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Obama, Chrysler And The Banks

The aftershock of the recent Chrysler bankruptcy rulings has reinforced concerns among those that actually respect the rule of law and, more specifically, the established legal protections for creditor rights and private contracts. That the Obama administration was able to buffalo certain lending institutions (I'm talking about TARP beholden institutions such as Citigroup, Morgan Stanley, Goldman Sachs, and JPMorgan Chase, not the holdouts mentioned here) into a settlement of the Chrysler bankruptcy is not so shocking as the rationalization of this outcome offered by the Left. The common argument is that the federal government had a substantial tax payer stake in the outcome and therefore had the "right" to enter into the fray.

As with any rationalization of an indefensible position, the Left's polemic rests on a fallacy, to wit, that the federal government should have even had a seat at the negotiating table. The federal government shouldn't have a say in the negotiations for many reasons (not least of which is that they should have no money in the game to begin with), but chief among them is the poisonous effect this intervention will have on the creditworthiness of any borrower that has a union shop. Who in the world would make a senior secured loan to a unionized company after witnessing the treatment given said creditors in the Chrysler negotiations? There is no defense to the federal government's intervention in Chrysler's business other than political expediency and political favoritism, two principles that are anathema to the concept of private wealth creation and capitalism.

Megan McArdle nails it with this comment:

What particularly worries me is that it seems so unnecessary. I heard repeatedly from progressives, in the run-up to the bankruptcy case, that the holdouts were unreasonably holding out for a trivial improvement--about 500 million dollars. But if it was so trivial, why didn't the government just put the extra money in, rather than jeopardizing confidence in the bankruptcy system--and the creditworthiness of a large swathe of unionized firms? $500 million is about the price of one cup of coffee per American, a trivial sum relative to the overall budget. This move has shown potential partners that government funds are dangerous, and potential lenders that union firms are risky bets; both have probably cost American citizens more than they saved. So why did the government risk so much for so little gain?

You know the answer, don't you? Because they're planning to do it again.

The Chrysler negotiations are now the archetype of the brave new world of Obama and American capitalism. Don't think for a minute that this doesn't have grave consequences for vital issues such as job creation, energy independence and credit decisions. Using a country's banks for political favoritism is a corner of the international political economy that was historically the domain of despots. President Obama has signaled that his administration is clearly unconcerned about leading this nation down that road.

H/T Instapundit


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Comments (8)

Superb post, Hugh.... (Below threshold)

Superb post, Hugh.

Once the government makes it abundantly clear that they have bestowed upon themselves the right to interfere with private contracts and, at their sole discretion, rewrite any contract, for any reason, then the amount of entrepreneurial risk taking in this country will plummet, and along with it, wealth creation.

Unless, of course, someone comes up with a way to insure entrepreneurs against losses due to government interference. Don't laugh -- it may be our only hope.

Wonder where Barry's going ... (Below threshold)

Wonder where Barry's going to get investors for all those 'toxic' assets Timmy still has to unload. Same for all those new 'green businesses'. Does Barry have a Sugar Daddy?

HughS: "those that actua... (Below threshold)

HughS: "those that actually respect the rule of law"

Obama already told us WHICH "law" to respect:
"I WON!"

Every day we see a new revelation as to how that LAW is to be applied! Get used to it...or get angry and motivated. But time's running out!

I take exception with one t... (Below threshold)

I take exception with one thing Megan McCardle wrote. She referred to THEM as Progressives. That is a false construct. THEY are STATISTS. I am pleased to see that some Conservatives, notably Mark Levin, are referring to them correctly.

After they tarnished the title Liberal to the point of making it toxic by turning it on its head; they decided that they were actually Progressives. There is nothing progressive about them. They are throwbacks to notorious Statists of the past; some of the more modern examples being Germany, Soviet Russia, PRC, N. Korea, and the great super-statist entity called the EU.

Maybe the government could ... (Below threshold)

Maybe the government could provide that insurance?

Yeah, and they're going to splice wings into the pig genome any day now...

I'm not an economics expert by any means, but I have a hard time believing that the effect that's going to result from this is unintended. (And I'm a great believer in the law of unintended consequences, by the way.) Don't they see their primary effect is going to have a hell of a lot of secondary ones down the line? And not exactly PREDICTABLE ones, either?

But then, I'm making the assumption that they really care about the secondary effects...

I think I need to stop doing that.

This is the American style ... (Below threshold)

This is the American style of Fascism. Fascism with a Smily Face. (See Liberal Fascism by Goldberg to spell it all out)

The problem with economic d... (Below threshold)

The problem with economic development in 3rd world countries is that the rule of law is not well established. It's more typically the fiat of some single person / small group of persons.

The problem with these countries is that the true risk is unknown because of this instability. The effect of unknown risk is reduced investment (i.e. capital seeking safer regions where the rules are better defined and better adhered to).

What the Chrysler 'bankruptcy' does is bring that facet of unknown risk to the U.S. whereby the effect will be decreased capital available and/or increased costs for acquiring capital willing to take on that increased risk.

And, _mike_ it also brings ... (Below threshold)

And, _mike_ it also brings some question about whether the 'rule of law' is absolute. Seems to me like political considerations have been the overriding factor lately, and I can't say it makes me feel very confident.

If I were someone with money to invest, I'd be REAL wary of any major industry in the US at this point. The risk is indeed unknown, and with the rules essentially tossed out the door it's virtually unknowable.

Actually, I take that back - the rules ARE known now, and it's that government will do what it finds most politically expedient at the time, taking into account obligations to the groups it currently owes. And the investor is not a member of those groups...






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