks’ capital was parked there instead of short term, easily convertible assets.  At the very least, they should have hedged their bets.

Ingram Pinn illustration

Meanwhile a crisis in investor and consumer confidence was beginning to rattle the tech markets, and  shaky silicon valley start ups – over 80 percent of these failed banks’ depositors – wanted their money back, money which the banks no longer had.  Investors also began to realize that ESG (Environment, Social, Governance) firms were losing money, the demand for their services declined sharply, and they told the failing banks that they too wanted their money.

Environmentalist hugging tree - Stock Image - F032/3703 - Science Photo  Library

In order to stanch the financial hemorrhage and to increase investor confidence, the Biden Administration – despite the lessons of 2008 – decided to bail them out.  They simply were too big to fail.

Liberals in Congress and in other corridors of power applauded the move.  Not only would the banking industry and its depositors and borrowers be saved, but the role of big government would be enhanced.  Although there were banks larger than SVB and Signature quire willing to take them over, clean them up, and make an eventual profit, the federal government said such mergers would be monopolistic and bad for business.

Of course the real reason was that the progressive establishment wanted the financial industry to be a government enterprise.  Through bailouts, federal watchdogs, and increasingly punitive regulations, the banking industry would soon be nationalized.

Once private banks become de facto public institutions, government can determine to whom they lend and how.  This government, for example, might want the new SVB to return to its ESG ways; and even if these environmentally friendly companies lost money and saw their shares lose value, continued support would be seen as ‘in the public interest’. Protecting the environment is a good thing, ipso facto and absolutely; so deficit spending a la American taxpayer to support a critical industry would be worth effort.

Similarly government would ‘influence’ Wall Street investment banks to withdraw from companies thought to be anti-progressive.  Oil exploration, exploitation, refinement, and transport could well be curtailed in favor of investment in alternate energy sources, however unprofitable they might be.

SolarCity and Vivint pulled out of Nevada. Is solar power losing at the  state level?

So where does this economic idealism come from? Dirigisme – an economic doctrine in which the state plays a strong directive (policies) role contrary to a merely regulatory interventionist role over a market economy, is not a new idea. 

As an economic doctrine, dirigisme implies a positive role for state intervention in curbing productive inefficiencies and market failures. Dirigiste policies often include indicative planning, state-directed investment, and the use of market instruments (taxes and subsidies) to incentivize market entities to fulfill state economic objectives.

Dirigisme has never worked in the United States and with few exceptions – e.g. Barack Obama’s multi-billion dollar taxpayer investment in Solyndra, a private solar energy firm which subsequently went bankrupt – but progressives have never lost their faith in government interventionism.

Where does this misplaced optimism come from? State financial monopoly and economic socialism have never worked.  The Soviet Union, perhaps the biggest example of the failure of a command economy, established and maintained complete control of the economy of its several republics.

The Soviet politburo and its apparatchiks determined when, at what cost, when, how and in which republic to put the nickel smelter, the cobalt mine, the oil refineries, shipbuilding, tractor production, etc. Without market forces which winnow the chaff from the wheat, the least productive industries were supported on a par with the most.  Investment, all a matter of drawing down the state treasuries and printing money, was an inherently failed enterprise.

Russian leaders unite as they review a parade from the rostrum of the...  News Photo - Getty Images

In the early 90s Deng Xiaoping revolutionized the Chinese economy rejecting the Communist model and replacing it with an open-market, free enterprise, capitalist system.   China’s economy quickly grew, and while the federal government has used public funds to support certain industries or companies, such support is small by comparison to the activities of the private sector.  Countries which still adhere to the old Soviet economic system – Cuba, North Korea, and Venezuela under Chavez and Maduro – are economically failed states.

Some liberal historians look to FDR and his rescue of America during The Great Depression.  His ambitious, all spigots open, deluge of public monies into the depressed economy was the reason why the state of the union was restored.  Conservative economic historians point to the FDR era as the birth of Big Government and the perpetuation of the myth of its all-encompassing, beneficent, reforming nature.  

The Constitution’s Preamble, however, says the federal government was established (and the Constitution was adopted) to “form a more perfect union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” Jefferson, Hamilton, and Adams never intended an interventionist government, smacking as is it did of the monarchist regimes of Europe from which new Americans fled. 

The economy was to be private, individualist, entrepreneurial and left to its own devices.  Government would step in to assure justice, to adjudicate disputes, and to facilitate productivity within the rule of law and in so doing would promote the general welfare.  Nothing more.

Political Cartoon U.S. biden fdr big government

The Biden Administration has revived the myth of Big Government, expanded it, and invested in it.  His policies have been disruptive if not damaging to the economy.  His border policy – or lack thereof – has been a total failure.  Rather than control the border and establish policies that reflect supply and demand, he has opened the doors with no national interest in mind.  

Before his inchoate policies were established and thanks to NAFTA, the movement of Mexican labor was self-regulated.  When the economy of Mexico began to grow, there was an out-migration from the United States. When low-skilled labor was in demand in the United States, there was a significant in-migration.  While some order and border discipline is required, the free movement of goods and labor cannot be ignored.

Biden’s energy policy has been equally shortsighted.  His concerns for ‘the environment’ have put the United States in a seriously compromised energy position, leaving the country exposed to the volatile energy market abroad.

His attempts to reform the social mores of the country – promoting and enforcing a radical gender policy to which many if not most Americans are opposed, dividing the nation on the basis of race, and shutting down free speech in the name of social justice – have been abject failures. 

His Congressional and academic supporters have longed for a muscular government interventionism, enforcing political philosophy by any means possible, and they see change coming.

Big governments have always failed because of the subjective, prejudicial, and arrogant assumptions of right action; the inherent inefficiency of bureaucracies and public sector institutions never held to accountability, and their common, perennial, never-ending profligate spending.

‘Too big to fail’, the taxpayer rescue of undeserving banks, is not only fiscally and financially unsound, but if there was ever a moral hazard, it is here.  If banks know that all deposits will be insured and that they will be rescued in dire times, they will take unreasonable risks, make bad investment decisions based on intuition and philosophy rather than hard economics.

It is time to roll back big government and return it to its Constitutional roots.

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