My Two Cents

What’s the exit strategy?

Chris Farrell May 22, 2009

The federal government appears to be everywhere when it comes to the economy. It’s actively shoring up the banking system, weighing in on executive pay, negotiating with the medical-industrial complex, offering bailout money to insurance companies, even playing hardball with financiers who balked at the Chrysler bankruptcy.

This historic expansion of Washington’s role has upended many traditional relationships. The Federal Reserve Board has greatly expanded its reach into the private sector, too, and it has abandoned its independence to work hand-in-glove with Treasury Secretaries Henry Paulson and Timothy Geithner. “There is no debating that the government is grabbing more power from the private sector,” says Edward Yardeni, economist, investment strategist, and head of Yardeni Research.

He’s right. But there’s little debate left that radical efforts by fiscal and monetary leaders are making it increasingly likely that the economic abyss has been averted. And Fed Chairman Ben Bernanke has argued in recent speeches that he and the rest of the Fed’s policy-setting members are well aware of the risks they’ve taken on with their extraordinary initiatives and that the central bank has an exit strategy designed to reduce its impact on private market decision-making and maintain the central bank’s vaunted independence. We’ll see if Bernanke can pull it off.

What about the Obama Administration? At the moment it has so many initiatives in the works–and the economy remains fragile enough–that its lack of focus on a clearly articulated exit strategy from its involvement in the operations and finances of a big chunk of American business is understandable. Still, it leaves the Administration vulnerable to charges of creeping socialism, fiscal imperialism, and other equally incendiary terms.

Yet even many people who don’t believe the Administration harbors any desire to run large parts of private industry share a nagging worry that the more taxpayer money is on the hook, the greater the pressure on Washington to intervene in the economy. Perhaps most worrisome, the longer Washington closely oversees key segments of the economy, the greater the ability of lobbyists to influence the rules written by legislators to benefit well-heeled clients.

Here’s a potential standard for defining an exit strategy. It isn’t really a reach, since the idea runs through many talks given by Administration officials:

First, focus on saving capitalism from the capitalists–and then get out of the way.

Second, move away from bailing out capitalists and focus instead on workers. When it comes to saving capitalism from the capitalists, the construction of a better safety net is paramount. And here the operating principle should be to protect the interests of employees, not companies.

You can read more about the Administration’s exit strategy here.

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