Category Archives: Bailouts

Dodd-Frank Is Five Years Old

On July 21, 2010, Congress passed the Dodd-Frank financial regulation bill. Today, that bill turns five. It is not a happy anniversary.

As CEI’s John Berlau points out in a new paper, Dodd-Frank has actually reduced competition in the financial sector. By codifying too-big-to-fail and adding in price controls and other regulatory hoops—27,669 total regulatory restrictions and counting—Dodd-Frank insulates incumbent banks from pesky upstart competitors. In fact, in the last five years, precisely one new bank has opened for business. This stagnation is not healthy for innovation or for competition—or for capital-hungry entrepreneurs throughout the economy.

A few other Dodd-Frank facts worth pondering:

  • The original bill text is 848 pages long. The edition of Herman Melville’s Moby Dick on my bookshelf is 602 pages long.
  • Dodd-Frank requires regulatory agencies to issue 398 regulations. Five years later, many of them have yet to be issued. Hopefully they stay that way.
  • Since each of those regulations contain multiple regulatory restrictions (some of the rules are hundreds of pages long and are extremely detailed), the actual number of regulatory restrictions Dodd-Frank enacts could eventually top 40,000, or even 50,000. Nobody knows yet.
  • Its price controls on debit card interchange fees have raised the cost of banking for small businesses and the poor (See Iain Murray’s new paper).
  • Dodd-Frank does not address the root causes of the 2008 financial crisis—banks took on too much risk, especially in the housing sector. Instead, by codifying government bailouts for major financial institutions, Dodd-Frank reduces incentives for financial institutions to keep their risk at manageable levels. Whatever its stated intentions, Dodd-Frank potentially sets the stage for another financial crisis and more bailouts.

For more, see John’s extensive Dodd-Frank research.


CEI Podcast for April 23, 2014: Reforming Fannie and Freddie

Have a listen here.

Senior Fellow John Berlau argues that a bill from Senators Tim Johnson and Mike Crapo intended to reform Fannie Mae and Freddie Mac would only make things worse.

CEI Podcast for August 23, 2012: Bailouts as Corruption

Have a listen here.

Senior Fellow Matt Patterson argues that when government is big and powerful enough to dispense favors like bailouts, special interests will flock to Washington to get a piece of the pie. Corruption is the inevitable result, as the GM/Delphi/UAW bailout showed. The only effective way to limit corruption, Patterson argues, is to limit government.

“Because That’s Where the Money Is.”

In one of those too-good-to-be-true urban legends, a man once asked the famous criminal Willie Sutton why he robbed banks. “Because that’s where the money is,” he replied. Fast forward eighty years or so, and one sees that the business world has learned from Sutton’s wisdom.

LightSquared is a technology company that is going through chapter 11 bankruptcy despite receiving a $267 million government loan. Its satellite-based high speed wireless network has a fatal flaw: it interferes with GPS devices, making it useless. The FCC is blocking it, leaving the company with essentially zero business until they can solve the problem.

The company has laid off about half of its workforce so far. But The Hill’s Brendan Sasso and Kevin Bogardus found out that LightSquared is making sure to retain its most lucrative employees. Those would be its lobbyists, not its engineers:

Despite the financial troubles and staff cutbacks, LightSquared has yet to disband its lobbying army — an implicit acknowledgment that the company’s future is contingent upon what happens in Washington.

In other words LightSquared, just like Willie Sutton, knows where the money is. And it isn’t in the marketplace.

Businesses fail all the time. If they don’t create value for their customers, they don’t deserve to stay in business. Capital that is being wasted by these companies is then freed up for more valuable uses. Schumpeterian creative destruction doesn’t work without that destructive part. When Washington puts its thumbs on the competitive scales as it has with the LightSquared loan, it should surprise no one that companies suddenly swarm Capitol Hill for a piece of the action.

The result is less destruction, but also less creation. Corporate welfare means less innovation and less economic growth. It creates plenty of jobs for lobbyists and lawyers, but at the expense of other jobs that create actual value for consumers – such as many of LightSquared’s layoffs, who could be finding a technical solution for its GPS interference problem.

Bill Clinton’s Economic Nationalism

Over at RealClearPolicy, I recently reviewed Bill Clinton’s latest book, Back to Work: Why We Need Smart Government for a Strong Economy. You can read the review here. It’s a thought-provoking book, so there’s plenty I didn’t have room to say. Hence this post. Where the review focused mainly on Clinton’s philosophy and rhetoric, this post is mainly about Clinton’s economic policy proposals. I’ll still take him over Bush or Obama, but some of his policy ideas make an economist’s head shake.

Two things are worth pointing out before we dig into the weeds of policy. One is that Clinton seems to believe that you are for something if you want to increase government spending on it, and against it if you want to cut government spending on it. The logic does not necessarily follow. Many people think the federal government should not be involved in the automobile industry. Therefore, they are against American-made cars. Yes, the logic is that weak. This bit of tunnel vision is not unique to Clinton, but it weakens many of his arguments.

The other point is a surprising one. Nationalism pervades the book; this is the belief that one person matters more than another if they are a citizen of one country instead of another. One expects this from Republicans. But it’s surprising to hear from a Democrat, let alone the man who passed NAFTA. It’s as though after decades of stump speeches telling voters that they’re better than everyone else, he started to truly believe it. Many of Clinton’s policy proposals leave no possibility but to believe that he is an American nationalist; let us explore.

Trade as a Battle

Clinton repeatedly refers to other countries as “the competition.” We have to beat them, or they’ll beat us. It’s as though he believes that for China and India to have more, America must have less. This simply isn’t true, according to global GDP data. Besides falling for the zero-sum fallacy, this reveals an ugly mindset.

Suppose we beat our competitors in Clinton’s zero-sum world. Rich Americans would be redistributing wealth away from the global poor and giving it to themselves. This kind of reverse redistribution is hardly progressive.


Clinton’s economic nationalism also expresses itself in his calls for factories to “insource” jobs they currently outsource overseas. Americans deserve a job more than others. In so doing, he ignores basic economic principles. One of them is that giving someone a job doesn’t therefore mean one less job for everyone else; the zero-sum fallacy strike again. Another is the division of labor.

The finer the division of labor, the greater the wealth workers can create; Robinson Crusoe lived in poverty for all his cleverness. If the U.S. were to become self-sufficient, its division of labor would be limited to about 310 million people. But it could be more than 7 billion people if the world was fully open to trade. Imagine what 7 billion people could accomplish together, if they were all able to pursue their specialized comparative advantage.

Renewable Energy

Continuing his nationalist rhetoric, Clinton calls for the U.S. to ramp up its renewable energy production, with the eventual goal of complete energy independence. To do this, we would have to divert resources from other, more productive sectors of the economy. The price of energy independence is less wealth, and a less specialized division of labor. We’d have to stop doing things we’re good at just to get the same amount of energy we already had before.

One also questions Clinton’s method of achieving energy independence. He would transfer billions of dollars from taxpayers to private businesses. He argues that this would create jobs, wealth, and would make America more energy-independent. He does not mention the opportunity costs involved — taxpayers would have have spent their money on other things they valued more if they had been allowed to keep it.

Assume that the economics of renewable energy are as bright as Clinton claims. Then there is also no need to subsidize it. Profits are deadly effective at luring entrepreneurs. If it’s economically viable, it doesn’t need a subsidy. And if it isn’t economically viable, no amount of subsidy will make it so.

Clinton also ignores public choice concerns. Taxpayer dollars tend not to be transferred to private businesses on the merits. Political connections play a large role. It is possible that subsidies given to the right companies would produce the results Clinton is after. But the possibility of that actually happening is vanishingly small. He does not address this problem in his book.


Clinton wants the U.S. to double its exports. Germany’s exports are roughly 40 percent of its GDP; the U.S. exports 11 percent. Clinton believes that increasing exports without raising imports would create jobs and wealth. While it would put people to work, it wouldn’t make them any wealthier if all the value they work so hard to create is shipped overseas.

Increasing exports would increase the amount of currency in the U.S., true. But currency is not wealth. Dollars cannot be eaten, driven, or otherwise consumed. Wealth is stuff. Goods and services. Dollars only have value because they can be exchanged for wealth. Given the choice between a car and a bunch of green pieces of paper, most people would take the car. Millions of people make that choice every year, and millions more are saving up to do just that.

Exports are the price we pay for imports. They are neither a good thing nor a bad thing in and of themselves. There is no need to artificially increase them.

Clinton’s nationalism-influenced thoughts on trade are very similar to the mercantilism that economists have been openly mocking for centuries. Considering that Clinton is the man who passed NAFTA, this is very disappointing.


Clinton also believes that fiscal stimulus softened the recession’s impact. He cites a study arguing that it kept employment 1.5 to 2 percent higher than it would have been without stimulus. But again, he forgets opportunity costs. Every dollar spent and every job created under the stimulus was a dollar and a job taken away from somewhere else.

Stimulus works by taking some money out of the economy and then putting it back in – less transaction costs, of course. The best possible outcome is negative. Even allowing for a Keynesian multiplier over 1, the politicking and waste that go into any large spending bill almost guarantee that the stimulus hurt the economy.


Clinton praises TARP and the auto industry bailouts. Even if all the loans are repaid, the bank and auto bailouts will still be costly, as George Mason University’s Russ Roberts has pointed out. This is because capitalism is a system of profit and loss. Not one or the other. Both. Profits encourage risk. Losses encourage prudence. When government removes losses from the equation, it also removes prudence. Banks take more and more risks, because they know they won’t bear the losses from the ones that don’t pan out. This does not save the financial system. It undermines it.

The auto bailouts saved the American auto industry, Clinton claims. But it didn’t need saving. A couple of firms were in danger, and the bailout saved them. But Ford, Toyota, Honda, and the many other American companies that make cars in America using American workers were doing just fine. The bailouts locked scarce resources into inefficient companies that had good political connections. The opportunity costs are massive.


Clinton has some good immigration ideas, not least because he lets go of his nationalism on this issue. He would like to allow more high-skilled immigrants into the country, especially the ones with advanced degrees in the STEM fields – science, technology, engineering, and mathematics. These types of immigrants are far more entrepreneurial than most native-born Americans. They would create a lot of jobs, which is Clinton’s main concern.

More importantly, they would also create much more wealth in America’s relatively entrepreneur-friendly environment than in countries with less liberal institutions. It could well be that the next Google or Microsoft will never be founded because the strict H-1B visa quota kept the wrong person out.


Almost all of Clinton’s ideas outside of immigration involve more government, instead of less. This could be because of a lack of creativity. It may be because of the planner’s hubris: “I am clever. Put me in charge.” It could also be because of an antipathy to the disorderly, and unpredictable ways of creative destruction and the market process. His plans are so much tidier, so much neater.

But the source of his ideas doesn’t matter so much. It matters if they’d work or not. Would they create more wealth and jobs on net? From the economist’s perspective, the answer is yes in a few cases, but mostly no. Clinton might like his work to be treated as one of pragmatism, but it is really a work of ideology. Given how moderate his presidency was compared to either of his successors, this is disappointing.

Halftime in America

A bit of bailout humor at Clint Eastwood’s expense. Click here if the embed doesn’t work.

Profits and Losses

Here’s a letter I recently sent to the New York Times:


Amar Bhidé argues that “governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks.” (“Bring Back Boring Banks,” Jan. 4).

The lure of profit is why banks take on risk in the first place. But the specter of loss encourages them to be prudent about it. When governments remove losses from the equation, banks lose any incentive to keep their risk-taking in check. Someone else will pick up the tab if a plan doesn’t work, so why not take a chance? Hence the financial crisis.

Capitalism is a system of both profit and loss. Wishing losses away would have consequences quite different from Bhidé’s good intentions.

Washingon, Jan. 4, 2012
The writer is a fellow at the Competitive Enterprise Institute.

Tim Carney Knows How Washington Works

Tim’s latest column, “Bail them out, regulate them, then work for them,” is a must-read.

Amy Friend, a former staffer for Sen. Chris Dodd, played a large role in writing the Dodd-Frank financial regulation bill. And she just got a new job at a lobbying firm. Tim explains:

There are two types of people on K Street: access people, who can get you in the door; and policy people, who know what’s on every page of every relevant bill and regulation. Friend is the latter. While business will dry up for other Dodd alumni on K Street, Friend is valuable because — to quote one Republican lobbyist — “she knows what’s on page twenty-three-[bleep]ing-hundred of that bill,” and every other page, too.

In other words, Friend didn’t just write a landmark piece of legislation — she wrote her meal ticket.

Tim doubts that Friend is corrupt. But her story is very common in Washington. Lobbying wouldn’t be such a booming business if regulation wasn’t, too. And the revolving door between the Hill and K Street can be very profitable, even when no corruption is involved. Most people forget that regulators act just as self-interestedly as the people they regulate.

Timothy Geithner, Political Strategist

The TARP bank bailout program polls poorly. 58 percent of Americans think the bailouts were unnecessary. Timothy Geithner, in recent remarks, subtly reminded voters that the hated bailouts were originally a Republican proposal. It began with George W. Bush, remember.

This is a clever bit of strategy from Geithner. President Obama and Congressional Democrats get most of the blame for TARP. And they deserve plenty of blame for not repealing the program. But Geithner is right. TARP began with Republicans.

The midterm elections will probably be very kind to Republicans. Geithner is saying, in effect, “be careful what you wish for.”

He’s right. If the GOP does regain control of Congress, little good is likely to come of it. They will probably do a decent job opposing the White House’s proposals. That could slow spending growth.

But what the country needs are spending cuts. And Republicans have serially proven they can’t be trusted with the public purse.

When Republicans last held power they passed the largest new entitlement program since the Great Society, nearly doubled federal spending in 8 years, gave billions of dollars in subsidies to businesses and farmers, and generally made a mess of things. The TARP bailouts and the largest spending stimulus in U.S. history were their closing flourishes.

Republicans  did all the things they ran against in 1994. Many GOP candidates are saying similar things in 2010. But remember Geithner’s counsel about TARP. Only a fool would believe that Republicans will actually cut spending. Beltway fever catches quickly. And it’s contagious.

Of course, Democrats are just as bad. As I say with every election involving Democrats and Republicans, whoever wins, we lose. The best that we independents can do is nudge the intellectual climate in a better direction. Geithner has kindly reminded us that we need to redouble our efforts on both conservatives and progressives.

The Real Cost of TARP

Russ Roberts nails it over at Cafe Hayek:

Please remember that the cost of the TARP isn’t the cost to taxpayers. Even if banks paid back every single penny, the cost of the TARP is that it reduces current and future prudence.