How do once-free people lose their liberty? The formula may be stated succinctly: crisis and leviathan. The procedure for government officials and their supporters who hope to gain by quashing the people’s liberties is, first, cause a serious crisis, thereby heightening the public’s fears, and, second, blame others for the crisis, pose as the people’s savior, and thereby justify the seizure of new powers allegedly necessary to remedy the crisis and to prevent the recurrence of such crises in the future.

Recent news reports bring us a perfect illustration—one of many during the past year of financial debacles and worsening economic recession. According to an Associated Press article, Treasury Secretary Timothy Geithner asked Congress on March 24 for “broad new powers to regulate non-bank financial companies.” Geithner, of course, earnestly expressed the finest motives: “We must ensure that our country never faces this situation again.” Federal Reserve Chairman Ben Bernanke joined him in “calling for greater governmental authority over complicated and troubled financial companies.” These men want the legal power “to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.”

Given what a significant matter this bureaucratic power-grab appears to be, why would Congress want to go along with it? Simple: failure to grant these powers to the government’s financial functionaries might result in the destruction of civilization as we know it. Speaking of the government’s having already poured more than $180 billion into insurance giant AIG, Bernanke told the House Financial Services Committee that the company’s “failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs.” Did he say catastrophic implications for jobs? That’s all the members of Congress needed to hear. Purported job creation or preservation is their very lifeblood when they run for reelection.

Since the onset of the current financial troubles, government officials have repeatedly chanted a new mantra, “systemic risk,” to justify shoveling mountains of the public’s money to favored firms. So, naturally, at the recent hearings, Geithner trotted out this new hobby horse: “As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can.” But did we really see systemic risk hovering over AIG, or have we merely been told repeatedly that it was hovering?

We’re all scientists here; let’s conduct an experiment: allow AIG, Citibank, Bank of America, or some other giant, mismanaged financial institution go bankrupt, and then see whether the world comes to an end. If it does, we’ll know that these power-seekers were right about systemic risk; but if it goes right on spinning more or less as before, we’ll know that they’ve been selling us a bill of goods. The odds, I believe, are overwhelmingly in our favor. In a thorough statistical study published by the Journal of Financial Economics in December 2007, Sohnke Bartram, John Hund, and Gregory Brown conclude that systemic risk in the international financial system is actually very small even during major crises. Here as elsewhere, a simple domino theory fails badly.

Many people might have missed what was going on at the recent hearing because as usual all parties tried to throw the bloodhounds off the scent by dragging a red herring across the trail. This time the rotten herring was the hefty bonuses that AIG recently attempted to pay certain employees to retain their services. The public is obviously angry about these payments. People seem not to appreciate, however, that the $165 million scheduled to be paid in AIG bonuses amounts to approximately 0.00002 of the total amount the government has dispensed in its recent commitments for loans, capital infusions, “stimulus” spending, loan guarantees, asset swaps, and other utter (and utterly destructive) wastes. The public ought not to allow a minnow to divert its attention from the whale in its living room.