Obama hobbles corporate borrowing to foster reliance on bailouts and force firms to "come crawling to the government"

At the 1986 White House Conference on Small Business, President Ronald Reagan offered these famous remarks about politicians' views on business in the 1970s. Reagan said, "Back then, government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Amazingly, in that speech nearly 25 years ago, Reagan also summed up perfectly the Obama administration's view of the economy in the present. On Thursday, President Obama announced that the government is providing a loan guarantee of $250 million to Ford Motor Co. from the Export-Import Bank. In making the announcement, at a Ford assembly plant in Chicago, Obama also defended billions of dollars in TARP bailouts to Ford rivals, General Motors and Chrysler, that he continued from the Bush administration.

Not mentioned by Obama, and not picked up in media coverage of the new $250 million loan, is a new regulatory measure signed into law by Obama just three weeks ago, which nearly stopped a $1 billion bond offering by Ford

Just days after Obama signed the Dodd-Frank so-called financial reform bill (here is my general overview for TAS of the Dodd-Frank monstrosity), Ford found that it couldn't issue a bond to allow it to finance more credit for its customers. The reason, as reported by AOL Daily Finance, is that Dodd-Frank "fixed" the problem of poorly researched credit ratings by designating the three big rating agencies as "experts" subject to the same liability as professionals such as auditors. Since the Securities and Exchange Commission requires that bond offerings have a credit rating, Ford's venture became a no-go.

The SEC fixed this problem temporarily by allowing Ford and other companies to issue bonds without rating for six months. But after that, according to experts quoted in the article, the trouble will resume unless there is a permanent fix to Dodd-Frank's "fixing" of the credit rating system.

It is not known if Ford's decision to take this government money -- after honorably refusing a TARP bailout when it was offered two years ago -- is related to expected regulatory troubles in the bond market.

But what is predictable is that the more frustrating the obstacles the government puts in front of businesses, the more some firms will come crawling to the government for bailouts -- and the more that firms will kowtow to the prevailing government's agenda and be politically connected, should they ever need this lifeline.

If Obama's gigantic interventions go bad, aroused Americans will be looking for a 21st century version of the guillotine

Chart source: Professor Mark Perry at Carpe Diem.


By David Brooks in the New York Times:

When historians look back on the period between 2001 and 2011, they will be amazed that a nation that professed to hate bureaucracy produced so much of it.

First, Democrats passed a health care law. This law created 183 new agencies, commissions, panels and other bodies. Democrats also passed a financial reform law. The law that originally created the Federal Reserve was a mere 31 pages. The Sarbanes-Oxley banking reform act, passed in 2002, was only 66 pages. But the 2010 financial reform law was 2,319 pages, an intricately engineered technocratic apparatus. As Mark J. Perry of the American Enterprise Institute noted, the financial reform law is seven times longer than the last five pieces of banking legislation combined.

Once again, government experts were told to take a complex, decentralized system — in this case the financial markets — and impose rules, rationality and order. The law creates one über-panel, the Financial Stability Oversight Council. It directs government experts to write rules in 243 separate areas.

This progressive era amounts to a high-stakes test. If the country remains safe and the health care and financial reforms work, then we will have witnessed a life-altering event. We’ll have received powerful evidence that central regulations can successfully organize fast-moving information-age societies.

If the reforms fail — if they kick off devastating unintended consequences or saddle the country with a maze of sclerotic regulations — then the popular backlash will be ferocious. Large sectors of the population will feel as if they were subjected to a doomed experiment they did not consent to. They will feel as if their country has been hijacked by a self-serving professional class mostly interested in providing for themselves.

If that backlash gains strength, well, what’s the 21st-century version of the guillotine?

Dodd-Frank is a triumph of overreach unrelated to problems

Instead of addressing the obvious flaws that led to the very real financial crisis that began in 2008, the Dodd-Frank bill’s labyrinth of regulatory overreach and ill-conceived changes is certain to injure our economy for years if not decades to come.

The fundamental principle of any reform has to be getting the right diagnosis, because without that you cannot possibly hope to find the right cure. The Dodd-Frank bill fails that crucial test in several ways.

First, and most importantly in this period of high unemployment, there is nothing in this bill that will help create jobs and much that will impede us in that goal. Through its numerous provisions that ban and ration credit products, make credit more costly and less available, and reduce consumer choices, the Dodd-Frank bill will be a private-sector job killer at a time when government policy ought to create an environment where private lenders lend responsibly to creditworthy consumers and small businesses. In fact, the only professions that may benefit from this bill are trial lawyers and government bureaucrats.

That sad fact gives way to yet another critical flaw in the Dodd-Frank bill: Massively expanding the size of government’s regulatory bureaucracy with new layers, agencies, and required rulemakings does not mean that oversight will get any better. In all likelihood, consumers will be worse off as the new alphabet soup of merged and restructured agencies struggle to organize, hire staff, stake out their jurisdictions and write an estimated minimum of 12 new government reports, 44 studies, and 243 new rulemakings required under the bill. All the while, banks and investors will sit cautiously on the sidelines waiting out the regulatory uncertainty of Dodd-Frank before they resume lending, Thus hampering our prospects for economic growth.

Financial regulation: 1.5 years and $30 billion yields "a full-employment act for regulators" and info on Chinese drywall

So long Glass-Steagall. Hello Dodd-Frank--the most comprehensive rewrite of financial rules since 1933. This 2,319-page colossus--10 times the length of Glass-Steagall--took 1.5 years to produce and will cost $30 billion and many more years to implement. Will all this time and treasure make Wall Street safe for Main Street?

No.

Dodd-Frank is a full-employment act for regulators that addresses everything but the root causes of the financial collapse. It serves up a dog's breakfast covering proprietary trading, consumer financial protection, derivatives trading, executive pay, credit card fees, whistle-blowers, minority inclusion and Congolese minerals. Dodd-Frank also mandates 68 new studies of carbon markets, Chinese drywalls, and person-to-person lending, and many other irrelevancies.

Now that borrowers are taking care and markets have calmed down, Washington is about to reopen the too-big-to-fail window

For 25 years, Washington has done everything in its power to subsidize Americans' profligate borrowing habits. Debt became the fuel for economic growth. Washington subsidized the financial industry's borrowing through implicit guarantees against loss.

The feds first started rescuing creditors to "too big to fail" banks in 1984. Since then, it's become clear to lenders -- Wall Street's global bondholders and trading counterparties -- that the government would save them anytime a large financial firm foundered.

Indemnified against losses, bondholders could lend nearly infinitely to Wall Street. Wall Street found creative ways to lend that money right back to the public, through mortgage brokers and credit card marketers.

Some exceptions exist. In September 2008, the feds refused to rescue Lehman Brothers' lenders. But the exceptions have only proven the rule. Today, conventional Washington wisdom is that letting Lehman fail was a catastrophe.

The Dodd-Frank bill is a monument to the status quo. Despite promises that the bill will end bailouts, it enshrines bailouts into law.

It provides for an "orderly liquidation authority," for example, which allows "systemically important" financial firms to escape bankruptcy and to escape, too, consistent losses for their creditors. It also sets up a fast-track procedure through which the White House can ask Congress for guarantees for Wall Street's lenders in a future crisis.

In effect, the government is saying to Wall Street's lenders: Carry on as you did before 2008.

Ordinary Americans, though, understand that they can't go on as before. Since 2008, they've started paying their debt back.

The process is painful. As Americans borrow less, they spend less and pay less for houses.

But as Americans pare back their debt, the economy will begin to heal permanently. As house prices fall, for example, because less borrowed money exists to send them higher, Americans will have more money left over after paying the mortgage.

They can invest that money in the stock market for retirement. Those funds, in turn, will go to entrepreneurs who create jobs outside of the financial industry.

The Dodd-Frank bill would pervert this healthy process. It would pit Washington's too-big-to-fail subsidies and Wall Street's creativity against Americans who are trying to do the right thing for themselves and the country