As I noted last week, the Obama administration believes it’s the civic duty of some Chrysler investors to lose more money than they should by law and contract so that the unions, who are major investors in the Obama administration, can lose less; when said investors balked at the idea, the president threatened to turn the awesome power of his tame PR flacks (aka the White House press corps, an arm of our “independent media”) loose on them to destroy them.
Megan McArdle summarized the situation this way:
I see a lot of liberal blogs crowing that Obama’s really taking it to the hedge funds who are holding out on the Chrysler bankruptcy. Hedge fund managers, you see, have a civic duty to lose large amounts of other people’s money in order to ensure that the UAW makes as few sacrifices as possible in a bankruptcy.
Predictably, I got a couple liberal commenters popping up saying, in essence, “What’s bad about this?” Well, let’s start off with McArdle again:
Which brings us to the real question, which is, when did it become the government’s job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line? Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.
No, leave that aside for the nonce, and let’s pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions. What do you think this is going to do to the supply of credit for industries with powerful unions? My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit. Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit. Though it may well be the last time they get it, on anything other than usurious terms.
Bill Roberts points out an interesting follow-up from one of her commenters:
Government interference, or arbitrary enforcement of the rule of law is a hallmark of bankruptcies in banana republics, and France. When lenders have confidence that the government will enforce bankruptcy laws (ie the rules of the game) will be consistently upheld, they will lend more freely. When lenders fear their contractual rights will be summarily ignored, they will demand equity-like rates of interest, thus stifling economic activity. Credit is a sacred trust.
The point here is not which party is more “deserving” of more or less of a shrunken pie, lazy unions or heartless hedge funds. Lots of folks fundamentally believe the government should do whatever the hell it wants (eg upend absolute priority in bankruptcy) to effect the “greater good”, as defined by a self-designated minority of people. But all government policies have a cost, and those same folks like to pretend that those costs don’t exist. When the Government flouts the rule of law to fit its preferred special interest groups, that has a real cost.
But then, this isn’t the only area in which we’ve seen banana-republic behavior from this administration starting off . . . I’m hoping this isn’t going to become a theme. (And if anyone thinks the government’s intervention into the Chrysler bankruptcy is anything other than a payoff to the unions, McArdle also does a nice job of debunking that idea.) For now, though, it has people in the financial market worried, and the backlash is already showing up.
John Derbyshire of National Review Online passes this one along from “a friend in the hedge fund biz” (HT: Bill Roberts again):
Hey John—Would you like a sound bite from one of those evil hedge fund guys for Colmes’ show tonight? How’s this: “As a professional investor I’d have to be out of my skull to partner with this government on anything.”
This administration has made it quite clear that they can’t be relied upon to honor contracts or legal precedents and if I can’t know what the rules are before the game starts then I’m not going to play. Hedge funds aren’t like the banks . . . we haven’t failed. We aren’t beholden to the taxpayer to make our way. We have contractual and fiduciary obligation which we will honor. People pay us to make them money not to meet a political goal. So Obama had better think long and hard before he tries to bully us like he did the banks, or try to tell us that “he’s the only thing between us and the pitchforks.”
Also, Geithner and Obama have been saying that they plan on balancing the budget once the crisis is past. The press may believe that twaddle about how he’ll do it by “making things more efficient,” but we in the hedge fund industry aren’t so stupid. We’ve looked at the numbers and know what he’s planning to do. I know dozens of people who are already putting the legal structures in place to move their companies and themselves offshore and away from the grip of the tax man. These are some of the smartest most dynamic people in the world and they’ll have no trouble staying ahead of the [dumb] kids . . . over at the IRS.
So unless Obama wants to run out of “other people’s money” a lot sooner than he expected, he had better keep some people around to pay the bills. And if he keeps demonizing the productive and saying that it’s their responsibility to let him spend their money on the unproductive, then we’ll all be gone. I’ll be working my 14 hour days in Bahrain or Singapore, and Obama can go suck eggs. He needs the productive classes a lot more than the productive classes need him.
The problem here for the kind of approach President Obama is using in this situation is that he really does need the people with the money to cooperate for his plan (or any plan) to work, and strong-arming them into cooperation will only work for a very limited time in a very limited way. The concern this raises among potential investors is succinctly expressed by Thomas Lauria:
The President is trying to abrogate contractual rights; if he will attack that contractual right, what right will he not attack?
I’ve often thought that the great problem with leftist economic theories is that they implicitly assume that people’s behavior doesn’t change as the incentives change—that reactions remain static, and thus that, for instance, increasing taxes on the rich will mean that the rich will pay more taxes. This is a problem because the assumption is wildly false; thus, above a certain level, increasing taxes on the rich actually decreases the amount of taxes they pay, because their behavior shifts in ways designed to produce precisely that result. Wealth protection (through tax avoidance) trumps wealth creation, economic productivity drops accordingly, and the economy suffers, hitting those who aren’t rich enough to make that choice—such as, for instance, the members of the UAW. The same sort of thing will happen if the investment class decides that the government can’t be trusted to honor contracts if it doesn’t like their outcome: they simply won’t sign contracts they don’t trust, leaving those who need investors to go whistle for them.
As such, the approach the president is employing here is a lot like the approach he employed in dealing with the Somali pirates last month: good short-term tactics that will breed distrust and prove counterproductive, perhaps severely so, once his opponents wise up to what he’s likely to do.Further exacerbating the situation is the fact that Chrysler won’t be paying back the $8 billion the feds have given them, and the government won’t be getting stock in return for its “investment,” either.
Instead, the wreckage of Chrysler will be divided up among Fiat, Chrysler’s unions, and Chrysler’s debtholders. Which means that the taxpayers’ $8 billion was just a gift to these three consitituencies.
We don’t know about you, but we can think of a few dozen charities that we’d rather have given that $8 billion to than Chrysler’s debtholders, Chrysler’s unions, and Fiat.
Is the White House going to explain this one, or are we just supposed to ignore it?
On the bright side, at least Barack Obama is making his payments to the labor movement for the nice big white house they helped to buy him . . .