Unconstitutional Bailout

When Treasury Secretary Henry Paulson announced that the government would provide a credit line to shareholders of Bear Stearns in order to prevent the giant investment bank from collapsing, he was consciously making a profound choice to use taxpayer dollars to save one bank and not to save another.On Friday, IndyMac, a huge California-based institution, with billions in assets, was permitted to expire while depositors waited in long lines outside of bank branches to retrieve the portions of their deposits and investments which were insured.The treasury secretary was at it again with an announcement on Sunday evening to the effect that the American government would grant a line of credit from the federal treasury to Fannie Mae and Freddie Mac in excess of the billions already granted by Congress.Fannie Mae and Freddie Mac were once owned by the federal government, but no longer are. They now are owned by private investors, and thus it is simply unconstitutional for the feds to use tax dollars or bonds or guarantees of loans backed by tax dollars to bail them out just as it was unconstitutional to use tax dollars to save Bear Stearns.There are logical reasons and constitutional reasons for this. The logical reasons are that poorly run businesses or those that do not adapt to changing economic forces should fail. It is a basic law of economics; you don’t throw good money after bad. Someone will pick up the pieces and make a profit off of them. Someone else will buy and service the mortgages.The constitutional reasons get us back to Mr. Paulson’s choices. How can the feds decide who to bail out and who to let die? Virtually all banks are being challenged by the current credit crunch. So why save Fannie and Freddie but not Indy? In another generation, why Chrysler but not DeLorean? There is simply no line that can be drawn, with intellectual honesty and constitutional fidelity, separating those shareholders saved by federal taxpayers and those allowed the fate to which their risks have exposed them.Here’s why. The federal government is one of limited powers. It may only constitutionally engage in behavior that is specifically authorized in the Constitution. The Constitution’s General Welfare Clause requires that all the federal government’s expenditures be for the general welfare, such as a highway, or a national park, or a military installation; something from which everyone can directly benefit. Shareholders of Freddie, Fannie, and Bear Stearns are a small limited class of persons whose well-being hardly enhances the general welfare.The reason this type of behavior was never authorized is two-fold. The first is that the federal government cannot favor shareholders of one company by relieving them of their risk or debt over shareholders of another similarly situated company whose risk and debt is permitted to stand without violating the Equal Protection Clause of the Constitution. That clause requires that the federal government treat similarly situated persons and entities in a similar way.Second was a fear the Framers had that if the government became a market participant, it would tilt the playing field in favor of itself or its patrons. That’s why they wrote in the Contracts Clause that no state may interfere with a contract, and in the Due Process Clause in the Fifth Amendment that the federal government as well may not do so.If Fannie Mae or Freddie Mac or any entity collapses because of market forces or poor management, and the Congress insulates the shareholders of the collapsing entity from the consequence of the collapse, it is favoring those shareholders over other shareholders of other companies that might also be on the verge of financial demise.It simply does not matter whether Congress favors the shareholders by loaning them money, by guaranteeing to their lenders that the taxpayers will repay the loans, or by purchasing their equity. The result is the same. Their contracts — their agreements with Fannie Mae and Freddie Mac — are not being enforced. And they are being relieved of a debt while other shareholders of other corporations are not.Perhaps the only public agreement that Jefferson and Hamilton had about the Constitution was that the federal treasury would be doomed and capitalism would expire if the treasury became a public trough. If it does, the voters will send to Congress those whom they expect will fleece the treasury for them. That’s why the Founders wrote severe spending limitations into the Constitution.Everyone in government takes an oath to uphold the Constitution. Shouldn’t we expect that they will comply with their oaths?Judge Napolitano, who was on the bench of the Superior Court of New Jersey between 1987 and 1995, is the senior judicial analyst at the Fox News Channel. His latest book is “A Nation of Sheep.”

Unconstitutional Bailout

Unconstitutional Bailout

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