Creature From Jekyll Island by G. Edward

62 THE CREATURE FROM JEKYLL ISLAND

over their smaller competitors was also one of the objectives of the Jekyll Island plan.

Perhaps the most interesting—and depressing—aspect of the Continental Illinois bailout was the lack of public indignation over the principle of using taxes and inflation to protect the banking industry. Smaller banks have complained of the unfair advantage given to the larger banks, but not on the basis that the government should have let the giant fall. Their lament was that it should now protect them in the same paternalistic fashion. Voters and politicians were silent on the issue, apparently awed by the sheer size of the numbers and the specter of economic chaos. Decades of public education had left their mark. After all, wasn't this exactly what government schools have taught is the proper function of government? Wasn't this the American way? Even Ronald Reagan,

viewed as the national champion of economic conservatism, praised the action. From aboard Air Force One on the way to California, the President said: 'It was a thing that we should do and we did it. It was in the best interest of all concerned.'1

The Reagan endorsement brought into focus one of the most amazing phenomena of the 20th century: the process by which America has moved to the Left toward statism while marching behind the political banner of those who speak the language of opposing statism. William Greider, a former writer for the liberal Washington Post and The Rolling Stone, complains: The nationalization of Continental was, in fact, a quintessential act of modem liberalism—the state intervening in behalf of private interests and a broad public purpose. In this supposedly conservative era, federal authorities were setting aside the harsh verdict of market competition (and grossly expanding their own involvement in the private economy)....

In the past, conservative scholars and pundits had objected loudly at any federal intervention in the private economy, particularly emergency assistance for failing companies. Now, they hardly seemed to notice. Perhaps they would have been more vocal if the deed had been done by someone other than the conservative champion, Ronald Reagan.2

Four years after the bailout of Continental Illinois, the same play was used in the rescue of BankOklahoma, which was a bank 1. 'Reagan Calls Rescue of Bank No Bailout,' New York Times, July 29,1984.

2. Greider, p. 631.

PROTECTORS OF THE PUBLIC

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holding company. The FDIC pumped $130 million into its main banking unit and took warrants for 55% ownership. The pattern had been set. By accepting stock in a failing bank in return for bailing it out, the government had devised an ingenious way to nationalize banks without calling it that. Issuing stock sounds like a business transaction in the private sector. And the public didn't seem to notice the reality that Uncle Sam was going into banking.

SECOND REASON TO ABOLISH THE FEDERAL RESERVE

A sober evaluation of this long and continuing record leads to the second reason for abolishing the Federal Reserve System: Far from being a protector of the public, it is a cartel operating against the public interest.

SUMMARY

The game called bailout is not a whimsical figment of the imagination, it is for real. Here are some of the big games of the season and their final scores.

In 1970, Penn Central railroad became bankrupt. The banks which loaned the money had taken over its board of directors and had driven it further into the hole, all the while extending bigger and bigger loans to cover the losses. Directors concealed reality from the stockholders and made additional loans so the company could pay dividends to keep up the false front. During this time, the directors and their banks unloaded their stock at unrealistically high prices. When the truth became public, the stockholders were left holding the empty bag. The bailout, which was engineered by the Federal Reserve, involved government subsidies to other banks to grant additional loans. Then Congress was told that the collapse of Penn Central would be devastating to the public interest.

Congress responded by granting $125 million in loan guarantees so that banks would not be at risk. The railroad eventually failed anyway, but the bank loans were covered. Penn Central was nationalized into AMTRAK and continues to operate at a loss.

In 1970, as Lockheed faced bankruptcy, Congress heard

essentially the same story. Thousands would be unemployed, subcontractors would go out of business, and the public would suffer greatly. So Congress agreed to guarantee $250 million in new loans, which put Lockheed 60% deeper into debt than before. Now that government was guaranteeing the loans, it had to make sure Lockheed became profitable. This was accomplished by granting 64 THE CREATURE FROM JEKYLL ISLAND

lucrative defense contracts at non-competitive bids. The banks were paid back.

In 1975, New York City had reached the end of its credit rope. It had borrowed heavily to maintain an extravagant bureaucracy and a miniature welfare state. Congress was told that the public would be jeopardized if city services were curtailed, and that America would be disgraced in the eyes of the world. So Congress authorized additional direct loans up to $2.3 billion, which more than doubled the size of the current debt. The banks continued to receive their interest.

In 1978, Chrysler was on the verge of bankruptcy. Congress was informed that the public would suffer greatly if the company folded, and that it would be a blow to the American way if freedom-of-choice were reduced from three to two makes of automobiles. So Congress guaranteed up to $1.5 billion in new loans. The banks reduced part of their loans and exchanged another portion for preferred stock. News of the deal pushed up the market value of that stock and largely offset the loan write-off. The banks'