The recent flap over Toyota recalls raises some interesting conflict of interest issues. The United States is a major stockholder in the largest domestic car company, General Motors. How can the Secretary of Transportation, a representative of the U.S. government, be objective when regulating one of GM’s largest competitors? There are obviously some quality issues with some Toyota cars, and it would appear that Toyota was slow to react to consumer reports of safety issues. So, clearly, someone needed to ring Toyota’s bell on the recalls. But is the U.S. government in a position to handle this issue?
I am no conspiracy theorist. But, ask yourselves this question. We have serious financial problems in government finances today. We have laid out large chunks of money to bail out companies like GM by taking ownership stakes in these firms. If we wanted to reduce future deficits, it would behoove us to increase the value of those investments…you see where I am going.
I am not the only person concerned about these types of Constitutional/legal issues. For example, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, has expressed concern about the Fed’s role in taking on debt instruments (primarily mortgage backed securities). By taking on this debt, the Fed is beholden to maintaining low interest rates so that it can unload those debt instruments in the future. Interestingly, Mr. Hoenig singles out agriculture as a sector for future bailout. The article says:
Mr Hoenig painted a picture of a slippery slope, where a less independent Federal Reserve was asked to find ways to support other ailing sectors, such as agriculture.
Because agriculture is not in particularly bad shape compared to housing, I can only presume that Mr. Hoenig was referring to the possibility of agriculture being in dire straits and the Fed being pressured to bail out farms to prop up land prices.
In either case, I agree with Mr. Hoenig that the mortgage situation is untenable and should probably have never happened. By allowing the Fed to become embroiled in this situation, they are ultimately tied to keeping interest rates too low (a key factor in this latest financial crisis in the first place) and may have their “hands tied” when it comes to fighting the likely inflation to come.