Government: The ex post facto “Investor”
Peter Schwartz has a great op-ed this week, “Mob Rule Comes to Washington.” In it he asserts that arbitrary, unchecked use of government power is tantamount to mob rule and that this is what exists today. President Obama even made a concrete reference to the force of the mob when he reportedly told bankers behind closed doors that his administration “is the only thing between you and the pitchforks.” But is this hyperbole? I mean, there isn’t really a mob of people with pitchforks out there, right? What does Swartz mean by “mob rule” and how does it manifest itself in today’s crisis.
The answer is in the arbitrary use of government power, in other words, the imposition of force, or the reversal of previous actions based upon whim. One of the clearest examples of this type of action is the ex post facto taxation of AIG executive bonuses. Congress used it’s legislative powers to essentially rewrite the terms of previously granted TARP investments to AIG. The government issued TARP investments under certain terms, typically as warrants for stock or as preferred stock. The terms of these investments are typically passive as far as company operations are concerned. That is, the investments do not allow the entity providing funds to exert control over the bank’s operations. Yet, the government, after the fact, exerted just such control.
But why is such action so destructive? This action took the form of a law passed by a legislative body, yet it is a blow at the very idea of rule of law. It destroys the idea of a contractual agreement, since the original investment terms mean nothing. And that will destroy man’s ability to use his rational faculty to live, by destroying decisions he has previously made. Had AIG known before hand that such terms would be imposed they might have chosen not to accept TARP funds. Yet they did not know and could not have known that such actions would be taken. These actions are forms of tyranny.
What precipitated this government action? Public outrage over the fact that bonuses were given. It was popular opinion expressed as displeasure to our elected officials. But the concept of rule of law is intended to prevent such expressions from resulting in arbitrary force.
Other examples of arbitrary actions include strong-arming of several of the large banks to “accept” TARP investments in the first place, firing CEO’s as preconditions of investment funds, proposed legislation to regulate any and all salaries at companies, refusing to take back TARP funds, and demanding such things as programs for investment in green auto technology.
Yet, if these companies were in bankruptcy some of the same actions, such as removal of executives, might occur as conditions or restructuring. Is this not the same thing? Clearly not. When we first defended CEO bonuses here, we had a commenter who suggested otherwise.
and i know government played its (small) part in the crisis, but we live in democracy. and as long as this plan is going forward, put into place by our elected officials, i think there should be ACCOUNTABILITY. since i have become a shareholder, so to speak, i say: don't take the money if you can't pay the price.
While I can certainly understand those who rightly fume at the government handing out TARP funds, and feel as though their money should be managed properly, the principled course to take is one that preserves the rule of law, does not unleash the mob, and accomplishes the same thing. This process exists already. It is bankruptcy.
What about the idea that such actions are just because these bank executives (or auto executives ) are deserving of the punishment they receive? Justice is not the arbitrary use of force. The sense of satisfaction that one feels when they see an executive being punished cannot be called justice if obtained in any manner whatsoever. There is a difference between justice in a courtroom and “justice” on the guillotine. The latter is not justice at all, but tyranny, and it is what we see the signs of today.
Schwartz is right. The mob is loose, and arbitrary government action is it’s harbinger.
Labels: bankruptcy, bonuses, Obama, TARP, Wall Street
When is Nationalization Not Nationalization?
The answer: when we simply call it something else.
Nationalization of key large banks has been the talk for the past few weeks. This seems to be the dominant mechanism being discussed for a thorough restructuring of bank balance sheets. Harvard University economist Greg Mankiw suggests that in order to describe what is really meant by the process, you have to properly describe it.
If the government is to intervene in a big way to fix the banking system, "nationalization" is the wrong word because it suggests the wrong endgame. If banks are as insolvent as some analysts claim, then the goal should be a massive reorganization of these financial institutions. Some might call it nationalization, but more accurately it would be a type of bankruptcy procedure.
Megan McArdle at The Atlantic.com adds,
If nationalization is just a way to take control of the downsizing and ensure that equity shareholders and creditors don't profit at the expense of the taxpayer, all well and good. If it is a way to avoid recognizing the full extent of the losses as quickly as possible, not so much.
This confusion regarding what is meant by a possible nationalization highlights a key issue with the whole scheme. It doesn’t have a “playbook” or in other words there is no rule of law that covers the powers that must be exercised to complete such an action. If you are worried by the concept, you have a reason to be. It is because we have very little recourse against the arbitrary exercise of power should such action be taken.
This seems to be the biggest issue I have with those economists who are discussing the option. They discuss the mechanics of such action in the abstract, as if government is simply taking the role of a surgeon operating on his patient, rather than a political entity composed of conflicting ideologies and agendas devouring their kill.
The issue of politicization was taken up in a Wall Street Journal op-ed, “The Problem with ‘Nationalization’” last week. Given Washington’s track record of not doing what it started out claiming it would do in regard to the crisis, is there any reason to believe that what starts out as a “type of bankruptcy procedure” would not end up becoming institutionalized government encroachment in the financial sector?
From the beginning, the handling of the U.S. crisis has been politicized. The partisanship is as toxic as the bad assets on bank balance sheets. Both parties are coming up with schemes to impede the process of foreclosing on homeowners who can't afford their homes, which would get those homes into the hands of new owners who can afford them. Does anyone believe that a government bad bank will squeeze homeowners? To ask the question is to answer it.
Moreover, we know how the government runs financial institutions -- consider Fannie Mae and Freddie Mac. Or IndyMac, whose management by the FDIC has been criticized for inflating the rescue costs through its liberal loan-modification program. A money-center bank in government hands would become a conduit for politicized lending and grants disguised as loans. That's what's happened at Fannie and Freddie. The government would never let go of its political ATM. You might as well consolidate such an institution with the Fed from the outset.
Mr. Geithner wants a public-private partnership to buy toxic assets from banks. All that government has done thus far has only scared private money off. As bankers now realize, when you turn to the government for financial assistance you take on an untrustworthy partner. Outside money will not come in only to see its investment diluted later on when the government injects additional funds.
Rather than focusing on ways in which we can further involve the government in the financial system, we need to find ways to extricate banks from government's deadly embrace. Banks, at least the behemoths, were public-private partnerships before the crisis. Deposit insurance, access to the Fed's lending, and the implicit (now explicit) government guarantee for banks "too big to fail" all constituted a system of financial corporatism. It must be ended not extended.
While the government currently ‘nationalizes’ banks as part of FDIC’s mandate, former FDIC head William Isaac points out that nationalization of one of our largest institutions is far beyond the scope and complexity of any nationalization ever attempted by FDIC.
The fact is that there is a process already covered by the rule of law meant for such instances, Chapter 11 bankruptcy reorganization or Chapter 7 liquidation. Yves Smith at naked capitalism argues that this is not an option for these large banks.
It's hard to convey to people outside finance why a big complicated bank isn't the same as a manufacturing business or a retailer, where you can resort to Chapter 11. The simplest explanation may be that banks are much more tightly integrated into various customer and counterparty webs than most other businesses are. If a big automaker wants to shut down a production line for a few hours or a week. it can be done with little disruption to outside parties if planned. It isn't acceptable for a trading desk to shut down for a day, say to do "routine maintenance". Counterparties would run for the hills the next chance they had a chance to initiate trades. Now one might argue that this is convention, but as a customer, not being able to trade, not having ready access to one's funds is seen as an unacceptable risk, and that business requirement makes it impossible to resort to Chapter 11.
The short explanation of Yves point is that banks are supposedly special beasts. For instance, when an airline goes into Chapter 11, people are still willing to fly. There’s not much chance on any given flight that the plane will take off without fuel. However, banks use your money as “fuel",” and there is a chance that if you give your funds to one in Chapter 11 that you might never see them again. As a result, bank bankruptcy has a confidence problem and risks a potential run.
I don’t buy it. Citi today is almost certainly insolvent. Given the government’s arbitrary actions in dealing with each problem as it comes along, there is a high level of uncertainty that any one party will be kept whole in a government led restructuring. Yet Citi continues to do business.
The key here is that a bad bank still consist of healthy operations which can be sold off intact as part of bankruptcy proceedings. In a free market, investment capital would seek out clean, vetted acquisitions of healthy chunks of these banks. Proven management teams who can perform adequate due diligence would field this capital to acquire portions of these banks. This would result in orderly transfers and recapitalizations of healthy portions of these banks, under rule of law.
Nationalization by any other name is still nationalization, because it is an arbitrary act of government, and as such unpredictable and uncontrollable. Instead of increasing arbitrary involvement of government in the financial sector, we need less government intervention.
Labels: Wall Street
As Wall Street Bonuses Go, So Goes the Liberty of All of Us
So we receive President Obama’s declaration that Wall Street bonuses must be cut. According to him, now is not the time for those bonuses, although he allows that there will be a time – determined by him – when bonuses will again become acceptable.
When Obama arrogates to himself the authority to determine whether, when, and in what amount payments shall be made by an employer to an employee, do not think that such power will only be used to lighten the wallets of Wall Street executives. Such a power demanded today becomes one that will be used in the future to cut the wage or bonus that any American is paid, if doing so should please the Presidency.
If you doubt that, consider that at several times in history the American government fixed the wages of nearly all Americans. It happened during World War II and it happened again in the early 1970s. It is neither a Democratic nor a Republican issue, with the former happening under Democratic President Roosevelt and the latter under Republican President Nixon.
It needs to be said, because Americans have become so used to having their liberties encroached: a man’s ownership of his labor is parcel of the ownership of his own life. If he cannot freely contract with an employer to offer his labor at voluntary, mutually agreed upon terms, then his life is no longer his own. Instead of being a free agent offering his services at a voluntary, mutually agreed upon rate to a willing employer, he becomes a serf, whose labor and life is controlled by his lord and master.
That is the meaning of Obama’s attack on Wall Street bonuses. Attacking the private right of employer and employee to voluntarily agree on salaries and bonuses is an attack on the freedom of both parties. In calling for Wall Street executives to be treated like serfs, President Obama is setting the precedent that will make all of us serfs in the future.
Do not be fooled by the issue of government bailouts. Government had no right to hand out that money. It does not belong to government; it belongs to each one of us. Moreover, this crisis would have ended on its own without any government “rescues.” Recessions always end through the economic adjustments of all participants in the economy. It happens on its own, without a “rescue” or despite it. The current recession is no exception and will end, despite Presidents Bush and Obama’s profligate showering of trillions of dollars of taxpayer money on the problem.
However, government committing a wrong by handing out bailout money does not give it the right to compound its wrong by using that as a justification for further violating the rights of employers and employees. Government should not be handing out bailouts, nor should it be telling employers whether they can pay bonuses.
No one, including President Obama, has the right to forcefully tear apart the private employment relationship between employer and employee. When a private individual does it, it is considered fraud or theft. When the President does it, he takes on the scary personage of a dictator.
Labels: bonuses, Obama, Wall Street