Constitutional Government as a Stakeholder

I would like to preface this writing by giving full disclosure and stating that work in the financial industry and I believe in an extremely limited government with the minimal services and entitlement programs to keep the country moving.  I am not typically a cynical person, but when it comes to entitlement programs I feel that you are doing a person/organization a disservice by providing them with a fall back due to fiscal irresponsibility. With extensive entitlement programs, the government is essentially telling citizens/organizations that it is okay to take a risk because if you fail, then the government will aid you in recovery.

Now, I’d like you to think back to the fall of 2008. What were some common terms and phrases that the media used in this time to describe what was occurring in the financial industry? For me, the two that come to mind are “Bailout” and “Too BIG to fail.”  Leading up to, what is now coined to be, the worst financial crisis since the depression of the 1930’s, large financial corporations were increasing their exposure to risk and taking on an enormous amount of “bad debt.” When mega-corporations such as AIG, Citi Group, Bank of America, Wells Fargo, etc. realized they would soon be in the red without assistance, the government determined those banks were “too big to fail” and granted financial assistance totaling around $200B of taxpayer money. A list of all “bailout banks” can be found here: http://money.cnn.com/news/specials/storysupplement/bankbailout/

One understated effect of the government granting assistance with anticipation of future repayment is that the government actually became a stakeholder in each of these companies that it assisted. As a stakeholder, the government now has an interest in the success of the company and future profits that are to come. Now, I understand that times have changed since the constitution was written but I don’t believe it states that the government should hold stake in any private corporation. According to John Locke, the sole purpose of government is to protect the rights of its constituent’s ability to secure life, liberty, and property. I do understand that the failure of these banks would have resulted in financial catastrophe;  but the act itself is unprecedented and creates many new opportunities for government intervention. This act really worries me as a citizen because it makes me wonder where they will draw the line as to what is deemed necessary of assistance.

In addition to a limited government, I am a firm believer that (relative) perfect competition is the best economic system because it creates the lowest price for the consumer due to competition. When the government took stake in these companies they essentially owned a portion of that company until the funds were repaid. First, notice that the government became a stakeholder in competing banks. The financial support was not equal among all banks. This deviates from the idea of perfect competition because a bank that receives more funds than another now has a competitive advantage and the government may favor the success of the bank it lent the most money towards.

A second observation worth noting is that additional unnecessary regulations and statutes may be written to favor the success of a specific bank.  

Consider this hypothetical situation:

The Federal Government lends Wells Fargo (a national bank with a great deal of customers) $25B and also lends Texas Capital Bank (a local bank with very few customers and assets) $2M.  Now that the government “owns stock” in each of these banks, the bank’s books must be opened up to the federal government.  In all likelihood, the federal government would be more likely to propose legislation that favors the success of the $25B they lent to Wells while overlooking the $2M they lent to Texas Capital. This is a very vague example but it does bring about the idea that with the government as a stakeholder, they might be more interested in the success of one company over another.

Overall, I do not believe our government was created to become a stakeholder in any private corporation or organization. When the government takes stake in a certain company, it is then tied to the success of that company.  I feel that the government should be as limited as possible to fully protect life, liberty, and property of each citizen. When the Federal government branches out into new industries(in the case lending), it sets a precident that makes me wonder where it all will end.