The View From 1776
Thursday, March 19, 2009
Publicly Berating Bankers and Businessmen Has Consequences
Fanning the flames of public outrage, abrogating legal contracts, and punishing businessmen with punitive, ex post facto taxes deepens a recession.
The Wall Street Journal editorializes:
By shouting “greed” in a crowded and panicky Washington, our supposed financial stewards thus gave license to everyone in the media and Capitol Hill to see who could claim to be most shocked and appalled at AIG.
We’ve now got a full-fledged mob on our hands, with Congress looking to string up bankers in whatever bunker they can be found. Senators Chuck Grassley and Max Baucus want to double the current income tax on these bonuses, to 70% from 35%, and that’s one of the more reasonable proposals. Congresswoman Carolyn Maloney, the Democrat from silk-stocking Manhattan, wants to tax it all—at 100%...
One consequence will be that every bank executive in America will try to repay his Troubled Asset Relief Program, or TARP, money as rapidly as possible. The political punishment for accepting public money is becoming higher than the benefits of the extra capital cushion…
For the larger banking system, however, this is exactly the wrong time to be shedding capital. The main point of the TARP was to backstop the financial system against systemic failure…
The worst mistake [President Obama] can make is to deflect attention away from government’s mistakes by joining the attack on the very bankers he needs to lead an economic recovery. That’s how a deep recession becomes a Depression.
President Obama, nonetheless, is ignoring history and emulating FDR’s 1930s New Deal.
President Roosevelt denounced businessmen and investors as “economic royalists,” “privileged princes” and “economic dictators,” leading businessmen and bankers to believe that ramping up production and hiring more workers was too risky. In addition to the problem that New Deal regulations prevented reducing costs enough to produce at a profit, businesses did not expand and rehire, because they were in perpetual uncertainty and fear about what FDR would do next. As a consequence, private investment was at historically low levels during the New Deal era.
Robert Higgs, in Depression, War, and Cold War (2006), writes:
Accepting his party