2008 - The Year of Government Bailouts

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As Americans are anxious to see that their nest eggs are there for them when it comes time to retire, the 2008 election may be going into history books as the 401(k) election.

 The year 2008, however, is earning itself a more dubious distinction, and may well be dubbed the “Year of Government Bailouts.”  What started with Bear Stearns and then continued with Fannie Mae and Freddie Mac, AIG, and the passage of the financial markets bailout package passed by Congress at the end of September 2008, has left taxpayers to pick up a massive tab. But beyond that, it has also turned into the launching pad for calls for government to assume even greater control over the financial market, opening the door for regulatory overkill and irreversible damage to our economy.

 However, the financial crisis of 2008 is not a result of careless deregulation and certainly not proof of the failure of the free market system – quite the contrary is the case. 

The “Four Horsemen” of the Financial Crisis – as Americans for Tax Reform has put it, bearing much of the blame, were the following:

• Government-sponsored enterprises (GSEs)
• Easy money from the Federal Reserve
• The Community Reinvestment Act
• Mark-to-market Accounting Rules

Click here for more information.

 The Center for Fiscal Accountability opposed the Treasury bailout package, and is including all votes for the bailout package in our ratings as negative votes.  Read our statement of opposition.

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Where Do We Go From Here? Guiding Principles

Following are some principles that should serve as a guide for lawmakers and regulators in the coming months. 

1. Don’t Perpetuate Moral Hazard

While it is too late to undo part of the damage done by the series of government bailouts, the bailout mania has to stop now. 

Regardless of the legislation Congress passed, it is not the business of the federal government to be the insurer of last resort.  If a company, or a household for that matter, takes on an obligation it can no longer afford, there must be consequences. There’s no such thing as “too big to fail.” One company’s downfall is another company’s bargain purchase. That’s what Joseph Schumpeter called “gales of creative destruction.” Choppy as it can be, this “creative destruction” is what causes America’s abundant prosperity.

The bailout package has created a horrible public policy precedent.  Already, industries are lining up to claim their government handout.   Over time, the government’s calming of Schumpeter’s creative gales will result in a poorer America more dependent on the state, and this is a development that must be stopped in its tracks.


2.  Transparency in the Bailout Implementation is Paramount

With the vote on the financial market cast and the implementation of the “Emergency Economic Stabilization Act of 2008 underway, it is paramount that every financial transaction made in relation to an impending deal should be made available for taxpayer scrutiny in a timely fashion.  The federal government has proven its ability to create a comprehensive searchable website for federal grants and contracts by creating www.USAspending.gov.

This requirement is timely, because already, we’re seeing reports on provisions of contracts relating to the bailout package being blacked-out.

If taxpayers are put on the hook for absorbing the cost of a bailout, they deserve the same level of fiscal accountability regarding every tax dollar that is put on the line. 

While forward-looking transparency on these transactions is key, more retroactive transparency is also warranted. 

Since the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac bear a large share of the responsibility for the current financial panic, any bailout legislation must contain provisions that require full retroactive transparency for these enterprises.

For the sake of transparency and accountability, any agreement should require that all internal documents, written communications, personnel contracts and expenditures of Fannie Mae and Freddie Mac, for the entirety of the Clinton administration (1993-2000) and Bush administration (2001-2008) be made available online for public scrutiny. 

3. Don’t Rush to Conclusions – Implement “Cool Off” Periods

While the pressure is on lawmakers and regulators to overhaul the nation’s financial system, reform proposals must be carefully scrutinized by the experts, and by taxpayers who are picking up the tab.  Therefore, any reform proposal should be posted on the Internet in an easily accessible fashion, and a vote-free “cool-off period” of at least five business days should be applied to any piece of legislation moving through Congress.  Technology makes it possible for allowing public comments in the document posted online. Amendments to the proposals should reset the clock and another “cool-off-period of five business days should kick in which no votes can be taken.

4. Conflicts of Interest

Conflict of interest is an issue that looms large as the financial markets bailout is implemented.  In this context, it is in the interest of taxpayers that nobody who used to work for a company that stands to benefit from the bailout should be in charge of handing out the money.  But beyond that, no company receiving bailout money should serve as a second career for any bureaucrat in charge of bailout implementation.

5. Focus on Pro-Growth, Free Market Solutions for our Country’s Future

Many of the needed reforms cannot happen over night.  While suspending mark-to-market rules until they can be re-written would be ideal, the Securities and Exchange Commission is currently merely looking to examine the controversial accounting standards. 

Full repeal of the Communities Reinvestment Act (CRA) likely is a long-shot. However, the main culprit of the financial crisis as it relates to the CRA is a regulatory regime put in place by the Clinton Administration, which should be undone in due process.

In the long run, broad based reforms need to focus on pro-growth, free market policies that include low tax rates and controls on government spending.  

In light of a widespread misrepresentation of the root causes of the financial crisis, the danger of more government intervention and a resulting regulatory overkill looms large. The free market is not dead yet, but we must tread with caution and not overreact so to not suffocate the forces of freedom that have made this country great.