Squaring the Culture




"...and I will make justice the plumb line, and righteousness the level;
then hail will sweep away the refuge of lies,
and the waters will overflow the secret place."
Isaiah 28:17

10/23/2009 (10:45 am)

Toleration and the Crown

Earlier this week Kenneth Feinberg, unelected agent of King Obama tasked with managing the executive compensation of subjects of the Crown, announced severe cuts in pay for highly paid employees at those companies that have still failed to pay back money forced on them by the King. At the same time, the Federal Reserve, a board appointed by the King and ruling with no authority except that obtained by its power to lend funds to banks, announced plans to review and approve the compensation plans of member banks, even those who received no funds from the King.

Before the rise to power of King Obama, compensation for employees of publicly-held companies was determined by the owners of those companies, expressing themselves through their boards of directors. The concept of private property, which is the cornerstone of a self-governing republic, demanded that only those who owned the company could speak to its practices, allowing only those laws that were necessary to protect the peace and safety of the American people an additional voice. Of course, the number, power, and intrusiveness of laws “necessary to protect the peace and safety” have multiplied like aggressive, carnivorous rabbits, eating more and more of the nation’s substance as they overran free trade. But still, there were limits.

But the government became part-owners of those companies by lending to them, an action not contemplated by the authors of the Constitution from which administrations prior to the Obama administration drew their legitimacy by obeying its strictures. And I have seen no effort on the part of the Crown to limit its intrusion into the operations of these companies based on a fair evaluation of the numbers of shares they hold in each; no, it seems that when a firm accepts a dollar of public money for any reason, that firm becomes a wholly-owned subsidiary of the US Treasury Dept., and must obey its every command.

And by similar measure, Congress created the Federal Reserve in 1914, exercising authority it did not possess and forcing banks to become members. Now the Federal Reserve is exercising authority not specified by Congressional act, claiming the power to approve or disapprove the compensation structure of banks that were coerced to become members.

This brings to mind a vital distinction that was made in the century prior to the establishment of the American republic. It was in the years of Queen Elizabeth I, I believe, when the British Crown decided to extend its toleration to religious dissidents, choosing not to prosecute those Catholics and Protestants who refused to join the Church of England. Implied, and clearly understood by all, was the claim that Crown had every right to demand obedience, that it could, at any moment it chose, revoke that benign toleration and arrest and prosecute those dissidents. The fact that subjects of the Crown exercised liberties did not mean they were free; it only meant that for the time being, the Crown chose to grant them liberty. They were still subjects of the Crown. This same concept of toleration covered every other aspect of subjects’ liberties in England; they were free because the Crown granted them liberty, but the power to grant or revoke liberty remained with the Crown.

When the American republic was established, it instituted a new and revolutionary concept for the first time in the planet’s history: namely, that the government had no powers at all other than those specifically granted by the people. Religious liberty, economic liberty, political liberty — the government did not grant them, they inhered to the people. What belonged (and still belongs) to the English people only by toleration from the Crown, belongs to the American people by birthright. At least, it did before King Obama.

Simply by claiming that he has the right, Obama has made himself King over America. It is he who holds all rights, and he who grants, or tolerates, the liberties of the people. He reserves for himself the power to revoke liberties wherever and whenever he chooses, limited only by Congressional cooperation. Rights no longer inhere to the people; now they are all held by the President, and we all live by his benign toleration, just like subjects of the Crown.

There are plenty of valid objections to these ham-fisted measures to limit executive compensation. I predicted months ago (here and here) that top executives would flee from companies subject to pay restrictions, and this is already taking place as the smartest people in the industry anticipate the inevitable and find safer havens from which to earn what the market says they are worth. I also noted (here) that partisanship inevitably affects measures controlled by the government, and sure enough, the compensation caps are not going to affect the King’s favorites at Goldman Sachs and Morgan Stanley, who were permitted to repay their TARP loans (not all recipients of the King’s largess were so lucky.) In all his major policy moves, King Obama picks winners and losers from among the largest firms — and the winners are always supporters. Curious. And finally, it is crucial to remember that the Fed, which is claiming urgency to control compensation because that’s what caused the meltdown a year ago, is itself the body most directly at fault for the meltdown, having created the housing bubble by its aggressively low interest rates in the wake of multiple shocks to the economy in 2001.

The real objection, though, is that President Obama (he’s not really King… yet) is busily erasing the core distinction between American liberty and the monarchies that preceded it — he asserts, by bold action completely devoid of Constitutional empowerment, that the liberties of a free people exist only by his toleration. He grants us liberty to continue free trade in some small measure — for now. By his actions, he indicates that he reserves for himself the power to revoke those liberties at will. We, the people, do not own those liberties; King Obama does.

Many individuals in the nation applaud these limits on executive compensation, exclaiming that such levels of pay are “obscene,” that they are “unjust,” that the fact that even the poor in America live at a standard unheard of through most of the world through most of history does not justify the extraordinary wealth of the most productive and effective among us. They should look to themselves; for if the Crown can tell executives how much they are entitled to make, then the Crown can also tell anybody how much they are entitled to make. Tyrants obtain the power they desire by setting precedents against the unpopular, and then taking the power granted against the unpopular and using it against everybody else. The super-rich have become unpopular here in America, and by controlling their pay, Obama is establishing his Sovereign Right to control the pay of all. He wants the right for a reason, and you can be sure it is not to prevent riches; he’s not limited his own pay, nor the pay of his “Czars,” has he? Most likely, his goal is to prevent riches among his opponents, and to give himself the power to reward his supporters. That appears to be the one, guiding principle under which this King operates.

We are so screwed…

04/03/2009 (8:37 pm)

Anti-Capitalist Arrogance in the White House

mister-mayhem1

This almost requires no comment whatsoever. Listen to the arrogance:

The bankers struggled to make themselves clear to the president of the United States.

Arrayed around a long mahogany table in the White House state dining room last week, the CEOs of the most powerful financial institutions in the world offered several explanations for paying high salaries to their employees — and, by extension, to themselves.

“These are complicated companies,” one CEO said. Offered another: “We’re competing for talent on an international market.”

But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. “Be careful how you make those statements, gentlemen. The public isn’t buying that.”

“My administration,” the president added, “is the only thing between you and the pitchforks.”

This report came from inside the meeting; one of the participants spoke with Eamon Javers of Politico, and a few others confirmed.

He’s not kidding about the pitchforks, by the way. We’re seeing serious threats of violence against capitalists in London (see also here and here,) and we heard about threats being mailed to AIG executives as well. This is the Krystalnacht moment for the socialists; are show trials next?

The accounts demonstrate that despite the public comments on both sides that the meeting was cordial, the tone in the room was in fact one of mutual wariness. The titans of finance — men used to being the most powerful man in almost any room — sized up a new president who made clear in ways big and small that he expected them to change their ways.

There were signs from the outset that this was a business event, not a social gathering. At each place around the table sat a single glass of water. No ice. For those who finished their glass, no refills were offered. There was no group photograph taken of the CEOs with the president, which typically happens at ceremonial White House gatherings but not at serious strategy sessions.

“The only way they could have sent a more Spartan message is if they had served bread along with the water,” says a person who attended the meeting. “The signal from Obama’s body language and demeanor was, ‘I’m the president, and you’re not.’”

So, here’s what we’ve got:

By attacking executive compensation, the government crippled the banks’ ability to attract talent.

When they tried to explain this to the President, what they got was a threat and belittling signals; anything but assistance in attracting talent to their banks.

bankvandalThe administration, the media, and the Democratic party have sold the American people on the notion that the bankers’ “mistakes” are responsible for the current economic crisis. This is practically slander; certainly they made mistakes — who doesn’t? — but the crisis is the responsibility of a large number of seemingly unrelated measures, involving community organizers, Congress, the Fed, Fannie Mae, three Presidents, mortgage salesmen, land speculators, fraudulent home buyers, securities traders, and yes, some bankers — that all came together at once to cause a problem. Hardly any of this was caused by “greedy bankers,” ill-informed opinions to the contrary; such phrases come from partisans who couldn’t explain a single one of those supposed “mistakes” if their mothers’ lives depended on it. But the socialists need a scapegoat, and they genuinely believe that greedy bankers are to blame, so… pitchforks. It’s the American way, right?

What we’re going to get is a lesson in mistakes. Since the banks will not be able to attract the sort of talent they need to run their business, they’re going to get the sorts of managers who will make the supposed “mistakes” of the current lot look like untarnished brilliance. We’re going to see how quickly a passel of inept bankers can tie a banking system in knots, and perhaps come to appreciate the skill and wisdom of these men we’re currently busy demonizing.

All this from the President of the United States, a man who never outgrew the sophomoric socialism that infects so many young people while they’re still callow. He actually thinks he’s greater and smarter than these bankers, not to mention their moral superior.

We are SO screwed…

03/19/2009 (2:23 pm)

The AIG Wage Rage Smoke Screen

aigtokyosmallThe contrast between the Obama and Bush administrations could not be clearer. The Bush administration, for all the noise about “lies,” announced its intentions plainly and defended them, sometimes ineptly. The Obama administration seems habitually, if 2 months of a pattern can be called a “habit,” to attempt to do all business behind a cloud of smoke, a cloud created by attacking American citizens. It’s an ugly pattern, and ominous.

The smoke screen this time is manufactured rage over AIG executives receiving contractually-demanded retention bonuses after having received federal bailout funds. And while some of the rage properly has been spilling over onto Treasury Secretary Timothy Geithner, who knew all about the bonuses but said nothing, and Sen. Chris Dodd (D, CT,) who slipped loopholes into bailout legislation that permitted the bonuses to be paid, the entire matter is still nothing but smoke to obscure what ought to be the real outrage: why did AIG receive almost $200 billion in federal funds in the first place?

The fact that $200 billion sounds like a small figure defines the times, doesn’t it? It’s an enormous sum (about 1½ times the annual budget requested to run the entire US Army in 2007). It’s so large that we actually filter it out. Americans can get outraged about a buck-fifty in ATM charges, and because outrage has its limits, the same energy undergirds outrage against a few hundred million in executive bonuses and a few hundred billion in federal subsidies. Outrage is outrage, and numbers are just numbers. But there really is a reason why we should be a thousand times more outraged by the waste of a thousand times more money — which is the proportion between the chump change being paid in bonuses (required by contract) and the sum being lent to AIG. And in fact, as I’ll argue later, we should not be outraged by bonuses at all.

AIG received its first round of government money in September 2008. AIG had been “insuring” derivatives trades by banks around the world against precisely what has happened — a loss of asset value underlying the derivatives, in this case the deflation of the housing bubble. Since the division of AIG providing the “insurance” was actually structured as a bank rather than an insurance company (hence the quote marks around the words with the root “to insure,”) AIG was forced by mark-to-market accounting rules to revalue its assets downward to reflect the falling value of housing, and further forced to obtain a huge amount of additional capital to meet reserve requirements. This occurred at the same time that AIG’s financial rating was downgraded by leading financial rating institutions, with the result that it was more difficult and expensive for AIG to obtain the additional funding. About to fold, AIG cried out to the Treasury Dept for help. They received an $85 billion loan from the Treasury, in exchange for 80% ownership by the government (without approval by the stockholders, I might add.) On Nov 10, the government raised the loan to $150 billion. On March 2, 2009, they added another $30 billion.

And the situation does not appear to be improving. Investors are suggesting that bankruptcy would serve them better, and certainly that would serve the American taxpayer better. But Goldman Sachs might have suffered, so here we are.

Even during the Bush administration, there was talk of a possible cover-up of favoritism within the Treasury Department to protect Goldman Sachs. Goldman was the source of Treasury Secretary Paulson, the father of the Grandmother of All Bailouts. There was a rumor, later debunked, that the President of Goldman Sachs, Lloyd Blankfein, was the only private citizen present in a special meeting at Treasury to discuss aid to AIG. Though debunked, it remains nonetheless true that Goldman Sachs was the largest beneficiary of AIG’s bailout. And favoritism might explain why the Treasury allowed Lehman Brothers to founder and sink beneath the waves, but sailed boldly to the rescue of AIG just a few days later.

Part of the outrage should be directed at the fact that enormous blocks of US funds, to be paid back by future Americans, have gone directly to large, foreign banks. Now, this part is not hidden or unexpected. The surface reason for rescuing AIG was that the failure of the large insurer would send ripples through the international banking community; for a lot of people, that phrase rolled off their tongues without them having considered precisely what it meant. What it meant was that international banks with holdings in mortgage-backed securities would not be compensated by AIG for the loss of the value of those securities, and would suffer, possibly fatally. So, when Treasury handed AIG a series of checks worth $173 billion, AIG proceeded to turn around and write checks to Goldman Sachs ($12.9 billion,) Societe Generale ($11.9 billion,) Deutsche Bank ($11.8 billion,) Barclays PLC ($8.5 billion,) and quite a few others. The US economy is shrinking, and lots of Americans are scrounging, but big, foreign banks are safe and sound. Your tax dollars at work.

I have nothing against foreign banks, and the world should be grateful that these banks are sound. However, I don’t imagine Congress would have approved foreign aid packages in those amounts to those recipients, nor do I think the people Congress is representing would have approved. It is not a proper use of US funds. AIG should have been permitted to fail.

madbobMore to the point, I don’t think the Obama administration is interested in directing outrage against foreign banks. Surely they could easily have done so, but they’ve been quiet about it. Quite the contrary; the Obama administration hates American exceptionalism, and is most likely eager in the extreme to hide the fact that the US government is paying to keep Deutsche Bank afloat.

The Obama administration is clearly interested, though, in directing outrage against American corporations. Why? Because rage against American corporations feeds the next steps in the Obama administration’s plans.

American liberals — Democrats, progressives, and some independents — deny that they are Marxists. It’s a fact that traditional American liberalism focuses on individual liberties, the sorts of liberties that have become the watchword of American conservatives like me (the roles have shifted.) However, American liberals have been deeply influenced by Marxism, much more than they are aware. It shows in a number of policies, but most directly it shows in their hatred of American business. The outcry against “big corporations” is nothing more or less than the Marxist denunciation of the bourgeoisie, translated onto the American landscape.

And in Marxist-like fashion, it’s remarkably easy to amplify this outcry in the public eye during a period when people are afraid for their jobs, simply by fanning into flame one of the basest of human evils — envy. It’s a stalwart soul that, while struggling daily with bills for basic things like heat and rent, let alone facing the possibility of layoffs, can resist envy when watching another man receive a single paycheck larger than the sum of his entire life’s paychecks. The best of us deflect that reaction only with difficulty. Couple that reaction with the fact that we resent the company having received a bailout in the first place, and with the fact that we perceive the company as having failed but not paid for its failure, and you have a demagogue’s dream. This is why the House is holding hearings on the bonuses, and why it’s calling for draconian taxes on them, and contemplating full takeovers. It’s why Rep. Barney Frank, himself one of the individuals most directly responsible for the collapse of the US economy, is calling for the AIG executives to be named publicly; imagine how long this issue can be stretched out over such a demand!

It’s also, plausibly, why Senator Dodd slipped the wording protecting bonuses into the bailout legislation in the first place, and why the administration pretended surprise at the announcement of it last weekend. This was a planned diversion, an orchestrated alarm designed to initiate the next stage in the administration’s rapid-fire assault on American capitalism.

And all of it serves to obscure the fact that the Bush administration, followed by the Obama administration, is funding major foreign banks with tax dollars to be collected from the next two generations of American taxpayers.

There is not a sound reason on earth why the compensation of executives should ever be the government’s business, nor any of ours, unless we are stockholders of the corporation. Compensation of executives is determined by a company’s Board of Directors, the individuals responsible for protecting the interests of the company’s stockholders. The salaries of executives are determined by a market where talent gets to negotiate its own worth. If an executive makes a huge sum, it’s because at some point in time the Board of Directors of the company employing that executive felt it was worth the expenditure of that sum of money to hire the talent necessary to run the company. The stockholders are the ones injured if the Chief Executive Officer of a corporation performs poorly; they’re the ones who should care the most, as they own the company. Consequently, the stockholders, represented by the Board of Directors, are the only ones who should be concerned if the CEO makes too much money. It’s their money, you see. And if any of us becomes jealous of the money the executive earns, that’s just too bad; if we want to earn that sort of money, we should work our way up the executive ladder to the place that our skill can command that sort of paycheck. The fact that most of us would never make it that high explains why their talent just might be worth that sort of money.

Even the provision of a large loan from the federal government does not make their compensation our business. The loan was not made in order to obtain federal control of the company; and to the extent that it was, the federal government stole the value of the company from the true stockholders, who were not consulted in the deal. If we are outraged about how our money is being spent, we should insist that the government provide no more such bailouts, not that executives not get paid what they are worth on the open market.

But whatever your feeling about executive compensation, the real enemy in this affair is the totalitarian impulse that deliberately diverts our attention from an encroaching government domination by encouraging hate toward other Americans. The White House has deliberately targeted radio show hosts, Republican legislators, and now American heads of American companies, as the targets for our rage, all to get us to accept increasing government domination of the US economy. Expect the pattern of character assassination to continue; it’s what they do best.

For further reading on the subject, consider spending a few minutes with Newt Gingrich’s explanation of how Treasury Secretary Timothy Geithner actually architected the bailout as President of New York’s Federal Reserve Bank. Whenever we pierce the smokescreen even a little, we’re told that the Obama administration inherited the mess; in Geithner’s case, it is not true. Even apart from Geithner, though, the Obama administration has not objected to the crisis, but rather reveled in it, and is determined not to let it go to waste.

12/13/2008 (6:18 am)

Capitalist Fools and Christmas Wishes

Put this post into the “Hubris On Steroids” category. I’m going to thrash a Nobel laureate in economics on the topic of economics. I’m doing that because I don’t recall ever before reading anything by a Nobel laureate and muttering “This guy’s a complete moron.” (That is, unless you apply Paul Krugman’s very recent Nobel prize retroactively; I mutter “moron” every time I read a single word that yutz writes.) Yes, it’s cheeky — hence the graphic of Icarus flying too close to the sun. But he’s just so very wrong.

The Nobel-sporting moron in question is one Joseph Stiglitz, Professor of Economics at Columbia University and one-time chairman of President Clinton’s Council of Economic Advisors. Herr Stiglitz has built his career and reputation on proving that free markets are not efficient, largely due to imperfect knowledge. This is to be expected of Columbia, that bastion of neo-Marxist nonsense.

The article over which I muttered such rash imprecations is Stiglitz’s explanation of the cause of the current meltdown for Vanity Fair entitled “Capitalist Fools.” He’s one of those claiming “deregulation” and “the failure of free markets” produced the meltdown. At the end of this piece, I’ll provide a very general but meaningful counter-explanation of what went wrong, in the form of a mild editorial by Daniel Henninger of the Wall Street Journal.

I originally intended to rebut Stiglitz’s entire piece point by point, but that turned out to be far too long; there’s just too much wrong with it. So I’m going to settle for recounting a few of the real whoppers, all of which seem to have as their central theme “Let’s rewrite history so we can blame everything that happened on conservatives.”

Before I begin, though, let me note that the claim that the meltdown was caused by “deregulation” fails because there were never any regulations in place that could have prevented the meltdown. When you start asking pointed questions of the critics of deregulation, what you discover is that they’re talking mostly about the failure to regulate derivative trading, something that was never regulated to begin with. I can see no reason to believe that regulators would have had the foresight to prevent what occurred, especially since, as we’ll see in a moment, regulators did have the opportunity to impose regulations on derivatives and chose not to. Governments, like markets, operate with imperfect knowledge.

Now, to specifics.

Stiglitz begins by naming, as a primary cause of the meltdown, Reagan’s choice to replace Fed Chairman Paul Volcker with Alan Greenspan, which he represents as something Reagan did as part of his deregulation plan. This is historical nonsense. The President appoints members of the Federal Reserve’s Board of Directors for a single, 14-year term (subject to Senate approval), and the President designates who will be the Chairman every four years. Reagan reinstated Volcker as Chairman in 1983 when he could have had any of the Board members as Chairman, and he had no authority to fire Volcker in 1987, as Volcker’s term was not over; Volcker resigned on his own initiative. Reagan’s efforts at deregulation were achieved through policy choices, Executive Orders, and proposed legislation, not through manipulating the Fed.

Stiglitz blames Greenspan for failing to place regulations on derivatives. The irony here is that Stiglitz, himself, was the one in a position to do so, as Chairman of Clinton’s Council of Economic Advisors. He even admits to chairing the committee of regulators that decided to forego limits on derivatives in order to encourage innovation. He quotes Warren Buffett’s assessment that derivatives were “financial WMDs” as though Buffett was communicating this to regulators during the Clinton years; Buffett, noted for his unorthodox opinions, made that comment in a newsletter to his investors in 2003, whereas Stiglitz is criticizing a decision that occurred almost a full decade earlier. Stiglitz was the man with the power, but he blames Greenspan for failing to act. This strikes me as despicable blame-shifting.

Stiglitz proceeds to make the doubtful case that the repeal of the Glass-Steagall Act contributed to the meltdown. Glass-Steagall was an overreaction by Congress in the wake of the Great Depression that attempted to create a distinction between commercial banks and investment banks. Stiglitz tries to claim that a commercial bank allied to an investment bank is incented to make bad loans to industrial customers of the investment bank. I can imagine one or two situations where a little of that might occur, but such situations have absolutely nothing to do with the current meltdown; Stiglitz is grasping at straws here.

He posits, rather, that the repeal of Glass-Steagall created an entire culture of risk-taking. Listen to how he does it:

Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

This is gibberish. First, there is no such risk tolerance differential between the wealthy and the average investor. Risk tolerance is a very individual matter, and there’s no correlation I’ve ever seen between risk tolerance and the degree of one’s wealth. Second, there is no such differential between the risk tolerance of commercial banks and investment banks. Banks have always tried to invest wherever they can make money, and the degree of risk is controlled by reserve requirements, by investment restrictions other than Glass-Steagall, and by the bank’s business need for a good reputation. The claim that Glass-Steagall was all that protected bank customers from their banks running amok with greed is sheer nonsense. The reserve requirements placed on commercial banks in exchange for deposit insurance by the FDIC, and the restrictions on where they may invest their funds, have nothing whatsoever to do with the Glass-Steagall Act, and remain in place to this day. And third, the commercial banks did not start making loans to risky customers because they got greedy; they did so because they were first forced to by Congress, then given vigorous encouragement by the federal government in the form of a program from FNMA offering $1 trillion in backing for such loans.

Here’s one that made my jaw drop: Stiglitz notes correctly that the SEC increased the debt-to-capital ratio for large investment banks — but he lies outright about it, claiming that the increase came because the SEC argued for self-regulation by the investment firms. In fact, the increased debt-to-capital ratio was granted only to those few firms that agreed to allow the SEC to oversee them directly! The man is far too knowledgeable to have forgotten this; this has to be a deliberate lie. The failure here was not a failure of deregulation as Stiglitz claims, but a failure of regulators to do their job properly.

Next, Stiglitz attempts to blame the meltdown on the Bush tax cuts. You heard me, the tax cuts. I couldn’t believe it either.

The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease—the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil—money that otherwise would have been spent on American goods.

Did you notice the disingenuous leftist catch-phrases? Tax cuts “especially for upper-income Americans and corporations?” Soaring oil prices because of the Iraq war? Gag me.

This is typical leftist revisionist history. The Bush tax cuts were deliberately back-end loaded at the insistence of the Democrats in the Senate (this is where the tactic of the minority filibuster to block major policy moves began its recent revival, remember?) The tax cuts were designed to take effect primarily after the 2004 election, with at least 70% of the monetary impact of the cuts delayed until 2005 and 2006. The Fed activity Stiglitz is attempting to blame on the failure of the tax cuts took place from 2001 to 2003. The tax cuts had abso-bloody-lutely nothing to do with the Fed’s actions. Nor did the war in Iraq, which began in early 2003. The unprecedented low interest rates occurred before it began.

The reason for the Fed’s activism was concern over a looming recession that would have been the result of three, separate shocks to the economy occurring in close succession: the internet bubble burst, the auditing scandal related to the Enron and Worldcom failures, and the 9/11 attack. Again, Stiglitz is far too intelligent simply to have forgotten all this; this is deliberate dissembling.

Let’s also note in passing that the rising oil prices had only a little to do with the Iraq war; they were mostly the result of rising oil demand in the Asian rim (India and China) and the weak dollar policy of the Fed. Let’s further note that the main reason America is so dependent on imported oil is the wrong-headed, deliberate policy choice of congressional Democrats to prevent development of nearly all domestic oil resources, of which we have an astonishing wealth. We’re not looking at a failure due to deregulation, but rather a failure due to over-regulation.

He’s correct in assigning some blame for the meltdown to the liquidity created by the Fed’s dramatic interest rate cuts. The boom in real estate speculation seems to have taken off immediately after that move. However, the attempt to assign that blame to the Bush tax cuts and the Iraq war is pure, bush-league, leftist propaganda.

Stiglitz spends a paragraph and one of his five named policy failures decrying how stock options as executive compensation lie at the root of the Enron, Worldcom, and Fannie Mae accounting frauds. This is like blaming the cookie for your kid stealing it. The frauds were the fault of the greedy men who committed them, not of the particular wrinkle in the system that they exploited illegally to make themselves rich. The time to adjust the practice of offering stock options is after Democrats Franklin Raines and Jim Johnson are in jail where they belong; and the people to adjust the practice are those who were hurt by it, the directors of the corporations themselves.

This last point — that frauds are the fault of the men who committed them — is the tune Henninger from the Wall Street Journal plays in his editorial. The simple explanation for the meltdown is that greedy people exercised poor judgement. People thought they could make money indefinitely on an overpriced housing market that had to turn at some point. When the market turned, they got burned. They should have been left to suffer their fate; and yes, we all suffer because of the sins of the wicked, even those of us who did not commit them. That’s the way of the world and the reason we need to insist on moral virtue in the public square. No amount of regulation can change that, and the attempt to prevent it will most likely make it worse.

Free markets do require a certain level of virtue if they’re going to work correctly (and so do free nations.) The desire for wealth in America has gone out of control. To posit that becoming a millionaire, buying a big house, owning a Lexus and a summer home constitutes “the American dream” is, frankly, obscene. America stands for the liberty to do what one’s conscience requires, and the opportunity to benefit from one’s own ingenuity and labor, not simply the opportunity to grow filthy rich. Wealth is nothing but a byproduct of liberty and opportunity, not a goal in and of itself.

Read Henninger’s editorial, listen to his explanation in the brief clip, below, and then adjust your Christmas plans accordingly. It’s not about the size of the presents; it’s about the grace we’ve received from on high to become better human beings, and not be ruled by our sins.

10/01/2008 (3:10 pm)

A Brief Respite in Which to Reflect

Rosh Hashanah gave us a 2-day respite from the media pressure regarding the US economy, giving us all time to take a deep breath and think through what we’re about to do.

With that in mind, allow me to make a few observations, which I hope some of you might consider passing along to your Senators and Congressmen.

1) The rest of the world considers that the US ability to produce wealth is sound. I know, I know, this is what Barack Obama has been ridiculing John McCain for saying, but it happens to be true and easy to prove. You see, as the willingness to lend money has dried up, causing a crisis in the credit markets, people are instead investing their money in Treasury bonds, and this is especially true of international investors. They’re doing that because they consider Treasury bonds safe. That means they believe the government is going to pay its debts, which means, in turn, that they think the US economy will continue to support its government with the level of tax revenue it’s used to. Think it through. Nobody thinks the US is bankrupt.

2) The Fed has responded to the credit crisis with its own flood of cash, doubling its offer of Treasury debt to both domestic and foreign banks. It is not the case that nothing is being done; it is the case, rather, that the House of Representatives rejected what most of them considered a bad response to the crisis. We should thank them. It was a bad response, and they all knew it.

3) You should spend the 19 minutes it will take to hear Newt Gingrich’s interview with Greta Van Susteren at Fox (part 1 here, part 2 here) to get some perspective on why the bailout bill failed in the House. No, it wasn’t Nancy Pelosi, as arrogant as her speech was; it was largely Hank Paulson, Secretary of the Treasury. He apparently demanded the right to fix things himself — personally — insisting that the Treasury be given the power to buy assets for what Mr. Paulson thinks they’re actually worth. The alternative of simply loaning money to strapped financials was not considered, apparently because Paulson did not want to consider it. He apparently tried to railroad opponents.

Couple this with the news that the AIG bailout was decided with Paulson’s successor at Goldman Sachs being the only person present in the room who was not a government employee (and holding a $20 billion stake in AIG,) and you can see why commentators are calling for Paulson’s resignation, and wondering out loud if he has enough political capital left to produce a bill to which legislators can agree.

Don’t underestimate this one. The Democrats who voted against the bill, did so because they saw too large an increase in Executive branch power, and too much fat pork for Wall Street. The Republicans voted against it because they saw too large an increase in government power generally, and a solution that was not directed at the roots of the problem. Both complaints find their way back to Secretary Paulson. He should step aside.

Do we now have a clue why government bailed out AIG but not Lehman Brothers? I’m just asking…

4) Notice the part about “what the assets are really worth.” Gingrich goes into more detail about this in the video, which I’ll again suggest you watch despite the time it takes. Paulson and Bernanke both are willing to have the government spend from 2 to 3 times current book value for distressed mortgage portfolios. Why? Because they know how badly they’re undervalued. They’re undervalued because of mark-to-market accounting.

The mark-to-market rule is a huge cause of the current crisis; it’s not just that the book values of portfolios dropped like a stone because the values of even good-paying mortgages had to be revalued to track the defaulting ones, but that federal reserve requirements forced the companies to borrow enough to cover the decline in value, which sucked up capital the market needed. Change the rule and the capital becomes available to the market as quickly as the companies can adjust their books. If Congress does not change this rule in the plan, then the plan should be rejected until it does. Notify your Congressman.

5) The Senate takes up the bailout proposal tonight, not only violating the Constitutional order of financing the government (the House is supposed to initiate finance proposals,) but also declaring a tactical mission — to sell the bailout to the American people. They’re talking of attaching candy to the measure to make it more palatable to the American people. I can’t think of a more insulting, wrong-headed, or reprehensible approach. In fact, I oppose the attachment of any amendment at all that does not attempt to address some core cause of the problem. If this is truly an emergency, then the injection of partisanship into the discussion can only hurt, not help.

For this reason, please contact your Representatives and Senators and let them know that you will not look kindly on the sale of the bailout by attaching any sort of pork. This is not the time to be asking for business-friendly measures unrelated to the crisis, nor for limiting executive compensation, nor for $20 billion slush funds for hard-left street organizers masquerading as home credit counselors. They need to understand the problem, then fix the problem, not take the first measure that presents itself and sell it to us with candy. Criminy.

6) If you can spare the time, two articles deserve your consideration, possibly before you write those emails to your elected representatives:

John Berlau at The American Spectator raises the possibility that what the government is considering doing will make the crisis worse, not better.

Martin Hutchinson at The Prudent Bear compares current measures to the measures that initiated the Great Depression, and finds alarming similarities.

7) I’ve been noticing the similarity between the Paulson plan and the shrewd maneuver Joseph pulled off when he nationalized the entire Egyptian economy in Genesis 41:33-37 and Genesis 48:20-26. In return for grain during a 7-year stretch of famine (grain which he had acquired through taxation,) Joseph bought all the land in Egypt for Pharoah. Today, using money obtained through taxation, Secretary Paulson is attempting to buy a huge percentage of the houses in America. Note the outcome in Joseph’s case: with gratitude, the people all said “We will become Pharoah’s slaves.” One wonders how long the gratitude lasted. Food for long, sober thought.

09/25/2008 (9:55 am)

The Alternative to the Bailout

I want to spend a little time this morning explaining why the Republican alternative to the Bush administration’s bailout proposal is a good idea.

First of all, recall what the proposed bailout does: it gives the US Treasury Department the authorization to buy assets that nobody else wants to buy. This provides liquidity to the market; as Megan McArdle explained earlier this week, the problem Sec. Paulsen is trying to address is not that some big companies are going out of business (though they are), but rather that capital markets have frozen in fear. Banks and large investors are so afraid of their assets losing all value at this point that they’re trying to dump huge blocks of them, driving the prices of those assets (Money Market instruments, formerly thought to be as safe as buying a house!) into ridiculously low numbers. With this going on, there’s a danger that there won’t be any short-term capital for banks and businesses to borrow for their day-to-day operations — and then the economy would simply screech to a halt. It’s an ugly doomsday scenario to which we are alarmingly close. Paulsen’s plan relaxes the tension by making the bad assets more profitable than they’d be otherwise.

The problems with the bailout are many. It grants the government immense power. It rewards bad behavior, in that it uses the money of taxpayers who behaved well in economic terms, and directs it into the hands of businesses that behaved badly in economic terms. It relies for solution on the very institutions that caused the problem in the first place. It saddles the government with buying assets for far more than they’re worth; the money would be wasted. It’s a response to a market panic with a government panic; it’s a knee-jerk, and that’s a very bad way to make policy.

Based partly on the responses of some very influential Senators, and partly on proposals from well-known conservative think tanks, Republicans in Congress suggest four specific actions instead of approving the Paulsen plan:

  1. Suspend the capital gains tax completely for two years.
  2. Schedule Fannie and Freddie for privatization.
  3. Suspend “Mark to market” accounting rules.
  4. Repeal the Humphrey-Hawkins Full Employment Act of 1978.

In order:

They want to suspend the capital gains tax for two years. This would encourage those who are afraid to invest, to invest immediately in sound assets, not in failing institutions. This provides liquidity to the market as certainly as Paulsen’s plan, only it does it by encouraging investors rather than direct spending by the Treasury. In effect, the Paulsen plan uses the government as a middleman between taxpayers and the market, and suspending the capital gains tax cuts out the middleman. It would reduce tax revenues to the government in the short run, but not nearly as much as the Paulsen plan would shell out in already-collected tax revenues, so even if you don’t buy supply-side economics it’s the cheaper solution. However, because supply-side economics really does work, the amount of business created by eliminating the capital gains tax would probably increase overall tax revenues within a year or two. This is a stupendous idea.

The objections from leftist blogs are awfully silly. The one I’ve seen most frequently is “there are no capital gains from the sale of bad investments!” This proves that they don’t have the faintest idea what the real problem is, let alone how to fix it. The problem is a lack of short-term capital to drive the economy, not just that some big companies are failing. The Paulsen plan rewards lousy investments by putting money directly into the hands of those who made the worst investments; the Republican plan rewards sound investments by putting money into the hands of those who have been functioning properly all along. Both plans create liquidity in the capital markets, though, which is what solves the current crisis.

The second most common objection is that it allows rich people to get richer. This is as opposed to allowing certain rich people who mishandled assets to remain rich; I don’t see how that’s any better. I think it’s time we all stopped allowing envy to make our economic decisions for us. People ought to be rewarded for good economic behavior, and everybody benefits from a robust economy.

China and Singapore both operate with zero capital gains taxes. American investors have the second highest capital gains taxes in the world. We need to unleash the American economy, not increase the power of the government.

Second is to privatize the GSEs (Government Sponsored Enterprises). This is at least 30 years overdue, and has been prevented by Congressional Democrats. There is no reason for the US government to be creating businesses; it’s probably not even Constitutional. Cut Fannie and Freddie loose, and make them sink or swim according to how well they actually perform. It’s the cozy relationship between the GSEs and their sponsors in Congress that allowed this disaster to develop in the first place. Break the relationship.

Third is to abolish the “mark-to-market” rule. This is technical but crucial, so pay attention.

This is a change in FASB, the Financial Accounting Standards Board decisions that make up the rules of Generally Accepted Accounting Principles (GAAP) for auditors. The mark-to-market rule was created by FASB rule 157 in September of 2006. It requires accountants periodically to adjust the values of assets in public financial statements to reflect the current fair market value of those assets including the risk of non-performance — that is, how much the investor would get if the mortgagor didn’t pay and the mortgagee had to foreclose. This practice is actually the immediate cause of the current crisis; investors are panicking because financial companies holding mortgages as assets are forced by FASB 157 to adjust the stated value of those assets downward as the market value of the home drops, and investors are seeing their long-term investments shrink in value before their eyes.

Now, it sounds like FASB 157 is good disclosure policy, but it’s really not; rather, it makes investors focus on short-term, worst-case conditions rather than long-term expected value. The reason mortgages were considered safe investments is not that homes have never gone down in value, but that they’ve never gone down in value for long — they always recover. However, because of FASB 157, the books were saying “These mortgages are worth half of what they used to be” when in fact the mortgages were probably worth as much as they always were in the long run. Even with sub-prime loans figured in, all but about 2% of all mortgages get paid off in good order at face value plus interest over the long haul. FASB 157 forced investors to view their assets as though 100% were going to default, and this caused a panic when no panic was in order. If investment companies had been allowed to report mortgage face value instead of market value in case of default, there would have been no crisis at all.

The alternative to FASB 157 is not a lack of disclosure, but simply a return to the previous accounting practice of valuing assets according to one of several accepted methods (most likely face value), and then disclosing the method in footnotes to the financial statements. Anybody who reads financial statements knows they need to read the footnotes; anybody who reads a financial statement and skips the footnotes a) is proving he’s either a rookie or a fool, and b) is asking for trouble. GAAP always required disclosure; FASB 157 required a specific type of accounting that’s not even particularly accurate in this case.

Abolishing mark-to-market is a good way to prevent this crisis from recurring.

I’m going to have to defer the last item for somebody who knows more than I do; I honestly don’t know what the Humphrey-Hawkins Full Employment Act of 1978 does to the Fed in anything but very general terms. The items I’ve read suggest that it requires the Fed to use “full employment” as one of its goals for adjusting the discount rate (the mechanism for setting the interest rates on loans throughout the financial sector). The authors of the Republican alternative would prefer it use “price stability” as the primary goal. If somebody comes up with a good explanation of what this measure is supposed to achieve and how it’s supposed to achieve it, please leave a comment with a link. I was unable to find such an explanation. (Author’s update: apparently this is an attempt to pare down the role of the Fed. I don’t know enough to comment further.)

For my own part, I’d like to see three other items added:

Repeal Sarbanes-Oxley. It saddled publicly-own companies with millions of dollars worth of paperwork, discouraged a number of profitable companies from going public (they remained private to avoid Sarb-Ox paperwork,) and did not measurably improve financial reporting.

Repeal the Community Reinvestment Act of 1977. This is the one that leftist activists are using to force banks to make loans to home buyers who can’t repay.

Impeach Sen. Christopher Dodd (D, CT) and Rep. Barney Frank (D, MA) for their role in protecting the Enron-like misrepresentations by the executives of Fannie Mae and Freddie Mac. Allowing them to remain in office would be like allowing a member of Enron’s Board of Directors to remain on the board after finding out that the Board member knew of the improper accounting but said nothing. I’d love to see these two jailed, but the behaviors that we know about are not explicitly criminal; they are, however, grossly irresponsible and corrupt.

The Republican alternative illustrates why Republicans should be in charge of Congress rather than Democrats. These are sensible measures directed at fixing what’s broken. The Democrats, by contrast, are spinning like tops attempting to cover up their complicity in the mess, and at the same time focusing on meaningless and tyrannical measures like capping executive compensation — as though stupidly paying CEOs tens of millions dollars is responsible for the loss of hundreds of billions of dollars. I mean, if you really want the government telling businesses how much their employees are worth, go ahead and advocate that — I won’t be supporting it, but you can advocate it if you want to — but it has absolutely no plausible effect on the current crisis. It’s a red herring, another Democratic instance of pursuing symbolism rather than addressing substance.

02/11/2010 (10:52 pm)

Why The Unions Didn’t Applaud

CitizensUnited

About two weeks ago, the US Supreme Court published their decision in the case of Citizens United v. Federal Election Commission, and the left went berserk. The Court declared that preventing corporations and unions from running ads on their own within two months of a national election or a month of a primary created an unconstitutional restriction on free speech. Henceforth, corporations and unions are free to run ads about candidates to their heart’s content. Leftists decried the demolition of barriers to “corruption,” the unconscionable bypassing of precedent, and the sheer, unnecessary activism of the conservatives on the Court, and predicted a flood of corrupt corporate money in elections (see here, here, and here for examples.) The President huffed,

…the Supreme Court has given a green light to a new stampede of special interest money in our politics. It is a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans…

You’d think the unions would have applauded the decision, since unions, like corporations, were restricted from running ads, but are now permitted. You’d also think the Democrats would have shrugged their shoulders and accepted the change, since unions, which have extraordinarily deep pockets and are nearly 100% in the Democrats’ camp, would offset whatever advantage Republicans might have in the corporate world. But they didn’t.

And if you had any doubt why they didn’t accept it, this week you got your answer. It seems that despite the law, unions have been pouring their vast sums into elections all along. What a surprise.

Joseph Abrams at FoxNews.com published an exposé about a web site called TheTeaPartyIsOver.org, which claims to be a grassroots organization aimed at countering the effects of the burgeoning Tea Party movement with legislation. Only, Abrams discovered that it’s not really a grassroots organization at all. The site is one of several created by a pair of Washington attorneys that funnel money from union bank accounts into local political races, bypassing campaign finance restrictions by laundering the money. The maneuver appears to be legal, but hardly ethical; it clearly utilizes a loophole in the campaign finance restrictions, allowing forbidden union funds to be spent in the guise of local, grassroots activism far from the source of the funds. Abrams uncovered donations from the American Federation of State, County, and Municipal Employees Union (AFSCME) numbering in the millions of dollars, and directed into state political campaigns.

We’ve known for years that unions have been engaging in similar actions. Apparently McCain-Feingold (formally know as BCRA, for “Bipartisan Campaign Reform Act of 2002”) did not really stop the flow of “corrupting” cash into elections, it just redirected it for those who were prepared to play the system. Democrats claiming that removing the restriction on corporate spending will ruin the election process are just posturing for the camera; what they really oppose is Republicans getting in on the act.

The President was particularly disingenuous on the topic during his State of the Union address. Recall the passage that had Supreme Court Justice Samuel Alito mouthing “Not true” from his second-row seat:

With all due deference to separation of powers, last week the Supreme Court reversed a century of law that, I believe, will open the floodgates for special interests, including foreign corporations, to spend without limit in our elections. I don’t think American elections should be bankrolled by America’s most powerful interests or, worse, by foreign entities…

“Law Professor” Obama was talking out of his nether parts. The restriction overturned by the Court was less than 20 years old, not a century old, and the decision had no effect whatsoever on rules restricting foreign entities from participating in elections. Worse, though, was the irony of President Obama decrying foreign participation after Candidate Obama deliberately removed normal checks on credit card donations to permit a veritable flood of illegal foreign contributions into his own campaign.

HillaryTheMovieThe Citizens United decision was a significant blow to the Obama effort to stack future elections in favor of Democrats. If you recall, the case was the result of partisan activism on the part of the Federal Election Commission (FEC,) which stepped in to halt David Bossie’s group from advertising its documentary “Hillary: The Movie” during the 2008 primary campaign season. The FEC declared that “Hillary: The Movie” was “express advocacy,” which made it a violation of section 441b of the BCRA: there was no reasonable interpretation other than that the film was an appeal to vote against Hillary Clinton. The partisan nature of the action was clear to those of us who recalled Michael Moore’s release of “Fahrenheit 911” during the 2004 election cycle, about which the FEC made not the slightest peep; there was no reasonable interpretation other than that the film was an appeal to vote against George W. Bush.

Citizens United appealed to the DC District Court but was not granted a stay, the DC Court noting that Citizens United used funds from corporate sponsors to market the movie. CU had to restrain its marketing effort pending appeal to the Supreme Court. The Court, in an opinion written by Justice Anthony Kennedy, overturned the decision from a 1990 case called Austin v Michigan Chamber of Commerce, in which the Court had permitted an exception to the first amendment, granting the government power to restrict the speech of corporations in order to prevent “distortion” caused by amassed corporate wealth. Today’s court, finding no other acceptable reason to permit CU to market its film, declared the reasoning in the 1990 decision faulty, recalling Justice Scalia’s dissent from that case: “The government cannot be trusted to assure, through censorship, the ‘fairness’ of political debate.” The Court left in place restrictions on the amounts corporations can donate directly to candidates, and requirements that the sources of funds be exposed publicly.

While caterwauling over the end of their monopoly on the use of amassed funds, Democrats have commenced extorting funds from corporations for use in elections. That extortion also became evident this week, as the Obamateur President announced exceptions to his own administration’s purported outrage over “unconscionable” executive bonus payments, stupidly admitting to Bloomberg BusinessWeek that he “does not begrudge” huge bonuses for the CEOs of Goldman Sachs and JP Morgan Chase. Those two investment banking firms, just by coincidence, are the firms from which employees contributed the most to his campaign of any corporations in America. Apparently the vicious assaults on ordinary corporate practice only apply to those firms that forgot to feather the Good President’s nest. He quickly backpedaled as the blogs took note, but too late.

Expect legislative action to restore the ban on corporate spending. Expect the legislation to neglect to include the ban on union spending. It hardly matters, though. Democrats decry the presence of money in politics — and then ignore the law. It’s their way.

05/28/2009 (9:32 am)

DealerGate, or Why Government Should Never, Ever, Ever Get Involved in Private Business

dealership

Among the flood of outrageous acts* from the Obama White House, the government has pretty much taken over Chrysler and General Motors, two ailing auto manufacturers, stolen whatever value is left from the individuals who worked for, financed, and earned that value, and given ownership to the government and the United Auto Worker’s union. This raised fears of partisan favoritism in the conduct of business, fears which are today being amplified.

About 2 weeks ago, Chrysler filed Chapter 11 bankruptcy and announced a plan to close roughly 25% of its dealerships that were “just not pulling their weight in terms of sales.” The dealerships selected to be closed, allegedly based on sales and service records, were to receive notice and be given a chance to appeal, and the final evaluation of the bankruptcy filing was to be heard by US Bankruptcy Court in New York on June 3.

In the past two days, bloggers reviewing the list of closings have reported a deeply disturbing pattern. It appears that of all the franchisees who have been selected to close, virtually none are Obama supporters, but lots and lots are major Republican donors. From yesterday’s WorldNetDaily article:

WND reviewed the list of 789 closing franchises and databases of political donors and found that of dealership majority owners making contributions in the November 2008 election, less than 10 percent gifted to Democrats while 90 percent gave substantial sums to Republican candidates.

The listed franchise owners contributed at least $450,000 to Republican presidential candidates and the GOP, while only $7,970 was donated to Sen. Hillary Clinton’s campaign and $2,200 was given to Sen. John Edwards’ campaign.

Obama received a combined total of only $450 in donations – $250 from dealer Jane Baldock in Wenatchee, Wash., and $200 from Waco, Texas, dealer Jeffrey Hunter.

Ten percent to Democrats makes it seem slightly less suspicious… until you realize that all the Democrats were Obama’s adversaries.

Doug Ross has been leading the charge on the research (here Monday, here Wednesday,) and other bloggers have been tracking the political angle as well, including this one dedicated solely to tracking political donations of the Chrysler franchisees. It’s not proof positive, but it’s awfully damning.

The bankruptcy filing makes sense — Chrysler’s been in trouble for a while — but closing dealerships does not. Chrysler dealers are franchised, which means they don’t cost the company anything besides administrative costs at the home office, and those are nominal. The franchise buys the cars from the manufacturer and pays for them immediately; the cars that you see on the dealers’ lots are already revenue to the Chrysler Corporation, and are assets owned by the franchisee. In one sense, it pays Chrysler to have as many franchises open as it possibly can. It would suit them if there was a franchise on every block. They sell more cars that way, and what do they care if the franchisees can’t make any money because there are too many Chrysler dealerships?

090527-lees-summit-mo1They care because they can’t get good dealers unless the dealerships are profitable. For this reason, franchise agreements usually include market protection clauses, that say, for example, that Chrysler will only permit so many dealers per 1,000 population in a given area, or that no other franchisee will be authorized within a certain county, or some such. This is done to protect the franchisee, and smart franchise buyers check market protection clauses carefully before investing their money to buy the franchise.

So, while revoking the franchises of non-performing dealers perhaps streamlines an administrative task for the home office, and (if done fairly) might improve dealer relations, it’s not the first move one would expect a company to commence when filing for bankruptcy, nor the second, nor the third. This is not where the company needs to restructure.

It makes sense, though, as part of a partisan move to reward political allies under the cover of bankruptcy proceedings. Chrysler is most decidedly not playing fair; it’s playing hardball with the franchisees. In many states laws protect franchise owners from suddenly losing their franchise rights without compensation, and forces the franchisor (Chrysler, in this case) to help the franchisee recoup losses — buying back parts and inventory, for example. Not this time, though. From a Gannet story describing a lawsuit being filed by cut dealerships:

Chrysler’s request goes far beyond just ending dealer contracts. It would bar an affected dealer from selling any Chrysler vehicle or part under warranty after June 6. Any payments or damages from ending the contract would be left with the “old” Chrysler whose liquidation won’t cover the liabilities it assumes.

And Chrysler wants to block dealers from appealing the decision with state authorities, and asked U.S. Bankruptcy Judge Arthur Gonzalez to rule that federal bankruptcy law supersedes all state laws over dealer contracts.

Under the laws of most states, if Chrysler wanted to end a dealer contract it would have to give the dealer several months to wind down its business, offer to buy back vehicle and parts inventory and, in some cases, offer reimbursement for a number of costs, such as remodeling.

But in bankruptcy, Chrysler contends it can avoid any such liabilities as part of the case.

Take note of that phrase, “payments or damages from ending the contract would be left with the ‘old’ Chrysler.” Since Chrysler is filing bankruptcy to protect itself from creditors, this means that the franchise owners who are being shouldered out can’t obtain satisfaction from a lawsuit; they might win, but they’d have to wait in line for payment out of whatever is set aside to satisfy creditors, usually a long, drawn-out repayment process that returns pennies on the dollar.

In short, the dealers who are being cut, are being ruined financially. They’re suing based on a 5th Amendment complaint; they’re being deprived of property without due process of law, and without just compensation, by the government.

Anecdotes are surfacing suggesting that some of the cut dealers are high performers. Others complain of grossly unfair practices, like this dealer who had just finished a company-mandated facelift for his dealership when he received his cut notice. Writes Josh Painter at Red State:

Some of the dealers chosen to be terminated were among the more successful outlets in the Chrysler dealership network, and many of them had been loyal Chrysler and Dodge agents who had maintained an excellent working relationship with the Detroit automaker for decades.

Some dealers who got a thumbs down from Obama’s automotive panel told compelling stories about their situations that raised doubts about the process of selecting them for closing. One example, a dealership in Alvin, Texas, had increased its new car sales by 50% in the first four months of 2009, while other MOPAR dealers’ sales were in the tank. Another in Melbourne, Florida, had, at Chrysler’s insistence, totally renovated its facility financed by incurring millions of dollars of debt in the form of a bank mortgage.

Adding fuel to the fire, a lawyer for the excised dealers deposed Chrysler’s chief executives, and reported that it was his impression that cutting dealerships was not favored by Chrysler’s board, but was in fact the result of pressure from the Obama administration’s auto czar. The Chrysler Corp’s official statement denies this, but do we believe it?

Doug Ross claimed yesterday he has statistical proof that the closings were selected by political donation, calculating that the probability of the pattern he’s detected is roughly 1 over 1 billion. In fact, this does not prove that the complaint is true — the sample of closed dealerships is not a random sample, and correlation does not prove causation — though it does suggest it strongly.

But proof hardly matters. What matters is the perception.

politicskenyastyleLast year about this time, Kenya erupted into violence because of a national election that many perceived was rigged. Hundreds died, and hundreds of thousands fled their homes in fear. Have you ever wondered why that does not happen in the US? It’s because here in the US, losing an election does not usually mean you won’t be able to feed your family or keep your business; in Kenya, it does, because the elected officials hand out huge favors to all their political backers, normally members of their own tribes who help keep them in power. Patronage here in the US has been chicken feed by comparison — until now. Now, we’re beginning to perceive that the government is choosing winners in the economic lottery by which party they’ve donated to, and which candidate. If people begin perceiving that losing an election means they’re financially ruined, we’re on the road to civil war, and the US becomes Africa.

This cannot happen if the government stays out of private business, and remains relatively small. The reason we don’t have Africa’s level of political violence is not that we’re better people than they are, it’s that we’ve by and large kept government out of private business, and kept patronage to a minimum. As strange as it may sound, we Americans have had relatively little at stake from the outcome of political fortune, compared with the rest of the world. President Obama seems intent on changing that.

The investigation of this matter should continue, and if it turns out that the Obama administration is deliberately ruining private businesses along partisan lines, I will call for his impeachment. This is completely unacceptable in the United States. The government must be kept out of business, because an economy ruled by political self-interest is never preferable to one ruled by economic self-interest.

*The flood of outrageous acts is a tactic, designed to prevent any individual act from getting the attention it deserves. I would say that President Obama learned it from President Clinton, who used the same tactic, but it appears that both learned it from Saul Alinsky.