by Dick Armey
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 actions15 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
WHEN 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 resolved16.”
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 power17 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.”
CONCEIVED IN LIBERTY, IGNORED IN WASHINGTON
SOME 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 powers18. 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 hands19 . . . 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 critical20 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 stabilize21 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.
CUTTING OFF THE INVISIBLE HAND
AS 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 information22, 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.
Not surprisingly, the Obama administration’s enthusiasm for the discretionary power of the program, originally scheduled to sunset in December 2009, has not waned. Treasury Secretary Timothy Geithner readily sent the pro forma letter to Congress required to extend the life of the program for two more years. The Democrats now in power seem intent on using TARP as a slush fund for various pet projects.
COALITION OF THE UNWILLING
THE DAY AFTER PAULSON released his sweeping plan, FreedomWorks quickly connected with other free market groups to assess their willingness to fight. It was a surprisingly small group. But a principled few stepped up, notably Andrew Moylan of the National Taxpayers Union. The Club for Growth and the Competitive Enterprise Institute also weighed in, and Dan Mitchell at Cato and the folks at Reason.com offered much needed policy support. The groups joined forces with a few free market Capitol Hill staffers who also were feeling remarkably isolated in their efforts to stop the massive government bailout.
Many groups that would traditionally fight such a massive outlay of taxpayer funds to irresponsible businessmen were sitting this one out, on the sidelines. Others would actually support the Republican administration’s efforts. The diffidence of many of our usual allies was striking.
Much of the recalcitrance from right-of-center organizations seemed to be driven less by principle or substantive policy analysis than by a reluctance to challenge a Republican president—even one who had been a great disappointment on the key issue of fiscal restraint. Were some more concerned with maintaining a relationship with the Republican White House than promoting the principles of limited government? We did not know.
Another problem is that it is much easier to pick sides—Democrat or Republican—and go along with whatever the leaders say. This is a simpler path than trying to think through each issue based on facts and principles. The more years one spends in Washington, the more tempting this path of least resistance looks. Plus, there are a lot more jobs for party loyalists than there are for those of us who are constant thorns in the side of the establishment because we have principles—as if that’s a bad thing.
Some free market grassroots groups were conflicted, holding public debates within their own organizations in an attempt to maneuver around various relationships with the Bush administration, politicians in Congress, candidates, and financial interests. They used the same flawed logic many on Capitol Hill used to convince themselves to support this giant government power grab: We must do something to address this crisis. This legislation is something; therefore, we must do this.
Days prior to the vote, FreedomWorks delivered our letter of opposition to the Hill—a “key vote notice.” This is a powerful tool in the arsenal of grassroots groups. Organizations like ours issue these on almost all major pieces of legislation. They outline our argument for or against a bill and let the members of Congress know we will track their votes and let all of our members know exactly how they voted. It’s one of the ways we help our members hold their representatives accountable and, we think, make our democracy function better by increasing transparency.
We were alarmed by how few of our erstwhile allies issued similar statements. Shortly before a vote there is usually a flurry of such letters, and it is usually many of the same groups taking the same position. We saw far more letters on far less significant bills.
The usually reliable Heritage Foundation ended up endorsing the TARP legislation. On September 29, 2008, Heritage vice president Stuart Butler and former attorney general Ed Meese coauthored a brief entitled: “The Bailout Package: Vital and Acceptable.” “The constitutional questionability of some provisions is worrying23, as is the centralization of power,” the authors argued. “Nonetheless, the situation is so grave that we must take unusual measures now and accept some negotiated arrangements that remain very troubling, provided they are limited in extent and time and are not accepted as a permanent part of our government.”
Perhaps some found the words of the Heritage Foundation in favor of the bailout more persuasive than our words against it.
Other groups decided not to get involved. How they could claim to be staunch defenders of limited government and not get involved was beyond us. But what surprised us the most, along with the Heritage Foundation’s endorsement, was the endorsement of the House bill by Americans for Prosperity (AFP), an organization whose Web site claims they “engage citizens in the name of limited government and free markets.”
AFP released the following statement on the Economic Emergency Stabilization Act (EESA), the bailout bill that included TARP:
AFP RELUCTANTLY SUPPORTS EESA
The Emergency Economic Stabilization Act is far from a perfect bill, although some of the worst aspects of earlier drafts have been removed, including the so-called affordable housing trust fund, the say-for-pay rules, and proxy access provisions. Still, t
he EESA does nothing to address the causes of the current crisis and it carries a frightening risk of permanently increasing the role of government in the economy, which could lead to worse market distortions and future crises. We shudder at the thought of Congress and bureaucrats controlling our country’s credit markets. Interest group politics could be injected into every aspect of economic life. . . . The current crisis, however, is grave. There were other options that deserved greater consideration, but the choice today is the EESA or inaction, and inaction is not a good option24.
It was one of the strangest, most intellectually tortured endorsements we have ever seen released by a self-described free market organization. While Americans for Prosperity’s endorsement of the bill helped provide the political cover Republicans would need to switch their no vote to a yea, the statement was at least prescient. The legislation has failed to address the fundamental problems responsible for the crisis. In fact, at best, the program is a poor attempt to hold harmless bad actors accountable and delay the necessary corrections the economy requires. And the frightening risk of expanding the government’s control of the economy has proved to be very real. The bailout program continues, and the Treasury Department has virtually unlimited discretion in its allocation of these funds.
The long, lonely campaign, first against the GSEs, then the housing bailout, and ultimately the Wall Street bailout, revealed just how few friends the cause of liberty actually enjoys inside the Beltway when it really matters. At each step there were fewer and fewer with us in Washington. But a growing, soon-to-be Tea Party movement had been awakened that would result in more allies than we had ever dreamed possible.