By Leslee Kulba-A story is told of two children in a sandbox. “Johnny has a truck. I do not have a truck. I want Johnny’s truck. Why should Johnny have a truck when I do not have one? Johnny is greedy. He is selfish. He is bad. Give me his truck. I will vote for Barney Frank. He will get me a truck from that greedy Johnny.”
The Financial Crisis and the Free Market Cure: How Destructive Banking is Killing the Economy, by John A. Allison is brilliant. Allison, who is now president and CEO of the Cato Institute, was the CEO of BB&T when he testified before Congress against TARP. At the time, BB&T was strongly capitalized and wise about the risks it took, but, like other healthy financial institutions, it received a call from the regulators. They were “very concerned” that regulations that had not yet been written would put the banks in a precarious position if they did not cooperate.
Allison supposed financially-sound and provident banks were being forced to cooperate in order to avoid a run on three politically-connected and mismanaged bad banks. If everybody took the bailout, nobody would look worse than the others. Accepting the money only to turn it around ASAP cost BB&T $50–100 million, which helped subsidize the carefree practices of the competition. If that was not bad enough, BB&T was required in successive regulations to adopt business practices that were pulling failing banks down.
Allison is not embarrassed to refer to himself as a financial authority. During a 25-year tenure as CEO of BB&T, he increased the bank’s holdings from $4.5 billion to $152 billion. All along the way, he let his intellect, which he constantly challenges, be guided purposefully. He also fostered a corporate culture that considered long-term risks and respected customer relationships. He argues evasion of reality lies behind many business failures.
There were times, however, when BB&T had to make decisions that were destructive of wealth. That is because the risk of government backlash from disobeying unsound regulations was greater than the pains suffered by individuals along the way. Allison still laments being forced to put customers out of business because the bank was not legally allowed to make good decisions that would have been prosperous with trickledown.
While Allison gets to take the heat for being greedy because he was successful; his bank, along with others well-run, got to foot the bill for institutions run by political appointees. According to Allison, they aren’t crony capitalists. They’re crony socialists. As the irresponsible and crooked got their Washington boys to regulate the industry to eliminate the consequences of ill-considered business practices, bankers who were trying to succeed according to the old-fashioned principles of thrift and industry were left turning cartwheels. The incentive to let a business run into the ground because the Fed will bail it out is a moral hazard.
The Fed bailed out Bear Stearns and Goldman Sachs, but it let Lehman fail. “Citigroup,” wrote Allison, “has been saved by the government three times. Each time, it has afterward become bigger and worse.” The Fed announced it would let Citigroup buy out Wachovia when Wachovia was on superior financial footing. Then, it turned on a dime to bestow Wachovia on Wells Fargo. This left responsible bankers convinced the regulators were whimsical and wicked, and those who wanted to stay in business had to allocate resources toward dealing with the irrational beast, and away from helping customers with their finances.
In a totally free market, bad products are not purchased, causing their producers to pursue other activities that society might value enough to demand. When crony socialists run the marketplace, they inconvenience others to save their own necks, but they also confuse market signals. The housing crisis illustrates how special deals, arrangements, tools, and regulations were used to keep a few financial institutions that were not acting prudently in business. To line one’s pockets with public largesse, one need only inform the public that the personally-lucrative policy empowers minorities and promotes economic justice. After votes, campaign contributions, and kickbacks, high-risk was still high-risk, borrowers were overextended, and people eventually had to give up the homes they couldn’t afford in the first place.
Allison argues against centralized control. He describes the free market as millions of experiments, and uses Thomas Edison’s claim that it took 1000 of them to invent the light bulb. He mocks the self-assured regulators who, while being neither bankers nor economists, presume they need only perform that single experiment that succeeds, skipping the 999. In reality, valuable information gathered from the failures leads to the successes. Allison accepts mistakes and failure as part of the business world, but finds it outrageous anybody would support a command-and-control model where everybody is forced to make the same mistake at the same time.
Other political weirdness distorting the economy includes the Patriot Act. Allison claims the financial industry has spent $5 billion in compliance without catching a single terrorist or even being able to do so. It is a thinly-veiled attempt to snoop in the name of privacy, as was illustrated when it caught a New York governor soliciting prostitutes. Privacy statements of gobbledygook flood the mail, and bank personnel dutifully fill out Suspicious Activity Reports to avoid $50 million fines for not doing so. Meanwhile, injurious criminals run loose while enforcement activities are diverted toward compliance with the Patriot Act.
Allison thinks there is still time to save the country from financial failure, but the problem is one of political will. He suggests a strategy reminiscent of the UN’s ICLEI program adopted by both Asheville and Buncombe County to reduce carbon footprints “by 80 percent.” Allison at least throws out some numbers to start the discussion. At $1.75 trillion in 2008, regulation was costing the country 12 percent of GDP. He proposes rolling back government regulation by 50 percent in 18 and months cutting nonentitlement federal spending by 30 percent in three years.