During the campaign, I wrote a column saying that Barack Obama was not a socialist, when the accusation that he was became pervasive in certain conservative haunts.
To me, some distinctions are valuable to maintain. And there is a very important difference between even a heavily regulated and taxed system of democratic capitalism and socialism. Obama was proposing the former, not the latter.
Nevertheless, there are some highly critical lines that should not be crossed if the essential character of our system of democratic capitalism is to be maintained. Treasury Secretary Timothy Geithner has proposed to cross one of them.
Geithner has proposed that the federal government be given the authority to take over financial institutions that, in its judgment, pose a systemic risk.
After taking over the company, the federal government would have unlimited power to do whatever it wants. It could override the rights of shareholders and abrogate obligations to and contracts with employees, creditors and customers. All the normal legal rights of these other parties would be extinguished.
This is basically the confiscation of private property without compensation or due process.
Companies which the federal government fingered for takeover could appeal to the courts for review. But since there are no normative standards to restrict such takeovers, it’s a subjective judgment of the regulators and there’s no real basis for appeal.
Moreover, there’s no point. A company so designated by the federal government is toast. There’s nothing a court can give it of any value at that point – except compensation, which isn’t a remedy permitted under the Geithner proposal.
Geithner says that his proposal is patterned after the resolution authority of the Federal Deposit Insurance Corporation over banks. But there is a critical difference.
The FDIC insures deposits at such banks. Such banks receive a competitive advantage in attracting capital in exchange for subjecting themselves to the FDIC’s resolution authority.
Geithner’s proposal is at least arguably unconstitutional. It would certainly be found to be so if we had judges who placed as much importance on protecting property rights as did the founders.
Regardless, the proposal puts too much power in the hands of fallible regulators. The handling of all the various bailouts to date hardly inspires much confidence.
Regulators have handed out hundreds of billions of dollars and shredded shareholder equity in several companies to stem a systemic risk they’ve never been able to coherently or cogently define. Moreover, what has been disclosed, for instance about AIG’s counterparties, severely undercuts some of the claims of systemic risk.
The proposal also is fundamentally unfair. Fannie Mae and Freddie Mac didn’t want to be taken over by the federal government. They thought they could still make it.
Then Treasury Secretary Henry Paulson made the decision to take them over anyway, even though it wasn’t legally his decision to make.
Fannie and Freddie may have been wrong. But their shareholders and management should have had the chance to try.
My solution is to let big boys fail. The Lehman Brothers bankruptcy is claimed to be evidence against that approach. But in his recent book, “Getting Off Track,” Stanford economist John Taylor makes a convincing case that the Lehman bankruptcy did not, in fact, add significant stress to the credit markets.
If additional regulation is to be the response, then regulating behavior is in keeping with our system of democratic capitalism. If leverage is thought to pose excessive systemic risk, then limit leverage. If opaqueness is a risk, then increase disclosure requirements.
But allowing the federal government to preemptively confiscate private property and abrogate contracts without due process or compensation is a radical departure.
It may not be socialism, per se. But it’s a giant and dangerous stride away from being a civil society dedicated, in part, to the protection of private property rights.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: firstname.lastname@example.org