Seizing the Commanding Heights

On the Opinion page of yesterday’s Wall Street Journal, George Melloan spells out how government stimulus is stifling lending, crowding out private investment and impeding economic recovery.

He writes that “the credit market has been tilted to favor a single borrower with a huge appetite for money, Washington.” It has done so in a number of ways.

First, the Fed announced that it will evaluate bankers’ pay on the basis of how well they manage risk.  How better to be a good risk manger in a bureaucrat’s eyes than to take no risk?  Purchasing Treasury obligations and federal agency paper is the sure way to avoid risk.  The Fed has a second policy to make that strategy profitable: zero interest-rate borrowing to finance Treasury and agency debt yielding 3%.or more.  The Fed continues to signal it will keep rates low, diminishing interest-rate risk.

These policies are choking off the supply of credit to the private sector, especially small business.  To add to the problem of small business, the Fed and the Treasury have a third policy of credit allocation to major banks like Citigroup (C), Bank of America (BAC) and JP Morgan Chase (JPM); large industrial firms like GM and Chrysler; and such entities as money-market mutual funds.

The government crowds out the private sector overall, and Wall Street crowds out Main Street.

Melloan doesn’t state it, but there is a name for this economic policy: corporatism.  Big government favors selected big business and rewards big labor as a junior partner. It’s not socialism, but the economic component of a fascist political program. Credit administered on a favorable terms is the narcotic that anesthetizes businessmen to the creeping government control of their firms. To paraphrase Lenin, government seizes control of the commanding heights of the economy.

After the loss of economic liberty, can political liberty survive?  As Melloan concludes, “it’s not unlike what we witnessed in the depression of the 1930s.”

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About Gerald P. O'Driscoll 16 Articles

Affiliation: Cato Institute

Gerald O’Driscoll is a widely quoted expert on banking and monetary policy. Previously the director of the Center for International Trade and Economics at the Heritage Foundation, O’Driscoll was senior editor of the annual Index of Economic Freedom, co-published by Heritage and The Wall Street Journal. He has also served as vice president and director of policy analysis at Citigroup, and vice president and economic advisor at the Federal Reserve Bank of Dallas. He has also served as staff director of the Congressionally mandated Meltzer Commission on international financial institutions.

He is widely published widely in leading publications, including The Wall Street Journal. He has appeared on national radio and television, including Fox Business News, CNBC and Bloomberg. With a dozen years experience as a university professor, O’Driscoll speaks regularly at academic conferences and universities.

O’Driscoll holds a B.A. in Economics from Fordham University, and an M.A. and Ph.D. in economics from UCLA.

Visit: Jerry O’Driscoll's Page

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