Bankers vs. Everyone

Libertarian Ron Paul’s “Audit the Fed” movement has gained the support of socialist Sen. Bernie Sanders (I-Vt.) and conservative Sen. Jim DeMint (R-S.C.). At the same time, anarchists in Greece riot against fiscal austerity measures, while organs of the strongest government on the planet—namely, the U.S. Justice Department and SEC—accuse Goldman Sachs of skullduggery.

These events show that traditional alliances are giving way to a growing awareness that a small clique of internationally-connected bankers is ripping off everybody else. Both left and right—including anarchist youths and retired Tea Partiers—are furious at the trillions in bailouts being shoveled into the hands of rich bankers who made horrible investment decisions during the housing-bubble years.

The transfer of wealth has become so naked that even the Obama administration had to do an about-face and make a show of attacking Goldman Sachs. Contrary to popular belief, the “progressive” Barack Obama has been quite friendly to Wall Street. Indeed, Obama’s own Treasury Secretary, Timothy Geithner, was head of the New York Fed during the AIG bailout in September 2008, and more generally was one of the chief architects of the Wall Street bailout. Aside from reappointing George Bush’s own Treasury Secretary, Hank Paulson, a former Goldman CEO himself, Obama could not have picked a more tainted insider than Geithner as his man at Treasury.

Precisely because of the unusual alliances, supporters of free-market capitalism can sometimes be led astray. For example, seeing self-described anarchists rioting in Greece might lead the average Rush Limbaugh listener reflexively to side with the IMF bailout package. For another example, seeing Bernie Sanders and other left-wingers demand “transparency” in the operations of the Fed might lead the average right-winger to believe Chairman Ben Bernanke when he assures the nation that Fed secrecy is essential for financial recovery.

As so often happens in politics, neither the “right” nor “left” position accords with a truly free-market philosophy. In the case of Greece, a bunch of large investment banks bought debt from the Greek government, which now is in danger of defaulting on those bonds. That’s unfortunate for the investors, but in no way should the average European be on the hook for boneheaded decisions. If there were no bailout and the Greek government defaulted, maybe investors would be more prudent in the future when lending money to spendthrift politicians.

In the United States, the backlash against the Fed and Goldman Sachs is not merely a reflection of anti-capitalist hostility to high finance. The genuine proponent of property rights and rule of law should have nothing to do with the $700 billion TARP bailout, or the trillions of dollars in support that the Fed gave to rich banking interests since the crisis began.

In a genuinely free market, investors who make savvy forecasts get to keep their profits. If they pay hundreds of millions in salary and stock options to their top executives, that is their prerogative and the government has no business second-guessing compensation packages.

If huge investment banks, however, lose billions in risky bets on derivative products they clearly did not understand, then tough. A capitalist system is one of profit and loss. For the government and/or Fed to rescue bankers from their own incompetence, simply transfers losses from the people responsible to the backs of average citizens, through higher budget deficits, higher prices because of newly-printed money, and slower economic growth.

It’s true many critics of our financial system have misdiagnosed the problem, and blame our current woes on “deregulation” and “raw capitalism.” They are mistaken, because the George W. Bush years were a far cry from laissez-faire principles—he went along with a partial nationalization of banks, after all.

But left-wing critics are right when they smell a rat, and supporters of a truly free market should keep in mind that the enemy of their enemy may be their enemy. One can consistently support private property and free enterprise, without endorsing trillion-dollar bailouts of bankers.

Robert P. Murphy earned a PhD in economics from New York University and is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute. He is the co-author with Jason Clemens of Taxifornia, available on PRI’s website. Contact him at [email protected].

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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