There are many reasons why Government can not effectively run businesses.  Inefficiency and waste inevitably result caused by a lack of:

• competition
• accountability
• the requirement that resources are productively disposed
• the necessity that capital invested produces a positive and competitive rate of return
• the incentives associated with private ownership
• the disciplining reality of opportunity costs
  • this is especially obvious in an environment where politicians spend beyond their “means” by engaging in perpetual deficits, increased borrowing and the arbitrary creation of new money

The actions of Government are motivated by politics, not the forces which define the choices made by individuals in the context of free markets and capitalism.  Money that is not earned or owned by politicians, is spent to achieve political agendas, proliferate power, present the appearance of accomplishment and expropriate trophy-projects for constituents back home.  These motivations are fundamentally inconsistent with the successful management of any company, industry or the economy.

The Credit Card Industry

The populist, political reaction to the business practices of the Credit Card industry provides an excellent case study.

The following are unassailable truths regarding the Credit Card industry:

• It is a legal business
• The companies provide a valuable and highly in-demand service to willing customers
• Customers freely enter into a legally binding agreement to consume this service
• The terms of this agreement are accepted by all subscribers
• The Credit Card companies are free to operate within the terms of those conditions in their own best interests

Credit card companies, unlike the Federal Government, are in the business of productively making money.  They are owned by shareholders who have invested in these businesses for the purpose of making a return.  It is the fiduciary duty of the managers of these companies to adjust to business conditions and, to the best of their abilities, maintain profitability.

The Credit Card industry is presently under extreme financial pressure as a result of the economic downturn. 

• Defaults are rising rapidly
• The cost of borrowing has risen materially
• Access to liquidity has decreased and become more expensive as the securitization market has shrunken and become more selective

Given current conditions, it is responsible and expected that Credit Card companies would pass higher operating expenses onto the customers that are consuming the more costly services.

The Paradox of Government

The Government has overtly stated that it wants lenders, including Credit Card companies, to lend more.  They wrongly believe that the solution to this financial crisis is increased access to credit.  Politicians have also deluded themselves into believing that a Government orchestrated restoration of pre-bubble credit is possible.  Regardless, shrinking availability of credit will certainly worsen the economic downturn.  Policy makers have made loans to or invested in finance companies with the intent to achieve the goal of maintaining or increasing the availability of credit.

Once these investments were made, though, politicians dramatically changed their focus from proliferating access to credit, to exercising their newly purchased influence over the finance industry to achieve populist, social agendas.  With respect to the Credit Card industry, this intent has manifested itself in the form of proposals to restrict the ability of these companies to respond to changing operating conditions and maintain profitability.

Without an ability to pass on higher expenses, Credit Card companies will inevitably reduce overall and account-specific credit, accept fewer new customers, drop or reject riskier customers and look for other ways to pass on higher expenses.  It also appears that the Credit Card industry is presently raising fees and interest rates partly in expectation of future Government intervention.

Through misguided intervention the Government is in the process of accomplishing exactly what it has attempted to avoid.  Interference designed to increase credit will ensure that overall credit is reduced and that the reduction occurs more rapidly.  This is just the latest example of Government making problems worse in an effort to solve them.

A smattering of recent examples of counter-productive Government interference include:

• TARP, which was supposed to shore up finance companies with much needed capital.  Instead the Government placed such onerous terms on the companies in receipt that many are unable to effectively execute their business models.  Recipients are now panicked to pay back the money and remove the burden.  Weaker firms, unable to pay back the funds, find themselves in a worse competitive situation than before they accepted the Government’s money.
• Executive compensation limits have had the effect of forcing productive employees out of Government assisted companies to firms that aren’t being operated at the discretion of politicians.
• GM is heading for bankruptcy because it is unprofitable.  The Government has asked GM to discontinue its GMC line, its most profitable brand, but is enthusiastically supporting the development of the Volt concept car.  All estimates have the Volt losing substantial amounts of money for the entirety of its production life.
• Subprime loans made to uncreditworthy borrowers were designed to increase homeownership amongst the poor.  The bubble, created partially by subprime lending, and its subsequent collapse will result in less homeownership amongst the poor.
• For fifty years the Government has actively worked to create “affordable housing”.  Fannie Mae, Freddie Mac, the deductibility of mortgage interest, HUD, the FHA, first-time homebuyer incentives, etc… were implemented to make homes more affordable.  The net effect of these efforts was to distort the home market and make housing more unaffordable.  For the first time in a generation home prices are in the process of becoming affordable, yet the Government is doing everything in its power to prop up housing prices at unaffordable levels.

Conclusion

The Government has no business operating companies or distorting the economy in an attempt to achieve political or social agendas.  The distorted results of such interference are consistently inefficient, wasteful and expensive.  The best thing the Government could do to successfully navigate the Depression is to get out of the way and stop trying to fix problems with misguided intervention.  But the very nature of Government precludes this possibility.  I only hope that the damage being done by our policy makers serves as a real-life economic lesson for those who are paying attention.