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Mission Impossible

Tom Hooyman, PhD

Several years ago, Jesuit theologian Richard McCormick argued that the mission of Catholic health care was no longer possible because of the inherent contradiction between running a business and being a ministry. Last week’s events of the Federal Reserve and Treasury Department rescuing Wall Street from a financial meltdown are akin to the unresolved debate started by Father McCormick. The Fed cannot serve two masters—Wall Street and Taxpayers.

Of course, the argument will be made that by stabilizing the financial system the Fed is minimizing losses to taxpayers. But is that the case? Over the past 7 months the Fed has either loaned or flat out spent $314 Billion to failing businesses:

  • 3/16/08–$29 Billion for JP Morgan buyout of Bear Sterns
  • 9/8/08–$100 Billion for Freddie Mac bailout
  • 9/8/08–$100 Billion for Fannie Mae bailout
  • 9/16/08–$85 Billion for AIG bailout

This is not counting the fees the Fed is paying BlackRock, Inc. to manage the $29 Billion securities pool of the Bear Sterns deal; or the fees to the lucky company for managing the $85 Billion AIG pool; or the tens of billions that analysts are reporting that the Fed is loaning to bankrupt Lehman Brothers–that’s right, Lehman Brothers.

Just because the Fed didn’t officially bail out Lehman Brothers doesn’t mean it didn’t happen. Reports in the NY Times state that Lehman “is borrowing tens of billions of dollars through the Fed’s six-month-old emergency loan program for big investment banks.” (Andrews, 2008) What could a bankrupt company put up for collateral for such vast amounts of money? None other than all of the risky investments that got them into such trouble in the first place—stocks, junk bonds and mortgage-backed securities rated BBB.

Who is next in line? The auto industry is not foolish when they see the government opening its coffers to bailout failing companies, so another $25 Billion loan guarantee for ailing car manufacturers. It’s an election year and Michigan is a swing state. Why not airlines—their having a bad year and what about housing—new housing starts haven’t been this low since 1991?

What could prevent the Fed from carrying out this impossible mission? Run out of money—but that’s not possible because all it needs to do is print more money or for the Treasury to sell more of its own securities. One year ago all of the Fed’s $800 billion reserves were in Treasury securities and last week that had dwindled to $300 billion in part because of the bailouts. No problem, just auction more T-bills.

Amidst all of the debate, rhetoric and punditry of the U.S. financial crisis is the fundamental question of the purpose of government, which is based upon an understanding of the common good. Some will argue that the role of government should be kept to a bare minimum—“let the market sort itself out.” This position is typically identified with the Republican Party, which holds that “the government should tax only to raise money for essential functions.” (Republican Platform, 2008) Of course, what is understood as “essential functions” is the essence of the debate.

During the tumultuous Clinton administration when health care reform was getting a lot of attention, there was a popular bumper sticker which read, “If you like our postal system you will love national health care.” This sticker’s intent was to connect what was thought to be horrible service by the post office with the possibility of a national health care system. “God forbid!” was the desired response. 42 cents still seems to be a pretty good deal to send a letter 3000 miles. Is a national postal system an essential function of government? Is the common good better served by the federal government operating and managing a national postal system or should this be left to the private sector?

These same questions should be asked of the systems that have been developed to provide education, health care, transportation, prisons, defense, communications and yes even commerce, to name a few essential functions of society. With the Fed’s bailout of Fannie Mae and Freddie Mac, the federal government has essentially become the mortgage holder of most American homes. “If you like our postal system you will love a national mortgage system.” The irony is so thick it is beyond laughable.

References
Andrews, Edmund L. (2008). A New Role for the Fed: Investor of Last Resort. NY Times, September 18, 2008: A1, A28.
Republican Platform (2008). Available at:http://www.gop.com/2008Platform/Economy.htm

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