The Crony Capitalist Threat to Our Economic Freedom

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Posted: Apr 21, 2010 10:34 AM
Guest post from Conn Carroll with the Heritage Foundation

The Obama administration’s game plan for passing their financial regulatory reform plan is clear: ignore the details of their bill, demonize Wall Street, and cast conservatives as the pawns of big bankers. But as Politico reports today, there’s a complication in their battle plan: “The Democratic Party is closer to corporate America — and to Wall Street in particular — than many Democrats would care to admit.”

Politico should be commended for acknowledging the left’s cozy ties with corporate America, but then they go on to write: “Some Democrats acknowledge that the legislation — and the harsh anti-Wall Street rhetoric — could cost them campaign contributions from the financial services sector in what is already shaping up to be a tough election year.” This is just flat wrong. As evidence and logic clearly demonstrate, the left’s harsh anti-business rhetoric and glee for expansive regulation is a boon to their campaign coffers. As USA Today reports, Goldman Sachs alone has given nearly $900,000 since January 2009 to congressional candidates, and according to the non-partisan Center for Responsive Politics, 69% of the firm’s contributions went to Democrats while 31% went to Republicans.

In fact, Goldman is not opposed to Obama’s Wall Street Bailout Bill at all. As a Goldman official told Politico Monday:  “We’re not against regulation. We’re for regulation. We partner with regulators.” This echoes reporting done by The Huffington Post on loopholes in the banking bill. HuffPo was told by a financial services lobbyist:[# More #]  “Obtaining a carve-out isn’t rocket science. Just give Chairman Dodd (D-CT) and Chuck Schumer (D-NY) a ****load of money.” And loads of money is what Wall Street has been giving to the authors of the Wall Street Bailout Bill. The Wall Street banker at the center of Goldman’s SEC fraud complaint recently solicited money from his banker friends for Sen. Schumer describing him as “one of the few members of Congress that has consistently supported the hedge fund industry.”

Sens. Dodd and Schumer are not the only ones colluding with bankers to profit from American taxpayers. Majority Leader Harry Reid (D-NV) scored $37,000 from a January fundraiser that included Goldman executives. And The Washington Examiner has detailed that not only did President Barack Obama receive seven times as much money from Goldman employees as President Bush did from Enron employees, but then-candidate Obama’s $950,000 2008 total from Goldman executives and employees is the most a politician has raised from a single company since campaign finance reform. It’s also more than the combined Goldman haul of every Republican running for president, Senate and the House.

There is a term for the Obama administration’s practice of using their government power to play favorites in the private sector: crony capitalism. Former vice president at the Federal Reserve Bank of Dallas Gerald O’Driscoll writes in The Wall Street Journal:

The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.

Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

It is because of these crony capitalist policies that the United States has dropped out of the exclusive club of free economies and was graded “mostly free” for the first time in the Index of Economic Freedom’s 16-year history. As Heritage’s Center for Data Analysis Director Bill Beach explains, this has a real impact on the lives of Americans:

While the U.S. economy undoubtedly is righting itself from the most severe recession since the 1930s, it is doing so at a glacial pace. Clearly, the burden of public policies that reduce the free use of personal property and retard the unsubsidized risk taking of entrepreneurs are lengthening the recovery process. The real cost of this sluggishness are the millions of unemployed Americans who continue to wait for the return of economic spring and the millions more who hope for a better economic times. The real source of this human cost – the real driver of persistent economic want – is the erosion of our economic freedom caused by these government policies.