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A debate is raging among free market advocates regarding the proper posture to take with respect to Too Big to Fail (TBTF) banks. This has become an increasingly important issue as the financial sector has grown to take up an unprecedented share of our economy. While cleaving to tried-and-true libertarian defenses of finance as vital to the economy, some of us fear that the machinations of the crony capitalists running the TBTF banks—in cahoots with their allies in the Treasury Department and the Federal Reserve—will result in not only another global financial collapse, but a populist anti-capitalist backlash that could destroy what’s left of our free enterprise system.
But before we can tackle this problem, we must figure out what is really going on. In all public policy debates, perceptions matter, and public perceptions are often driven by the leading narratives that gain cultural acceptance. Let’s look at what these are.
The prevailing narrative on the left is that we are locked in a two-sided conflict pitting greedy capitalists against the working man. Within this narrative noble legislators and wise regulators must accumulate power unto themselves in order to: 1) rein in the capitalists’ depredations; 2) balance the playing field to offset “market failures;” and 3) “invest in the future” to compensate for the shortsightedness of profit-seeking investors. Success requires waging a permanent campaign against corrupt political opponents doing the dirty work of the wicked 1 percent—who if left to their own devices would accumulate all the wealth leaving the 99 percent destitute.
The prevailing narrative on the right is that we are locked in a two-sided conflict pitting American business against ham-handed legislators and clueless regulators whose well-intentioned but misguided laws, regulations, taxes, and mandates threaten to kill the goose that lays the golden eggs. Within this narrative, free market advocates must fight every attempt by tree-hugging Luddites and their socialist fellow travelers to interfere in the free flow of information, goods, and services that are responsible for driving innovation and creating all the wealth the left is trying to redistribute. Failure will leave the working man unemployed, American businesses crippled, and the global economy in perpetual recession.
Both of these narratives are oversimplifications, and both contain elements of truth. How can that be? Because they both miss the key point that the battle we are in is actually a three-sided struggle. Why is this important to realize? Because attempts to defend capitalism strictly within the bounds of a two-sided dialectic can only accelerate the emergence of a populist regime that fuses the centralized economic controls of fascism with the income redistribution of socialism. We are already more than halfway there with today’s “mixed economy”—a pale shadow of the laissez faire system that serves as the libertarian ideal.
So, who are the three constituencies battling over America’s economic soul?
In one corner we have the traditional market capitalists, the bedrock of American exceptionalism and the source of our prosperity. These businesses, both large and small, pursue profits by trying to do a better job than their competitors at pleasing customers. Often referred to by the press as “Main Street,” most market capitalists seek neither special privileges from government nor regulatory shackles for their competitors.
In an adjacent corner, claiming a common heritage, are the crony capitalists. These are generally large companies with substantial lobbying operations. Contrary to popular belief, crony capitalists love regulations—especially when they get to write them. Nothing chokes off up-and-coming competitors better than a thicket of incomprehensible and expensive new rules. Crony capitalist enterprises have a well-oiled revolving door that allows their key people to seamlessly enter “government service” (sometimes taking huge severance bonuses  with them), while welcoming former bureaucrats , congressional staffers, and elected officials seeking to cash in on their connections. And while crony capitalists have been with us since the friends of Alexander Hamilton cornered the Revolutionary War bond market, never before has their raiding of the public till so focused the public’s attention.
This brings us to the third member of the triad—the federal Leviathan. Bloated beyond recognition, the beast in Washington has reached the point where it can only be kept alive using borrowed and printed dollars. Contrary to some Republicans’ small-government rhetoric, both parties have contributed to its growth over the last half century. And neither is doing anything substantive to restore fiscal sanity, as they engage in cosmetic battles that do nothing more than tinker around the edges. Even worse, while Congress claims to maintain oversight, it is no match for the crony capitalists and career bureaucrats who run the Treasury Department and the Federal Reserve, particularly when they join their corporate brethren to shout “crisis” and demand more of the bailouts that have allowed firms to socialize losses and privatize gains.
The Leviathan’s business model is simple: 1) Collect tribute in the form of taxes from market capitalists and redistribute it to favored constituents in return for votes; and 2) collect campaign donations from crony capitalists so that incumbent politicians can remain in office and expand their power. In return for said contributions, those politicians regale their crony capitalist supporters with special favors, including subsidies, tax loopholes, and regulations designed to cripple their competitors.
And so the question arises: What are free marketers to do? There is no question that market capitalists deserve our support. But even crony capitalists deserve to be defended against regulatory depredations when these are clearly counterproductive and being used by demagogues like Elizabeth Warren as convenient tools to expand their power base. While coming to their aid can be the right thing to do, it risks doing tremendous damage to the free-market brand. So how do we counteract that?
Quite simply, we should not shy away from tarring and feathering any supposed “capitalist” who goes to Washington hat in hand, looking for favors to “save” America’s financial sector, auto industry, “green” energy economy, or what have you. Whether it’s Goldman Sachs, General Motors, or General Electric, we need to shout to anybody who will listen that any one firm imploding will not blow up the economy. Being pro-business is not the same as being pro-market. There is no reason why defending the right of money changers to operate free from onerous regulations should translate into letting the counterfeiters run amok and the temple priests loot the public treasury.
Finally, it’s worth noting that the oversimplification of our political landscape into a false right/left dichotomy presents us with an opportunity to better inform members of the general public who are seriously looking for answers, because it partly explains why a record number of our fellow Americans are disengaging from both the Democratic and Republican parties. They are baffled, frightened, and lurching right and left depending on the calamity du jour. Desperate for practical guidance, they are met with demagoguery. Free market advocates have the information and insight they seek, as well as practical solutions that can help guide our nation out of the statist morass it is in. But to do so we must not be afraid to name and shame false practitioners of capitalism whose behavior threatens the entire economy. Are we ready to take up that challenge?