For the better part of the last century the trend has been for the lines separating big business and big government to slowly blur as the rights and liberties of individuals and small businesses slowly erode. This trend has accelerated since late 2008 at the onset of the credit crunch – which itself became inevitable after the government insinuated itself in the private sector mortgage business through such measures as the Community Reinvestment Act and the creation of quasi-government companies like Fannie Mae and Freddie Mac.
Now, the Obama Administration is reportedly considering levying a special tax on the nation’s largest banks and financial firms to re-coup some of the TARP bailout money for the U.S. Treasury. The furor this has caused on the part of business leaders, coupled with the outrage over last year’s special tax on the AIG bonuses is almost as amusing as it is alarming. It is amusing to see the same Wall Street executives who crawled, hat-in-hand, to the federal government for bailout money finally realize what we critics of the legislation had been warning all along: federal largesse always comes with strings attached; and that sometimes those strings can strangle those they were ostensibly meant to help. It is alarming to see how quickly the president and members of congress reacted to the public backlash caused by last year’s bonuses by passing a law more chilling (a blatantly unconstitutional bill of attainder which specifically targeted the bonus recipients) than any enacted by congress in recent memory. They are now considering a similarly unconstitutional tax on the banks themselves. This turn of events begs two simple questions: how did we get here? What went wrong?
Our modern banking and finance system can trace its earliest recognizable roots back to the Middle Ages. It was during this time that a coherent and workable system to finance long-distance trade developed to facilitate both pilgrimages to the Holy Land during the Crusades and the exchange of goods between distant and disparate cultures from Western Europe to Asia via the turbulent and dangerous trade routes in the Middle East. For this purpose bills of exchange were issued by entrepreneurial bankers in Italian cities such as Genoa and Florence, and by the mighty order of warrior-monks called the Knights Templar (named for their original role of protecting the church – or temple – of the Holy Sepulcher in Jerusalem) so that a traveler could deposit rather than carry cash or gold and be given a receipt or bill of exchange, before a long and dangerous journey. They could then, upon arriving at their destination, exchange this document for their wealth – minus a transaction fee. It was in this way that our modern system of international finance began.
Later, the role of banking expanded at the dawn of the Industrial Revolution as bankers and financiers were used by industrialists and entrepreneurs to raise capital from investors to start and expand companies which produced tangible goods and provided needed services. The point of all this is that in the beginning, the finance industry served a useful purpose for the broader economy and helped bring about economic opportunity and freedom to a growing middle class.
This, however, is no longer the case. Wall Street no longer represents merely a mutually beneficial meeting place between industry and investors. Instead, thanks to a toxic combination of greed, incompetence, and government meddling, many of Wall Street’s best and brightest spend their time cooking up complex and opaque financial instruments such as credit default swaps and derivatives whose primary purpose is to enrich speculators and circumvent taxes, not to finance growth in the broader economy.
This type of activity would be perfectly legitimate in a purely capitalist system under which the basic laws of risk/reward, supply/demand, caveat emptor, laissez faire government, and binding contracts prevailed. Unfortunately, thanks to big-government progressives and corrupt business leaders, our economic system no longer qualifies as capitalism. Instead we’ve created a grotesque caricature of Adam Smith’s vision which bears a greater resemblance to Marx’s the Communist Manifesto than the Wealth of Nations. What we have now is an insidious amalgam of historically discredited leftist economic and political systems such as socialism and fascism which favors an ever shrinking cabal of elites in government, business, and labor at the expense of an exhausted middle class groaning under the combined weight of this three-headed leviathan.
The result is a system where a massive and powerful labor union such as the UAW can contribute to the collapse of a once great company like General Motors by piling unsustainable cost obligations on the firm, then use its government connections to bail it out at taxpayer expense. We see a massive and powerful financial firm such as Goldman Sachs flood successive administrations with former executives, and then use this leverage to orchestrate the demise of its two biggest competitors, Bear Stearns and Lehman Brothers, and the bail out of insurer AIG to protect its multi-billion dollar investment during the credit crisis. And we see firms such as General Electric push the government to pass environmental regulations compelling citizens to buy its “green technologies” from energy-efficient light bulbs to windmills.
This type of system first reared its ugly head at the dawn of the “Progressive” era when, for example, the titans of the meat-packing industry pushed the government to establish onerous federal standards on their industry to bankrupt their smaller competitors who could not meet the increasing cost of compliance. It expanded under FDR’s New Deal and LBJ’s Great Society, with Nixon’s wage and price controls and the passage of CRA under Carter. It was briefly and modestly reversed by Ronald Reagan only to re-emerge under Bill Clinton and George W. Bush with such measures as CRA expansion and the Wall Street bailout.
Gone are the days of supply-side economics where a firm endeavors simply to produce a good product at a fair price absent government meddling. Looking to gain a competitive edge over smaller, less-connected competitors, the captains of industry invite and encourage government intervention in the free-market economy, then bristle when the government intrudes on their own prerogatives. We then see ever greater and more intrusive measures by a political establishment seeking greater control of the means of production and wealth creation as a means of re-distribution using the public backlash against corporate excesses as a pretext.
This process is reminiscent of the scene in the movie Goodfellas (scroll ahead to 6:00) where the hapless restaurateur invites the mafia boss (Paulie) to be his partner in order to protect him from the mob’s own thug (Tommy). What the businessman did not anticipate was that once they gained an interest in the firm, the mob would systematically destroy it from within while repeating the line, “f-you, pay me.” And like a once-legitimate business getting mixed up with the mob, any business that gets in bed with the government is, by definition, the junior partner. Business leaders have only themselves to blame for this mess in which they find themselves.
The only remedy for this problem is for business leaders at all levels to re-dedicate themselves to competitive, free-market principles and forswear any and all government intervention and help and for Republicans, as the center-right party in America, to re-dedicate themselves to the founding principles of limited government and laissez-faire economics. For if current trends continue the legacy of individual liberty the citizens of this country have enjoyed for generations will be crushed by the imploding bulk of this axis of greed comprised of the leaders of big labor, big business, and big government.