Timothy Carney
2008-04-04 08:00:00.0
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WASHINGTON -

JPMorgan and Bear Stearns’

bondholders both benefit from the Federal Reserve’s bailout last week, but without delving into the intricacies of the financing involved, it’s easy to see another beneficiary — politicians and regulators who want more government power.

Sens. Barack Obama and Hillary Clinton have used the Bear Stearns bailout as a class-warfare talking point; the steps taken by the Federal Reserve and Treasury truly are worthy of criticism. But don’t expect any action from these critics.

Democrats love attacking “corporate welfare,” but most of them never do anything about it, because corporate welfare gives government more control over corporate America — and controlling other people’s money is what big-government politicians and regulators (a class that includes many professed “conservatives”) came to Washington to do.

Since the bailout, Clinton has called for new regulations to “ensur[e] effective functioning of our financial markets.” Obama, while lamenting the influence of lobbyists and “special interests” in deregulation of the 1990s, has proposed his own set of new federal rules. The Senate banking committee yesterday debated various new regulations.

While Clinton and Obama are ideologically predisposed toward increasing government control over the economy, the Federal Reserve bailout justifies their position. A recent report from the Congressional Research Service asked this about the bailout: “These actions raise an important issue — if financial institutions can receive some of the benefits of Fed protection, perhaps because they are ‘too big to fail,’ should they also be subject to the costs that member banks bear in terms of safety and soundness regulations?”

Put more simply: If big investment banks are going to be getting federal money or federal guarantees, doesn’t Washington have the right to put limits on what they can do? Of course Washington does. If you wanted to borrow money from Bailey Building & Loan, Mr. Bailey would have every right to dictate the terms of the loan -- to place conditions on your access to his money.

If the Federal Reserve is now in the practice of lending money to troubled investment banks, the government can certainly dictate the terms; JP Morgan is playing with taxpayers’ money and so taxpayers get to place some limits on what JP Morgan does.

More broadly, as the CRS paper suggests, the Federal Reserve may now implicitly be the guarantor of these huge financial institutions. If Lehman Brothers is on the verge of bankruptcy next year, will the government really let it collapse? If the federal government is now the safety net for investment banks, it’s within its rights to regulate what the investment banks do.

So who’s benefiting from this new system of bailouts and guarantees? The Bear Stearns case shows that it’s not the shareholders — their stock fell from about $60 to just above $10 per share in the last couple of weeks. It’s the people whom Bear Stearns owes money — the creditors and bondholders who might not recoup their loans if Bear went bankrupt.

Did Bear’s creditors help bring about this bailout? That’s a safe bet, because things don’t usually happen in Washington unless someone well-connected stands to get rich. But asking politicians and bureaucrats for a bailout doesn’t really involve twisting arms, because the officials know it will give them more control and love of control is why they are government officials in the first place.

This is why you won’t find liberal Democrats trying to undo or prevent such bailouts. They may use the bailout as a valid critique of the influence of corporations, but they know that expanding corporate welfare expands their regulatory power.

If Democrats really minded corporate welfare, they would have tried to do something about it in the 15 months they’ve controlled Congress. But the Export-Import Bank, sugar subsidies, ethanol subsidies and farm subsidies all are thriving under Democratic control. And now, Congress will not take one step to reverse what National Review’s David Freddoso has labeled “the mother of all government subsidies.” Congress will welcome it, while attacking it.

To understand Washington’s machinations, it’s always worth asking: Who is getting rich? But you also have to ask: Who is getting more power? California politician Jesse Unruh was correct that money is the mother’s milk of politics; but power is the blood.

Examiner columnist Timothy P. Carney is senior reporter for the Evans & Novak Political Report.