GM, QE3, and Crony Capitalism

Yesterday on The Beacon I noted that the Federal Reserve’s new “quantitative easing” measure, QE3, is an example of crony capitalism: the use of public policy to increase the profitability of specific firms and industries. Today I want to compare QE3 with another example of crony capitalism to reinforce the point.

General Motors provides a prime example of crony capitalism. The federal government bailed them out from bankruptcy, and still owns about a third of the company. The bailout transferred assets to the United Auto Workers union—one group of cronies—even as it took away from bondholders what they would have been due in any normal bankruptcy proceeding. And with the president’s initiative to build electric automobiles sagging, the Department of Defense is buying 1,500 Chevy Volts to boost demand for the ultra-costly automobile.

It is hard to see the Defense Department’s purchase of the Volts as anything other than crony capitalism. Volts price out at $40,000 each, so that’s $60 million in government money headed toward GM. Is the Defense Department really being a good steward of taxpayer dollars by buying these cars?

But, you might argue, the Defense Department “needs” cars and they have to buy them from someone. Maybe this isn’t cronyism, but just a sensible purchase. OK, but my point is that if the Defense Department were purchasing those Volts for the purpose of boosting the demand for GM’s car, that would be crony capitalism. With that, I will set this example aside.

The financial industry does not build cars, but they did create and sell mortgage-backed securities which, like Chevy Volts, haven’t been that popular on the market lately. So, with QE3 the Fed is stepping up with a promise to purchase $40 billion in mortgage-backed securities a month for an indefinite period of time.

The Fed is buying the products of the financial industry—the mortgage-backed securities—just like the Defense Department is buying Volts that are the product of GM. In both cases, the purchases are designed to increase the demand for a product the government wants to support, for the benefit of the producers of the product.

If there are any differences, they are (1) that, as I noted above, the Defense Department may actually have a use for automobiles, but the Fed has no use for mortgage-backed securities, and (2) the scale of the operation. There’s a big difference between a purchase of $60 million in total and on-going purchases of $40 billion a month. So, looking at these two examples, QE3 is much more clearly an example of crony capitalism—designed to benefit cronies in the real estate and financial industries—and QE3 is crony capitalism on a much more massive scale.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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