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The Spectacle Blog
Those were the words Marc Ambinder, then of the Atlantic, used to describe the Obama administration’s efforts to “fashion a deal to its liking” during General Motor’s bankruptcy and bailout in early 2009.
They are words worth remembering as President Obama claims that this week’s GM IPO represented a success for the bailout and that “American taxpayers are now positioned to recover more than my administration invested in GM.”
The narrow claim that taxpayers are in a position to profit from the support they extended to GM in 2009 is laughable — the public is still many billions in the red, and unlikely ever to recover the dollar amount they lent, let alone make a profit, as John Berlau capably explained in his piece yesterday.
However, the focus on the taxpayers’ “investment” is of the administration’s own framing, and obscures the larger problem with the GM bailout. There is no amount of “profit” that could accrue to the taxpayers now that would undo the damage the Obama administration did when it rewrote the rules of capitalism in the GM bailout.
The basis of a capitalist, free enterprise system is that unsuccessful companies fail. By propping up GM when it became unmistakably insolvent, the Obama (and Bush) administrations undermined that basis. Even worse, by jawboning and harassing GM bondholders into accepting an unfavorable deal (and the full extent and nature of the pressure the administration exerted on them is still unclear) the administration blurred the line between the rule of law and the arbitrary rule of those in power.
Perhaps, at the time, Obama and his advisers thought that those were the necessary steps to take in a moment of crisis. And maybe, as Ambinder suggests, the Obama administration wasn’t trying to benefit the UAW at the expense of others, even though in the end the union did well for itself, but instead was just making a deal to save the auto industry, Detroit, and the country.
Even in that telling, which is the narrative that most flatters Obama’s leadership, the Obama administration’s bailout of GM was inexcusably poorly executed. In a New York Times op-ed that ran the December prior to the GM bankruptcy, Tyler Cowen used the collapse of Long-Term Capital in 1999 as an example of how not to deal with troubled systemically significant firms. The lessons he drew — that one transgression of rules-based regulation only makes such interventions more likely in the future — could also have applied to the GM bailout:
The ad hoc aspect of the [Long-Term Capital] bailout created a precedent for what has come to be called “regulation by deal” - now the government’s modus operandi. Rather than publicizing definite standards and expectations for bailouts in advance, the Fed and the Treasury confront each particular crisis anew. Decisions are made as to whether a merger is possible, whether a consortium can be organized, what kind of loan guarantees can be offered and what kind of concessions will be extracted in return. So far, every deal - or lack thereof, in the case of Lehman Brothers - has been different.
While there are some advantages to leaving discretion in regulators’ hands, this hasn’t worked out very well. It has become increasingly apparent that the market doesn’t know what to expect and that many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.
John Maynard Keynes famously proclaimed that “in the long run we are all dead.” From the vantage point of 1998, today is indeed the “long run.”
We’re not quite dead, but we are seriously ailing. As we look ahead, we may be tempted again to put off the hard choices. But perhaps the next “long run,” too, is no more than 10 years away. If we take the Keynesian maxim too seriously, and focus only on the short run, our prospects will be grim indeed.
View all comments (11) | Leave a comment
More Blog Posts by Joseph Lawler
http://spectator.org/blog/2010/11/19/rewriting-the-rules-of-capital
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Oldefarte| 11.19.10 @ 7:59PM
There was/is no credible economic/financial reason for the government to bail out the auto companies, and same was only a theft of taxpayer money in order to ingratiate himself to the UAW. In MHO, this should be grounds [along with many others] for IMPEACHMENT. The major banks had to be rescued sonce the collapse of same would have created financial mayhem and panic. Today the GM price/share was perilously close to that of the original IPO which is not good. The government should deactivate the governmental employee unions [and that of GM] but since he will never allow that to happen, this country's economic condition will sink lower and lower into the financial toilet bowl. The only hope is 11/2/12 if we can survive that long!!!!
Mimi| 11.20.10 @ 9:45AM
O. F....When have we ever seen such uncertainity, lack of faith and trust , pure ignorance, and outright deliberate incompetence and destruction in any Whitehouse as this!!! Your thinking IMPEACHMENT.....I hope and pray it doesn't come to that. We can stand the economic despair and even the outrage at exhorbitant trips to SPAIN and the many rooms at the Taj-Mahal/ But comes the breaking point of the extremes we will tolerate. Even the 2010 Nov. 2 election didn't wake the DEM's up really!!!!....on with their sick agenda, Pelosi / SMILES and Harry still up to NO-GOOD.....Hope the new CONGRESS stands strong...and yes, you are so right...we hang on to 2012.
Alan Brooks| 11.20.10 @ 9:21PM
"we hang on to 2012."
You have nothing else to hang on to- you are clueless.
Tim*| 11.21.10 @ 11:04AM
Obama Is Clueless.
Aaaand You Voted For This Poster Boy For The Peter Principle.
Go Feed The squirrels In The Park, Brooks.
Alan Brooks| 11.21.10 @ 3:38PM
"Go Feed The squirrels In The Park, Brooks."
Your family is hungry?
vergilius| 11.23.10 @ 1:53PM
"The major banks had to be rescued sonce the collapse of same would have created financial mayhem and panic."
Emphatically no! No type of "rescue" has any place in a free society. We ought to instead abolish the cartelization of the banking sector by shutting down the Federal Reserve, abolishing the FDIC, and going back on the gold standard.
Or, even better, we ought to have purely private currencies outside the control of government.
Oldefarte| 11.20.10 @ 1:25PM
Mimi, I agree that impeachment would be a waste of the new congress' time and of taxpayer's money, and it's only ought of frustration that I even suggest it [even though I do believe that there are numerous grounds upon which such a charge could be brought]. Agreed also is the fact that 11/2/12 cannot arrive fast enough for some of us. My most horrific fear is [based upon what they have already done in two years] the potential damage to this country that they could inflict until this future date. Specifically, I have nightmares concerning our foreign policy under their direction, and God forbid if we got hit again with another horrific terrorist attack similar to 9/11/01. 11/2/10 was just the beginning, and we taxpayer-voters must continue to monitor, put political pressure upon, and vote accordingly from this day forward if we are to survive as a nation.
Alan Brooks| 11.20.10 @ 9:19PM
No, you'll screw it up on voting day '12 with another second rate candidate.
It's the death wish, old fart.
PattyMor| 11.21.10 @ 1:23PM
The bailout of GM & Chrysler was not capitalism. Its fascism --a blending of government and business. We have left capitalism a long time ago at the same time we abandoned the constitution.
Alan Brooks| 11.21.10 @ 3:36PM
Free Market?? quick, reinstate HUAC:
PROSECUTOR: "are you now, or have you at any time been an employee of a free market auto corporation?"
DEFENDANT: "I invoke the fifth Amendment, Sir"