Republicans choose Wall Street over protecting the free market 

Republican leaders have proven the Democrats right: The GOP’s teeth gnashing about “permanent bailouts” was cynical populist showmanship — and Republicans can’t pull off that act as well as President Barack Obama.

By proposing a financial reform bill that is mostly identical to the one proposed by Sen. Chris Dodd, D-Conn., Republicans have passed up an opportunity to appeal to their base, by returning to their alleged principles of limited government, and appeal to much of the middle by waging a populist battle against Wall Street’s corporate-welfare queens who panhandle on Capitol Hill.

Republicans favoring limited government over a “pro-Wall Street” policy would have been out of character, to be sure, but events were conspiring to make such a free-market populist stance possible. For one thing, the bankers had already abandoned the GOP.

Wall Street was even longer on the Democrats in 2008 and 2009 than it had been on mortgage-backed securities in 2005 and 2006. Obama raised more money from Wall Street than any candidate in history, and more money from Goldman Sachs than every Republican running for president, House and Senate, combined.

Maybe Republicans bought into the myth — useful for big-government liberals such as Obama and repeated unceasingly by lazy journalists — that Wall Street is the beating heart of the free market.

Arnold Kling, an economist associated with the free-market Cato Institute, has laid out his own ideal financial reform, and anyone who believes in free markets and wants to protect taxpayers from bailouts should listen to Kling.

First, eliminate the corporate welfare that powered our current mess: Abolish Fannie Mae, Freddie Mac and the Federal Housing Authority. Sunset the tax deduction for mortgage interest. Next, get the government out the business of dictating capital requirements and thus declaring who is safe and unsafe — leave that up to credit markets.

Then there’s a not-quite free-market fix that Republicans should embrace because it’s less intrusive than its alternatives and more likely to prevent future bailouts: break up the big banks. Kling argues that big banks inherently have too much political power, and that they will use that power to guarantee bailouts.

Republicans could go further, though. Why should the Federal Reserve have a “discount window” that lends to banks? Why not end TARP and claw back outstanding TARP money? Let’s look for a real way to end bailouts — it might take a constitutional amendment.

Republicans have a choice today: free-market populism or pinstripe protectionism.

Timothy P. Carney is the Washington Examiner’s lobbying editor.

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