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Marketplace Scratch Pad

Learning to say no

Scott Jagow Sep 14, 2009

President Obama delivers a speech on Wall Street today. The main thrust of it will be his vision for regulating the financial markets, but equally important is the administration’s strategy for getting out of American business.

The government has gotten so involved in the economy, it may be difficult to back out. Today, the Treasury said “the process of exit will be prudent, not hasty.”

Check out these numbers from the New York Times:

Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government.

If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank.

President Obama uses the term “reluctant shareholder” to describe the government’s involvement in companies. Perhaps GM, AIG, etc are reluctant dependents. Either way, there’s a provider-dependent relationship. You know how those usually turn out. Until the provider says “there won’t be a next time” and means it, the dependent rarely changes:

“This crisis, whether it’s because of the Fed or the Treasury or Congress, has created a lot of new moral hazards,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. “Once you have done this once, even though it was in a severe crisis, the temptation will be for people to figure that in the next crisis you’ll do it again. You’ve got to figure out a way to say no.”

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