Monday, May 25, 2009

Totalitariansim in Finance

Rule of law goes out the window

Communism is when everyone owns everything. Socialism is when the government owns everything. Fascism is when private people own the means of production but then the government tells these people what they can and cannot do with their assets. What we are getting now in the USA is some weird mix of all these systems.

The Obama Administration (which is really not all that different from the Bush II administration in many ways) now decides in some cases who can be the head of companies and what the companies can invest in and how much the managers of the companies can be paid. And now too the government is deciding who can own the companies and how much of the companies they can own. (This of course all relates to the bailouts, no one gets money without strings is the human condition. But too so is the human condition the ability to say "no" to money if you don't like the strings attached.)

To be more precise, and the purpose for this blog entry, is specifically on the General Motors bailout and restructoring.

What we are seeing is the government running rough-shod over creditors' rights. The labor unions (unions are big Democrat Party supporters - President Obama is a Democrat) are getting a government-mandated sweetheart deal whereas the people who actually have paid money to keep GM going (those who have lent the company money by buying its bonds) have to take the loss. A real bancruptcy of GM, one which followed the contractually-agreed upon rights to the assets of GM as it became restructured under a bancruptcy work-out, would be a more enlightened, less political (e.g. less power-grabbing and less special interest-oriented) way to approach the situtation because it would mean people would know what to expect throught the rule of law.

Adherence to the rule of law would then would create a more solid ground for future investment in productive assets in the USA. It is only through investment and increased productivity that wealth is created, and wealth creation is needed by the poor most of all.

By the government mandating, with its money bailouts, the terms of the restructuring it just adds fuel to the fire of economic uncertainty. Which of course is not at all helpful during a recession and during a time when the Fed is increasing the money supply at unprecedented rates.

Why should people want to invest in a country where their rights are violated, where the local currency is treated under such short-termism, and where the government budget deficit (now more than 3 times greater than that allowed for countries if they want to the join the European Monetary Union) has more than tripled in 4 years ? Without overstating the obvious this is just another case of Mises' Law, where one government intervention must necessarily therefore then lead to another.

The labor union monopoly-bargaining rights created by the 1935 Wagner Act then lead to much higher than average wages in the unionized American automobile industry (thus making it less and less competitive compared to its overseas competitors, too because unionization and structured job categories can be less flexible in the face of improved manufactoring techniques).

Monopolized union bargaining rights, in addition to (much) higher than average wages, created extraordinary pension and health benefits for union members. It is this GM union health trust fund (the retirement trust fund is already guaranteed by the government, e.g. by everyone in the economy) who will now, under the current government plan at least, then have a large ownership stake in a new GM. Politics as usual, though, perhaps, worse than usual. Worker ownership is a wonderful method for gaining economic efficiency and equality, however not when it is done by bypassing an expected, adhered to, heretofore rule of law.

Ironically enough, those people who lent the states and the confederation money to fight the Revolutionary War against England in 1775 through 1883 were also labelled as "speculators" (albiet their downside risk was death for treason against the King, a little worse than the government just taking their money), just as President Obama is labelling the GM bondholders as speculators. (Workers does not mean to denigrate President Obama, he needs to garner votes however low he must stoop to do so.) Luckily the US Constitution required that these creditors be paid back according to the the rule of law, e.g. according to the loan agreements. This is of course one of the reasons the USA became the most productive nation on earth by 1900.

Things are a little different now due to the great expansion of the size of the government as a percentage of the economy since the creation of the welfare state in the 1930s, and, a corresponding increase in special interest politics skewing the rules of the game. Still, one can wish for politics a little less cynical, or, even, perhaps, a more enlightened leadership, one that doesn't take advantage of hard times to press their own self-interest.