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Jun 22, 2024  |  
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Andrew Reder


NextImg:Mamas, Don’t Let Your Babies Grow Up to Be Cronies

In 1979, Ed and Patsy Bruce’s song “Mamas Don’t Let Your Babies Grow Up to Be Cowboys” became a hit with the release of Waylon and Willie’s version. One interpretation of this song can be taken to promote modern careers and urge young Americans to move beyond the nostalgia of life on the frontier. It encourages parents to teach their children the importance of settling down to establish a steady job and home life. The message at the core of this interpretation communicates that America has moved past the corruption and chaos of its youth and we now have the opportunity to build a stable future for ourselves and future generations. Interestingly, a similar song could be sung to bureaucrats in Washington who are diving into age-old regulatory mistakes in reaction to recent large bank collapses.

Many episodes in the history of the American economy feel very much like the wild west, rampant with corrupt cronyism and regulatory chaos. During the Great Depression, the government pursued a variety of programs such as the Agricultural Adjustment Act, the National Industrial Recovery Act, and the Civilian Conservation Corps in which they bailed out hand-picked winners with tax money. Arguably, these programs extended the depression and did little more than line the pockets of the lucky winners. Another example is the Chrysler bailout of 1979 in which the feds rewarded the struggling company with a $1.5 billion loan guarantee on the taxpayer’s dime.

As alluded to previously, one of the most high-profile examples of cronyism recently has been the collapse and a federal bailout of the Silicon Valley Bank. The bank was founded 19 years ago and quickly became a major player in the world of tech finance, lending money to some of the biggest names in Silicon Valley. However, the bank’s rapid growth was fueled by risky lending practices and a lack of oversight, and it inevitably all came crashing down. The collapse of the Silicon Valley Bank and other large, poorly managed banks prompted the Federal Reserve to create a new program that insures loss beyond the original FDIC program. The Bank Term Funding Program (BTFP) has cost taxpayers billions of dollars and has raised serious questions about the prevalence of cronyism in Washington.

Political favoritism runs rampant through BTFP, which provides loans to financial institutions which pledge certain types of securities—including US Treasuries, agency debt, and mortgage-backed securities—as collateral. This collateral is valued at par instead of open-market value, meaning that banks can borrow on asset values that have not been impaired by a series of interest rate hikes since 2022. As a result, the program is unfairly benefiting large financial institutions and their wealthy shareholders who have the ability to pledge these types of securities as collateral, while smaller banks and average citizens do not have access to the same resources.

Furthermore, BTFP has been created specifically in response to the failures of banks with significant exposure to the technology sector and cryptocurrency. By providing emergency loans to these institutions, the government is effectively bailing out banks that made risky investments and may have engaged in questionable practices. In this sense, the government is unfairly intervening on behalf of large, influential banks which took on excessive risk and lost. This violates fundamental free-market principles that have been the core of American success.

It can be painful when a previously successful business or financial institution fails. Employees, shareholders, and even the economy at large can suffer the effects of poor investment decisions. It can be very tempting for politicians to attempt to ease this temporary pain with tax money, but this almost always worsens the problem. In a truly capitalist system, winners and losers are chosen through natural selection in an evolutionary process that we know as competition. In a crony capitalist system, winners and losers are hand-picked by the government. Essentially, if previous success and popularity are on your side, you can apply for an opportunity to dip into the taxpayer’s pocket when you can’t compete fairly.

Instead of a system in which one can compete based on their offerings of high-quality, low-cost goods and services, companies with crony capitalist advantages are competing for the favorability of the government. Essentially, the government becomes the customer instead of individuals in the economy. This leads to a stifling of new innovators who offer a better product to consumers and thus threatens established institutions.

Furthermore, crony capitalism often leads to the concentration of wealth and power in the hands of a few individuals and companies. The vicious cycle then continues as the wealthy and powerful soon become the only businessmen who can compete for the government’s favor. The logical result of this is a class system in which social mobility through entrepreneurship is throttled and the growth potential of an economy is further limited, threatening our edge in the global economy.

The prevalence of cronyism in American economic history has, at best, hindered the growth and success of small businesses and entrepreneurs and, at worst, led to major recessions and economic loss. The consequences of such policies can be seen in the bailout programs of the past and present, which often only serve to prop up failing institutions and reinforce a cycle of concentrated wealth and power. America has obtained historically unprecedented economic success not through cronyism, but through innovation and entrepreneurship which is encouraged by the fair and natural competitive process.

Like in the message of Ed and Patsy Bruce’s classic country song, we should urge young Americans to embrace modern opportunities for growth and success and reject the unsuccessful policies of a bygone era. By doing so, we can create a more fair and equitable economy that rewards innovation, hard work, and talent rather than political influence.

Mamas, don’t let your babies grow up to be cronies—let them grow up to be honest, entrepreneurial citizens who contribute to human flourishing through healthy competition in the free market.

Content syndicated from Fee.org (FEE) under Creative Commons license.

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