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May 13, 2009

Another Hidden Cost of Obama's Thuggish Economics: Undermining the Cost-Effective Rule of Law

Another one from Megan McArdle I've wanted to link for a bit.

The Chrysler deal...

...didn't just pay wages on a gamble that a reorganized firm would be worth more than a liquidation; it reaffirmed the union's pension obligations, and, [as far as I can tell], much of the rest of their current contract. This is unprecedented. Moreover, it was not necessary to keep the firm going. Detroit autoworkers do not have a lot of other exciting opportunities to make $40 an hour in compensation. Had the bankruptcy followed a more normal course, most of them would have kept going.

By which she means they would still be working, but for reduced (but still good) wages and benefits, and the company would have continued. In a more sound fashion, of course.

That makes it a pretty straightforward transfer from senior [bondholder] to junior creditors [employees]. And that's costly. The seniority rules have no particular moral priority; like traffic rules, they matter because they are the rules. People make decisions based on what the rules are, and if you change the rules without warning, you get nasty accidents.

Right now, senior debt is cheaper than junior debt; secured debt cheaper than unsecured. If you declare that there are no priority rules, because the government will step in and arrange things so its friends get to cut in line, then everyone will have to pay something close to what the most junior unsecured creditors get now. Not only will interest rates go up, but terms will shorten--no one wants to lend into a period when default risk can't be calculated. And companies that are particularly likely to have administration "friends"--union shops, when Democrats are in office; maybe oil companies or defense contractors for Republicans--are going to find it harder to do debt financing at all.

I do appreciate her attempt to be politically neutral here, but the idea that Republicans could -- even if they wanted -- privilege major oil companies or defense contractors over anyone, let alone their workers, is fanciful, to say the least.

Most people underestimate just how economically valuable the rule of law is. A roughly stable investment environment that doesn't maximize social justice is undoubtedly better than an unpredictible one that tries to--just as the billions of poor people who live in states that have tried to exchange the former for the latter. The winners were not the dispossessed.

Obama's too busy cutting the pie up into pieces he considers "fair" to even notice that he's losing a lot of pie on the floor due to his gleeful butchery.

And not really related, except in terms of the same villains being involved, but Sowell's piece is worth reading. Yes, we've been through this before; can't hurt to go through it again.

When the housing boom was going along merrily, Rep. Barney Frank was proud to be one of those who were pushing Fannie Mae and Freddie Mac into more adventurous financial practices, in the name of “affordable housing.”

In 2003 he said: “I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals.” He added: “I want to roll the dice a little bit more in this situation towards subsidized housing.”

In other words, when things were looking good, he was happy to acknowledge the role of the federal government in pushing the housing market in a direction it would not have taken on its own. But, after the risky mortgage-lending practices fostered by government intervention led to massive defaults and foreclosures that caused financial institutions to collapse or be bailed out, Representative Frank changed his tune completely.

By 2007, his line was now that “the subprime crisis demonstrates the serious negative economic and social consequences that result from too little regulation.” By 2008, his line was that the financial crisis was caused by “bad decisions that were made by people in the private sector.”

When television financial reporter Maria Bartiromo reminded Representative Frank of his statements in earlier years, he simply denied making the statements she quoted and blamed “right-wing Republicans who took the position that regulation was always bad.”

...

Although this is the biggest housing disaster the government has ever produced, it is by no means the first. Republicans intervened in the housing markets to promote more home ownership in the 1920s, Democrats in the 1930s, and both parties after World War II. All of these interventions led to massive foreclosures.

Thanks to JackStraw for that.


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posted by Ace at 08:53 PM

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