The Emergency Economic Stabilization Act of 2008, more commonly referred to as the “bailout plan,” has caused significant debate, suspicion, and anger among the American people. As giant companies cried out for help in the face of imminent collapse, Congress wrote a $700 billion check ostensibly to rescue the economy from the alleged devastation that would otherwise have occurred. The economy, however, continues to struggle. The New York Times reports today that unemployment in the United States has reached a 14-year high, rising to 6.5 percent. The stock market continues to bounce uncontrollably, which does nothing to help restore consumer confidence. It has been widely reported that the bailout money is not being used to restore the economy, but rather, for executive bonuses. Time magazine reported that executives of those firms receiving bailout funds can expect to earn bonuses worth about “15 times the income of the average American household.” The American people, watching prices rise, job opportunities fall, and their retirement funds slip away, are asking themselves what went wrong.
One of the main arguments in favor of the bailout package was that the collapse of some companies, notably AIG, would have too much of a negative impact on the economy. American citizens were cautioned that the economy would crumble if these companies weren’t propped up. Perhaps that is true. The question, however, is: Why were these companies allowed to become so singularly powerful in our economy? If a company has too much power in its own market, the government intervenes through antitrust law to rein it back from excessive power. There is a vital, relevant market that appears to have been neglected by the antitrust movement: The Public Market.
The United States government is familiar with protecting Americans from unfair and corrupt business practices, largely through antitrust law. Antitrust law, initiated by the Sherman Act in 1890, protects American consumers and competitive firms from the harm that arises out of anti-competitive activities, such as price fixing, cartels, and predatory pricing. The Act was supplemented by the 1914 Clayton Antitrust Act, which granted the government the authority to intervene earlier to prevent such illegal behavior. The spirit of the Sherman and Clayton Acts is rooted in the fact that consumers are often coerced into paying higher prices and competitive firms generally struggle to stay in business when monopolies exist. The Antitrust Division of the U.S. Attorney General’s Office and the Federal Trade Commission (FTC) are responsible for monitoring signs and symptoms of anti-competition in the market. One of the ways in which the Attorney General and the FTC have measured unfair business practices since 1985 is through a market share analysis: If a company has too high a percentage of the relevant market, the Department of Justice is responsible for investigating its excessive power and punishing the company for it.
It is time for the United States government to enact similar legislation with its eye towards the Public Market, which we shall define as any market with significant public involvement. Significant public involvement can be established in the following ways: (1) significant financial investment by individuals, (2) significant repercussions to individual financial investment in the event of collapse, and/or (3) significant ties to other firms that have significant investment by individuals. Significance should be understood as an unreasonably risky level. The legislature should establish a threshold, past which significant public involvement is deemed unacceptable and must be hedged in. If and when the FTC and Attorney General report significant public involvement, the accused firm must post bond to insure the public against any negative repercussions as it corrects itself. An index, similar to the one used in antitrust law, must be established as a function of significant public involvement. The index will be a function of the firm’s aggregate public involvement as a fraction of United States Gross Domestic Product. The bond required for those firms with significant public involvement will be a function of each firm’s involvement. The bonds will only be reimbursed if the firm reduces its public involvement without damage to the economy. Through such legislature, the United States government would achieve both short-term and long-term goals necessary to revitalize the economy:
(1) Improve consumer confidence;
(2) Increase transparency;
(3) Increase firm responsibility for harming consumers; and
(4) Minimize the need for a similar bailout in the future.
Of course, there is some responsibility on the part of consumers for the economic crisis in which we find ourselves. To minimize the future risk of poor individual credit decisions, we recommend Credit Licenses, similar to drivers’ licenses: If a consumer wants a loan or a credit card, she must take a class and, later, a government-administered exam to demonstrate her competence at making significant financial decisions. In particular, each consumer must be able to comprehend the details of any consumer credit agreement and must be able to calculate the financial effect of revolving credit. If the consumer credit agreements are excessively complicated such that a consumer with a high school diploma cannot comprehend them, the government must enact regulation to improve transparency.
Financial analysts, politicians, and reporters have described the current crisis in such a complicated, complex fashion that American consumers may understandably feel disempowered. It is important to remember, however, that the complexity of an industry must not protect it from inquisition. Consider the case of the physician: If a physician makes a mistake on a patient – no matter how technical or complex the procedure – he may be sued for malpractice and may pay damages. In the case of the current economic crisis, there were, simply put, traders and analysts lacking the competency and wisdom to understand the repercussions of their mistakes. When the economy was doing well, those mistakes were accepted or ignored. But when the economy began to slip, the lacking abilities turned devastating. The financial institutions have a responsibility to their shareholders and consumers to make appropriate staffing decisions. At the end of the day, regardless of whether the financial institutions could accurately predict the damage they would cause the economy, economists and lawyers will be prepared to estimate the damages now.
This article was written by Dr. Sebastien Gay and Nadia Nasser-Ghodsi. Nadia is a 2011 J.D. Candidate at the University of Chicago Law School.