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.