Topic: Government and Politics

Toxic TARP: Mr. Geithner’s Takeover Targets

A front-page story in the February 23 Wall Street Journal describes a plan to let the government convert its preferred shares in Citigroup to common stock, taking 25-40% ownership.

It could be worse.  A brilliant February 19 Journal report by Peter Eavis warned that “Government capital injections sit like ill-disguised Trojan horses in the nation’s largest banks,” showing that under Treasury Secretary Geithner’s socialist scheming the government could seize 74% of Citigroup and 66% of Bank of America. Meanwhile, most other reporters kept claiming bank stocks collapsed simply because Geithner had left out a few details.  On the contrary, he said too much, not too little.

The newer Journal report says, “When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions… . Citigroup’s low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake could backfire, potentially spurring investors to flee other banks, even healthier ones [emphais added].”

Why is any of this a surprise?  Even before the scary “capital purchase program” was unveiled, I wrote in the October 20, 2008 issue of National Review that, “Conservative legislators who expressed fear about letting the Treasury buy mortgage-backed bonds were strangely enthusiastic about inviting the Treasury to acquire equity in companies.  Critics of derivatives became enthusiasts for warrants … which would give the Treasury secretary virtually unlimited power to confiscate the wealth of stockholders of any company foolhardy enough to play this game.” 

More recently, in a February 11 New York Post piece (subtly titled “A Plan to Kill Banks”) I explained that, “Once a bank or insurance company gets in bed with the government, the property rights of that company’s stockholders become uniquely insecure. When the government jumps into the cockpit, smart stockholders bail out.  And depressed stock prices deflate the banks’ capital cushion.”

If “few experts” predicted these consequences of Treasury purchases of bank preferred shares and warrants, then why are they called experts?

This Week at Cato: ‘Obama and Presidential Power: Change or Continuity?’

Will President Obama follow through on his campaign promises about executive power and oversee a more modest presidency that recognizes constitutional limitations? Or will the new administration end up expanding the powers of the presidential office?

Please join us Wednesday, February 25th at 12:00 PM to discuss the prospects and possibilities for the presidency in the Obama era.

The forum will feature Louis Fisher, Specialist on the Constitution, Law Library of Congress; and Jeffrey Rosen, Professor, The George Washington University School of Law. It will be moderated by Gene Healy, Vice President, Cato Institute.

Reserve your seat for this free event today. Lunch will be served after the event. For those who cannot attend, the forum will be simulcast live online.

Are Higher Taxes the Solution to Bloated Government?

I normally enjoy reading Jonathan Rauch and Bruce Bartlett. Rauch has written extensively about the failure of govenrment, and Republicans might not be in such terrible shape if they had paid more attention to Bruce’s book exposing Bush’s fiscal profligacy. Yet even though both of them seem to understand that excessive government is bad, they want to throw in the towel. Rather than redouble efforts to reduce - or at least restrain - bloated government, they argue that conservatives (and presumably libertarians) now should focus on how best to raise taxes to finance the welfare state. Here are excerpts from Rauch’s article, which seems almost entirely based on an interview with Bartlett:

For decades, everyone pretended to have a profound ideological disagreement about the size of government, but the reality was a comfortable standoff between 21 percent liberalism and 18 percent conservatism. In the end, both sides got what they most wanted: 21 percent spending for liberals, 18 percent revenues for conservatives – at the politically tolerable cost of a deficit averaging 2 to 3 percent of GDP. This result was handy for politicians and acceptable to the public. …Conservatives…face a doctrinal crisis. …Many conservatives insist that structural reforms of entitlement programs – benefit cuts, means-testing, privatization, and so on – could keep spending at or even below 21 percent of GDP going forward. Dream on, Bartlett says. …The only really workable option, Bartlett argues, is a value-added tax or its equivalent: a broad-based tax on consumption. “It’s the only way of preserving incentives and keeping the economy alive.” Because it taxes spending rather than saving or investment and is inhospitable to market-distorting loopholes, this kind of tax raises a lot of money at relatively low economic cost. Reaganites hate the value-added tax precisely because it is such an efficient cash cow. But Reagan, Bartlett contends, would have known better. Reagan was a conservative who admired FDR, and what he conserved was FDR’s welfare state. He understood that the most practical way to make government less economically burdensome was to grow the economy. …as Bartlett wrote recently in Politico, “Conservatives would better spend their diminished political capital figuring out how to finance the welfare state at the least cost to the economy and individual liberty.”

In effect, Rauch and Bartlett assert that the American right should copy the European right: Make peace with big government and raise taxes in order to keep the budget balanced. In the real world, though, that is a recipe for ever-growing government. What inevitably happens is that the left increases the burden of government, which leads the supposed right to acquiesce to higher taxes. But, as Milton Friedman famously warned, governments will always spend whatever they collect in taxes plus whatever amount of borrowing they think is politically and economically feasible. So every time the right capitulates to a tax increase, the left has more leeway to increase spending - which is one reason why the burden of government in Europe is significantly higher than it is in the United States. If the American right listens to Rauch and Bartlett, they will be like Charlie Brown in this youtube clip. Last but not least, I must quibble with this line from the article about Bartlett’s book:

Conservatives mistrust him because in the 2000s he broke publicly with President Bush, in a book called Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.

That’s not true. Republicans distrust Bruce because of this book. Conservatives distrust Bruce because he wants to be the tax collector for the welfare state. I’ve been buddies with Bruce for years, so I will not give up trying to help him see the truth. Fighting excessive spending with higher taxes is akin to pouring gasoline on a fire.

‘Tons of Jobs’ Opening Up in D.C.

Business Week reports that the national capital area is barely sensing the recession:

Washington is getting a boost from government spending to fight the recession and fix the financial system, as well as the ongoing expenses of fighting wars in Iraq and Afghanistan and promoting homeland security. While President Barack Obama pointedly left Washington for Denver to sign the $787 billion stimulus package on Feb. 17, locals expect the metro area to garner a big share of the dollars.

“Oversight alone will (mean) tons of new jobs,” enthuses Jill Landsman, a spokeswoman for the Northern Virginia Assn. of Realtors, who says the pace of home sales has picked up over the past year even as prices have continued to fall.

Cato analysts propose to slash jobs in Washington–at least 100 agencies and programs [pdf].  It’s no big mystery why tons of people in the capital oppose Cato proposals.