Big Government and Big Business Can Mean Big Trouble for the Public

Writing in Forbes, AEI’s Karlyn Bowman highlights the low regard most Americans have for Washington and Wall Street:

In 2010 55% told Gallup interviewers that the honesty and ethical standards of members of Congress were low or very low, the only time a majority has given that response since the question was asked first in 1976. Only 9% described them as high. A new Fox News Opinion Dynamics poll found that most people thought that elected officials were more interested in power and wealth (67%) than in public service for their constituents (14%). …

Politicians aren’t the only ones whose ethics are held in such low regard. Americans’ opinions of the honesty and ethical standards of businesspeople aren’t high either. In Gallup’s 2009 polling just 19% said the honesty and ethical standards of bankers were high; 12% felt that way about business executives, and 9% about stockbrokers. Stockbrokers were tied with members of Congress. Both ranked only slightly above HMO managers (8%) and car salesmen (6%), who took last place in the poll. Compare these responses with the views of the honesty and ethics of nurses, who topped Gallup’s list: 83% of respondents said their standards on this score were high.

If only Americans’ low opinion of politicians and big business would translate into a skepticism about how much power we should grant government. After all, it’s no surprise that many businesses focus on finding ways-often ways that are unethical if not illegal-to influence policymakers when government has so much for sale. Policymakers can give out favors to big business in the form of tax breaks, earmarks, specific programs and mandates, and of course, through regulations. It’s no wonder that businessmen feel as though they have no choice but to pay attention to what’s going on in Washington and curry favor with influential politicians.

People should keep this in mind particularly as Congress embarks on financial service regulation and other efforts which will undoubtedly be dubbed as “cracking down on Wall Street.” As Peter J. Wallison and David Skeel write in today’s Wall Street Journal, by giving government the power to oversee how failing banks and other financial institutions are handled (instead of relying on the legal system and bankruptcy courts, as was done in the case of Lehman Brothers failure), the process is sure to become more political, less effective, and worst of all, it will encourage additional risk taking because lenders will be shielded from many of the losses when an institution goes down. They write:

The difference between the Lehman bankruptcy and what the Dodd bill proposes is important to understand. The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms, that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out. That’s what these outside funds are for. But if the creditors are to take most of the losses-as they did in Lehman-a fund isn’t necessary.

Which system is more likely to eliminate the moral hazard of too big to fail? In a bankruptcy, as in the Lehman case, the creditors learned that when they lend to weak companies they have to be careful. The Dodd bill would teach the opposite lesson. As Sen. Richard Shelby (R., Ala.) wrote in a March 25 letter to Treasury Secretary Tim Geithner, the Dodd bill “reinforces the expectation that the government stands ready to intervene on behalf of large and politically connected financial institutions at the expense of Main Street firms and the American taxpayer. Therefore, the bill institutionalizes ‘too big to fail.'”

Mr. Shelby is right on target. It doesn’t matter where the money comes from-whether it’s the taxpayers or a fund collected from the financial industry itself. The question is how the money is used, and if it is used to bail out creditors of large firms-reducing their lending risks-it will encourage large firms to grow ever larger.
Like Fannie and Freddie, these large financial firms will be seen as protected by the government and, with lower funding costs, will squeeze out their Main Street competitors. Then, if these financial giants are on their way to failure, they are handed over for resolution to a government agency that has no experience with firms of this size or complexity. Surely the Senate will see the flaws in this idea.

Let’s hope an already cynical American people does too.