Reich’s Indecent Proposal

In the space of a couple of days, public opinion on the Paulson plan has shifted from grudging acceptance to incredulity. That is good: Congress should not accede to the Administration’s naked power grab and I’m glad that point is fairly obvious to the layman. Unfortunately, it has engendered a realization by many liberals that this is a good opening for a power grab of their own.

House Speaker Nancy Pelosi wants to tap into that $700 billion line of credit to bail out homeowners. Representative Marcy Kaptur stopping short of calling for Wall Street executives’ heads to be mounted on a pike in front of the Exchange, but not by much. The best (and most representative) grab for power by the left is by Clinton’s Secretary of Labor, Robert Reich:

1. The government (i.e. taxpayers) gets an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk.

2. Wall Street executives and directors of Wall Street firms relinquish their current stock options and this year’s other forms of compensation, and agree to future compensation linked to a rolling five-year average of firm profitability. Why should taxpayers feather their already amply-feathered nests?

3. All Wall Street executives immediately cease making campaign contributions to any candidate for public office in this election cycle or next, all Wall Street PACs be closed, and Wall Street lobbyists curtail their activities unless specifically asked for information by policymakers. Why should taxpayers finance Wall Street’s outsized political power – especially when that power is being exercised to get favorable terms from taxpayers?

4. Wall Street firms agree to comply with new regulations over disclosure, capital requirements, conflicts of interest, and market manipulation. The regulations will emerge in ninety days from a bi-partisan working group, to be convened immediately. After all, inadequate regulation and lack of oversight got us into this mess.

5. Wall Street agrees to give bankruptcy judges the authority to modify the terms of primary mortgages, so homeowners have a fighting chance to keep their homes. Why should distressed homeowners lose their homes when Wall Streeters receive taxpayer money that helps them keep their fancy ones?

The wealthy have always served as a useful bogeyman for the left. In their world, someone is rich only because someone else is poor. The notion of a fixed pie underlies so much of their rhetoric and worldview. Reich is using this “crisis” as a pretext for evening things up a bit.

What he proposes is, in some ways, worse than Paulson’s bailout plan. Paulson’s corporate welfare is unprecedented, but mostly contained within the next two years and unlikely to be extended beyond that. Reich’s plan, though, would be here to stay and would serve as a useful precedent for later interventions.

To wit, taking equity stakes in Wall Street firms that accept a bailout would make the federal government a significant shareholder and give it proxy power to do things that it can’t do with regulation—”can’t” because of general strictures and constraints of oversight. This model could be applied to automobile manufacturer and airline bailouts. Struggling companies might find it advantageous to petition the government for a salve in lieu of going bankrupt. Do we want the government owning businesses? Absolutely not.

Limiting or restricting employee’s pay because of poor performance is the province of a firm’s management or board of directors. The left has long had a hate-hate relationship with executive pay, but compensation is by contract and we should not allow the precedent of meddling with existing, lawful contracts because a politician doesn’t like the terms. Or a judge, for that matter. Contract re-negotiation belongs to the two parties involved in the contract in the first place—I am terrified of the ramifications of subverting this most basic job of government.

Finally, Reich’s suppression of executives’ Constitutional protection to petition Congress is abhorrent. At a time when Reich has placed their necks under the jackboot, he’s simultaneously muzzled their ability to complain. The average American is far removed from the Wall Street executive, but we must not lose sight of the fact that they’re both still humans and Americans. Just because they’re well paid doesn’t mean that they waive their rights and mob rule becomes warranted.

The current situation did not arise because of a lack of regulation. George W. Bush is not—and never has been—an advocate of free markets. The financial sector is among the most heavily regulated parts of the economy; these problems stem from the very nature of regulation. Regulation is inherently imperfect: unintended consequences and unforeseen incentives rule the day. Bureaucrats aren’t any more enlightened than those they oversee and they are insulated from the consequences of their actions, so they make decisions with imperfect knowledge for political reasons.

But all of that, while true, is secondary. The primary knock against regulation is individual rights. People have the right to life, liberty, and the pursuit of happiness and they don’t give any of that up when they enter the financial sector, manage a company, or earn money. Much of the left ignores that fact and we can’t let them blind us to it too.

[UPDATE (9/25/2008): Looks like Obama’s loving Reich’s folly. And McCain’s cool with several of his planks.]

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