One predictable consequence of a massive bailout for investment banks is strong political pressure to provide similar handouts for others. The New York Times reports that big financial firms are starting to lobby for an even wider bailout than the already hefty $700 billion plan proposed by the Bush Administration:
Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.
Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages. At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees. Nobody wants to be left out of Treasury’s proposal to buy up bad assets of financial institutions.
“The definition of Financial Institution should be as broad as possible,” the Financial Services Roundtable, which represents big financial services companies, wrote in an e-mail message to members on Sunday. The group said a wide variety of institutions as varied as mortgage lenders and insurance companies should be able to take advantage of the bailout, and that these companies should be able to sell off any investments linked to mortgages.
Congressional Democrats are arguing that the feds should bail out homeowners with mortgages they can't pay. Meanwhile, as George Will reports, the troubled auto industry also wants to get in on the act. No doubt, other industries will also try to get in line for their own handouts.
I realize, of course, that there are various arguments distinguishing the bank bailout from these other proposed bailouts. But as a matter of practical politics, it may be difficult or impossible for the federal government to resist the pressure. The general public is "rationally ignorant" about politics and economics and doesn't understand the subtle economic arguments that supposedly prove that the bank bailout is a good idea while other bailouts aren't. Many voters will think that if we are going to bail out a bunch of greedy Wall Street bankers, the "little guys" should get some goodies as well. The combination of ignorant public opinion and interest group lobbying will almost certainly ensure that this bailout goes far beyond its initially envisioned scope.
Senior Conspirator Eugene Volokh's classic article on "The Mechanisms of the Slippery Slope" is relevant here. We have a combination of what Eugene calls an "attitude-altering slippery slope" (a bailout for one industry makes public opinion more receptive to others as bailouts come to seem "normal"), an "equality slippery slope" (if banks get a bailout, many voters will think that "it's only fair" if industry X gets one too), and a "political power slippery slope" (as more interest groups become dependent on government largesse, the relative power of the pro-bailout groups will increase and that of their opponents will be reduced, thereby paving the way for further handouts).
These slippery slope dangers should be kept in mind as we weigh the potential risks of the bailout. They aren't the only relevant factor, but they do deserve greater consideration than they seem to have received so far.
UPDATE: As co-blogger David Bernstein points out, the homebuilding industry is now among those clamoring for a bailout of their own.
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- A Homebuilder Bailout?:
- A Bailout in Every Pot:
- Do Low-Probability Catastrophic Risks Justify the Bailout?...
- A Simple Argument Against the Bailout:
- Gary Becker's Doubts About the Wisdom of the Bailout:
- Crony Capitalism: