Out of Control Policy Blog

FDIC Head: Have a Fiscal Exit Strategy

One part of the Iraq War troubles was ignoring a key principle of the Powell Doctrine: have a plausible exit strategy to avoid endless entanglement before sending in troops. When it comes to the economy, FDIC Chairman Sheila Bair is now saying the government should not repeat that mistake. Speaking to a group of corporate executives, Bair said the government needs to devise and "exit strategy" in regards to the amount of money is using to rescue Wall Street to avoid artificially propping up banks and other institutions over the long term. "We really need to think through the exit strategy because (government guarantees) could become a crutch," Bair said, adding that weaker financial institutions "need to be allowed to fail."

The government has "invested" nearly $8 trillion dollars to-date in the form of loans, debt guarantees, and the purchase of equity shares--and the FDIC has played a prominent role in that extravaganza. The need for a plan to get out of the ownership business should be especially important in developing an exit strategy. Currently the government owns nearly 80% of AIG, all of Fannie and Freddie, plus a decent percentage share in various financial institutions. How long will the government hold on to those ownership stakes? A what dollar figure have they "recouped" the purchase price? Should the government be in the business of making profit?

Without a clear timetable for pulling out, we could get stuck in this mess for a very long time--and I am referring to the economy. It is not the role of government to own business. Every business operation by the government is generally a fiscal failure (just consider the USPS and Amtrak). Plus there are many unseen negatives when it comes to government ownership, moral hazard issues, and the potential for corruption. The Obama Administration, and in particular the new Treasury Secretary Tim Geithner, should make it one of their first priorities to set a target date by which they will be completely disentangled with the financial industry as a support structure.

Anthony Randazzo is Director of Economic Research


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