“There’s nothing so permanent,” Milton Friedman famously said, “as a temporary government program.” For instance, I grew up in a rent-controlled apartment thanks to a temporary measure enacted during WWII. I was born nearly three decades after the war ended.
Let’s hope that the partial nationalization of America’s banking system isn’t equally “temporary.”
In a dramatic meeting Monday between Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke and the heads of the nine biggest banks, the U.S. government made the financial industry an offer it couldn’t refuse: Uncle Sam is buying big chunks of your banks whether you like it or not. Paulson didn’t say, “I can either have your signature on this contract or your brains,” the way Don Corleone explained things to Johnny Fontaine’s bandleader in “The Godfather,” but you get the picture.
Extraordinary crises sometimes require extraordinary measures. The danger is that the extraordinary could become merely ordinary.
Fannie Mae and related institutions were created during the New Deal to help expand homeownership. It was — and is — a laudable goal, and the government can point to some real successes, particularly when such programs were fundamentally conservative in their practices. But even then, the government was simultaneously subsidizing bad risks — hence making them seem less risky than they really were — while delaying the day when those toxic loans would reach critical mass.
We’ve hit that day, and it has cost us trillions of dollars.
The Bush administration’s shock trauma team has been doing things they once considered unimaginable and even today find philosophically repugnant. But again, we do things to patients in an emergency that we would never do when they’re healthy.
The federal government’s mandatory quarter-trillion-dollar buy-in to the American banking system, we’re told, is a temporary measure. The terms of the loans rammed down the bankers’ throats are designed to encourage them to pay it all back within five years.
But who says those terms will stay that way? After all, the government now has a more real and explicit ownership position in these “private” banks than it ever did in Fannie and Freddie, which were so-called Government Sponsored Enterprises. More important, the Bush team is heading out the door. When the next squad comes in, they might discover they like being co-owners of America’s banking system.