The Clichés Come Home to Roost in Cyprus

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The clichés are frequent, abundant, and apt: have your cake and eat it too; kick the can down the road; squeeze the tube of toothpaste; see the chickens come home to roost — in that order. They are being used these days to describe financial crises and political responses to financial crises. A couple of years ago, writing about the role of Greece in the ongoing euro monetary-financial crisis, I said that the “contradiction is between the love of state largesse and the limits of governments’ ability to raise revenue,” and I suggested (unoriginally) that Greece might be a domino to tip other dominos (more clichés).

Now Cyprus. It’s the latest hotspot in the euro crisis. If you read or listen to news supplied by the mass media here in the US, you know that Cypriot banks are on the ropes. You know that they have a lot of euro-denominated deposits, including somefrom tax-dodging or money-laundering Russians. And you know that a bailout is in the works. However, unless you think or read more deeply, you don’t know how the situation in Cyprus fits into the bigger picture of euro zone troubles.

Even if you read The Economist, as I do, you only get a hint. In its March 30, 2013 issue, it got through two articles on the Cyprus bailout while barely mentioning how that was precipitated by Greece. I’m not saying there is a media conspiracy to obscure the facts, but there is a tendency to avoid speaking of and maybe even to avoid thinking of the complex and unsettling cause and effect relationships among the various financial unbalances in European banks, treasuries, and currencies. (Yes, I know there is supposed to be only one euro, but more on that below.)

Why would those rich Russians trust banks in miniscule Cyprus? Because the deposits were in Europe, in the euro zone, denominated in euros, and implicitly guaranteed by Europe.

The Economist said, “The troubles of the two banks were caused, some believe, by a decision to buy Greek government bonds that were then restructured.” It said thisonly in the context of an article mentioning that Cypriots feel like victims, in this case of the “restructuring.”

That sentence from The Economist does everything wrong. It directs us away from the truth that the euro mess is a great tangle of interrelationships with “moral hazard” at every knot. And it downplays important circumstances, employing euphemisms. “Troubles” should be “failures”; “some believe” should be deleted; “a decision” should be followed by a statement of the reasons and motivations for the decision; and “restructured” means “defaulted.”

As a corrective, I’ll tell you what I think is going on, preferring clichés to euphemisms.

How does a miniscule country get pumped up on foreign deposits? Why would those rich Russians trust banks in Cyprus? Because the deposits were in Europe, in the euro zone, denominated in euros, and implicitly guaranteed by Europe. That’s an example of having your cake and eating it too. The “cake” is having a hard currency that does not fluctuate against any other currency in the euro zone and can be freely transferred among all euro-zone countries, since it’s supposed to be the same currency. “Eating it too” is failing, as a nation, to have the reforms, institutions, sovereign finances, and controls in place that would justify the currency’s value and stability.

The deposits in Cypriot banks, like all deposits, are loans. The banks had to invest the money. They bought Greek government bonds — more cake being had and eaten. The Greek bonds were paying better interest than, say, German bonds. That should tell you something, but they were supposed to be risk-free, again because of the implicit guarantee of Europe.

The Greek crisis, going back at least to 2004, is now nearly a decade-long process of kicking the can down the road. The can is, of course, severe economic pain that may take the form of extreme austerity, high inflation, and currency devaluation (which would require exit from the euro and, in the case of Greece, the dreaded “Grexit”). The bits of pain that were inflicted along the way — on bondholders, employees, and taxpayers — have always and ever been insufficient to constitute really doing something with the can other than kicking it.

The crisis in Cyprus demonstrates that Europe’s restructuring of Greek debt and bailouts of the Greek treasury were also largely examples of squeezing the tube of toothpaste. One pinches the problem here, and it bulges out over there. One collapse delayed begets another threat of collapse that demands immediate attention.

Cyprus may remain in the euro in name only. A euro that cannot leave Cyprus has a value different from and lesser than a euro that can travel freely.

Now, one or two birds at a time, the big flock of chickens is beginning to come home to roost. In the Cypriot bank bailout deal, bank shareholders are wiped out. They get nothing. Some bondholders are wiped out. Depositors are restricted from getting their money; there are daily withdrawal limits; and currency controls are in place. Some depositors, the uninsured with balances above 100,000, will not get all their money back; they will see their deposits converted to bank shares, probably worthless. In theory, smaller deposits are secure, and Cyprus keeps the euro.

The tough conditions for the bailout, ostensibly required by a commission composed of the European Central Bank, the European Commission, and the IMF, but in substance required by Germany, are the price for Cyprus “staying in the euro,” and that is the main goal of the bailout. But it is not clear that Cypriot euros are still the same as other euros. In other words, Cyprus may remain in the euro in name only. A euro that cannot leave Cyprus has a value different from and lesser than a euro that can travel freely. Such a euro sits in Cypriot banks, from which it can’t be freely withdrawn. The bailout may fail to render the banks solvent. The risk of insolvency, the restrictions on withdrawal, and the currency controls all undermine the value of the deposits.

Enter Gresham’s law: bad money drives out good — if the exchange rate is fixed by the state. In this case the bad money, Cypriot euros, drives out the good money, other euros, other currencies, precious metals, and other stores of value, because the exchange rate is fixed by law and by definition: euros are supposed to be euros. That’s what monetary union was supposed to mean. The troika cannot let the Cypriot euro float; that would be an immediate, rather than slow, failure of the bailout plan; therefore, the official exchange rate between the Cypriot euro and the real euro will be 1:1. Cypriots will withdraw their bad money as fast as they can. They will hoard good money. They will seek opportunities to spend or exchange their bad money at the official rate. Goods will leave the country to be sold for good money to be held abroad. Scarcity will reign. Cyprus will impose export controls (a usual next step after the imposition of currency controls), turning many of its people into criminals. In the 1980s, I saw this in Bénin, where after a period of currency controls, the markets were utterly bare and smugglers were being shot on sight. Next door in Togo, the markets overflowed with goods, including, I suppose, goods from Bénin.

There is much more to be said, about the near-certain collapse of the Cypriot economy, about “contagion” — the fear that similar blows will strike depositors in other weak euro zone countries, and the resultant capital flight — about many more chickens coming home to roost, about the suffering of men, women, and children, and about whose fault it is.

But the topic is depressing. I begin to feel sympathy for the journalists and reporters who do not dwell on these things. I’ll kick this can down the road.

How does a miniscule country get pumped up on foreign deposits? Why would those rich Russians trust banks in Cyprus? Because the deposits were in Europe, in the euro zone, denominated in euros, and implicitly guaranteed by Europe. That




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GM: The Other Shoe Drops

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After having run ads in Michigan boasting of its “success” in rescuing GM and Chrysler, the Obama administration won rather narrowly in the general election. It now feels safe enough to let the other shoe drop: it has just announced that it will start selling off its remaining stock in Government Motors. It will sell 200 million shares immediately and the remaining 300 million over the next 12 to 15 months.

All of this allows us to assess the costs of the Great American Carmaker Nationalization Game. And the price is high, indeed, at least to the US taxpayer.

Start with the direct costs. The 200 million shares will be sold by Uncle Sap back to Greedy Motors for about $27.50 per share. Let’s charitably suppose — though it is not at all clear that this supposition is realistic — that the other 300 million shares will also fetch the same price. That returns to the taxpayer about $13.75 billion, out of the $30 billion the US is owed, so the loss is about $16.25 billion.

But wait. The sale of Chrysler stock last year netted a loss to the taxpayer of at least $1.3 billion. That brings the total loss to $17.5 billion.

But wait again. In the corrupt bankruptcy engineered by the Obama administration, the new GM was illicitly allowed to carry forward a tax writeoff of at least $15 billion. So that brings the total to $32.5 billion.

Those are only the direct costs to the taxpayers. Let’s follow Bastiat’s advice to look for costs that are not salient.

Fist, the very fact that bankruptcy law was corrupted and the top position of the secured lenders put aside in favor of the UAW (big Obama financial backers) doubtless led to at least some investors becoming reluctant to loan to business out of uncertainty whether the administration would stiff them, too. How much business activity this crony deal deterred we can only guess at.

Second, Ford Motor Company, which did not get crony bankruptcy treatment, is now at a disadvantage, because its profits will be taxed, while GM, with that tidy tax writeoff, will face no such disadvantage for quite a while.

As if to rub the taxpayers’ noses in the fiscal dirt, the UAW has grandly announced that its members will be getting $7,000 profit-sharing checks this year. This is on top of all the loot the UAW already pocketed. What are the chances the true patriots at the UAW will use their bonuses to make whole the secured creditors, much less the taxpayers? Absolutely zero — the UAW is only too happy to rip off fellow citizens.

One can understand why a corrupt administration should have waited until after the election to let the other shoe drop. It would have been difficult to explain the massive losses during the campaign. Harder to understand is why people put up with these things.




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Government Motors Goes Subprime

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President Obama continues pointing to his crony bankruptcy bailout of GM as a success. Never mind that it stiffed the secured creditors to favor the UAW, a huge backer of Obama and the major cause of the domestic auto crisis to begin with. Never mind that that GM was allowed to carry forward losses from the bankrupt entity to offset future earnings, stiffing the taxpayer and giving it an unfair advantage over Ford and the foreign auto makers, none of whom got the bailout. Never mind that when GM went public again, the UAW was able to sell its shares first, which enabled it to be made whole while the taxpayers saw their shares diminish in value.

Now it turns out that much of the recent sales growth GM has bragged about is due to GM jacking up its sales with subprime loans.

In the auto industry (like other industries that sell products and offer financing to the customers), the credit worthiness of customers is judged by their FICO scores, which range on a scale from 300 to 850. Subprime customers are those with a score below 660. In the fourth quarter of 2010, subprime loans accounted for 4.8% of GM’s sales. In the first quarter of this year, they hit 8.32%, which is over one-third higher than the industry average (6%).

Why is GM taking on more risky debt in a chancy economy? Edward Niedermeyer (editor of The Truth About Cars) puts his finger on it: “[GM] may be trying to goose short-term sales with subprime lending to boost its stock price, which is tied to the government getting out of its GM investment.”

Indeed. The federal government still owns nearly 30% of the stock (500 million shares). The stock price is only about $20 per share, close to the post-IPO low. For us to get our $26 billion in direct support back, the price would have to hit $53 per share.

So GM — controlled by the Obama administration — is pushing junk loans. This is rich, coming from the same guy who sold the Dodd-Frank financial regulation bill by claiming that greedy capitalists had duped innocent buyers into risky subprime loans.

What’s greedy for capitalists must be ethical for neosocialists.




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The Sarah Palin of the Wild-eyed Left

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Right now, our ineffectual President is not the highest-profile among those who would make slaves of free citizens; his incompetence as an executive has reduced him to a cynical, groveling faux populism. The highest-profile slaver is not a significant writer or intellectual of the Left; those who might be significant waste their time performing on cable television minstrel shows. It’s not an internet or New Media big-shot; they’re more interested in feuding than influence.

Right now, the highest-profile collectivist in America is a woman named Elizabeth Warren. A Harvard Law School professor and aspirant to elected office in Massachusetts, she combines the President’s cynicism with the intellectual Left’s focus on cable TV performance and a strong internet presence. Her writing indicates a trivial, though eminently credentialed, mind; her body of work reads more like Suze Orman than Richard Posner or Lawrence Tribe.

If you follow the news or scan left-leaning media outlets, you’ve heard Warren’s name. If you live in Massachusetts, you know that she’s seeking Teddy Kennedy’s old U.S. Senate seat, presently occupied by Scott Brown. But the chances are that you, like most Americans who aren’t wild-eyed Maoists, have a vague impression of the woman.

But it’s important to clarify that vagueness. This woman reflects several current trends in American culture — most of which are not good.

She was born Elizabeth Herring in Oklahoma City in the late 1940s. It was the front end of the Baby Boom, but her childhood wasn’t Happy Days. When Elizabeth was a young teenager, her father had a heart attack and related health issues. These led to severe financial problems for the Herring family. They lost a car to the repo man . . . and fell out of what they considered the middle class. Her mother went to work as a telephone operator. Later, Elizabeth waited tables to help support the family.

She was bright. Did well in school. Got a debate scholarship to George Washington University in the nation’s capitol — and left Oklahoma. Quick as she could.

GW isn’t an intellectual mecca. The biggest part of its student body is made of underachieving kids from affluent families who pay full freight, leavened with some smart kids from hinterlands there on scholarship.

While still an undergraduate, Elizabeth married a classmate named Jim Warren. In 1970, she graduated with a degree in speech pathology. Jim pursued a career and established himself as a middle-class breadwinner; Elizabeth used her degree to get work helping children who were recovering from head traumas and brain injuries.

Various left-wing media outlets were entranced by the soft totalitarianism of Warren’s schoolmarm demeanor.

But that wasn’t satisfying. The collegiate debater felt drawn to something more ambitious. Law school. While having two children with Jim, Elizabeth cobbled together a law degree — starting out at the University of Houston and eventually finishing at the Newark campus of Rutgers. Along the way, she interned at a white-shoe Wall Street firm and was an editor of the Rutgers Law Review.

She got her law degree in 1976 and ran a solo practice in the New Jersey suburbs, focusing on wills and real estate closings. She taught Sunday school, reading and telling kids about Methodist founder John Wesley. She still cites Wesley as an inspiration.

In 1978, she and Jim divorced. That seems to have changed many things.

Elizabeth moved from practicing law to teaching it. She started at Rutgers and moved through short-term gigs at the University of Houston, Texas, and Michigan before getting a tenured position at the University of Pennsylvania. And, as she explains it, she began to change from a free-market advocate to a full-blown statist.

While her academic research wasn’t exceptional (more on that in a bit), she was a dynamic classroom instructor and popular with students. While Reagan and the elder Bush occupied the White House, she refined an approach that worked well in the university setting. The actual content of her writing and speaking is usually unexceptional; but she conveys — by demeanor and implication — sentiments that click with campus radicals. She signals progressive pieties that flatter students and colleagues, making them feel they aren’t just careerist clerks but Deep Thinkers interested in Profound Issues.

She moved from UPenn to Harvard in 1992.Today, she is the Leo Gottlieb Professor of Law, teaching commercial law and bankruptcy. She is or has been a member or officer of: the American Academy of Arts and Sciences; the American Law Institute; the Executive Council of the National Bankruptcy Conference; the Federal Depository Insurance Corp.'s Committee on Economic Inclusion; the National Bankruptcy Review Commission. As I’ve noted, she’s eminently credentialed.

She signals progressive pieties that flatter students and colleagues, making them feel they aren’t just careerist clerks but Deep Thinkers interested in Profound Issues.

Most university professors are expected to produce a steady stream of peer-reviewed academic articles and research papers related to their fields. Generally, law professors have some relief from this severity; because law schools are usually profit centers for their universities, law school teachers can focus on classroom teaching rather than driven academic publication. Still, a law professor is expected to produce — or at least contribute to — the occasional academic paper.

Here, Warren has had some trouble.

In 2005, she and several colleagues published a study in the academic journal Health Affairs on the relationship between medical bills and individual bankruptcy. They concluded that half of all families filing for bankruptcy did so in the aftermath of a serious medical problem and that 75 percent of those families had some form of medical insurance. This gave a lot of rhetorical ammunition to people vilifying “evil insurance companies” and calling for “health care reform.”

Some readers questioned the study’s methods. As a surprisingly good analysis from ABC News noted:

The Harvard report claims to measure the extent to which medical costs are “the cause” of bankruptcies. In reality its survey asked if these costs were “a reason” — potentially one of many — for such bankruptcies.

Beyond those who gave medical costs as “a reason,” the Harvard researchers chose to add in any bankruptcy filers who had at least $1,000 in unreimbursed medical expenses in the previous two years. Given deductibles and copays, that’s a heck of a lot of people.

Moreover, Harvard’s definition of “medical” expenses includes situations that aren’t necessarily medical in common parlance, e.g., a gambling problem, or the death of a family member. If your main wage-earning spouse gets hit by a bus and dies, and you have to file, that’s included as a “medical bankruptcy.”

So, the study was marred by the hacky left-wing politics that pass for “consensus” in many of the social sciences. (The University of East Anglia’s Climate Research Unit caused a similar controversy when it filled its reports on global warming with comparable manipulations.)

While academic research isn’t her forte, Warren has shown greater enthusiasm for more popular fare. She has co-authored (with her daughter, Amelia Tyagi) two consumer books on personal finance, All Your Worth: The Ultimate Lifetime Money Plan and The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke. The books offer useful, if basic, financial advice. They read like personal-finance versions of celebrity cookbooks — people who come to the books because they like Warren probably find them worth the price; others probably don’t. In its review of The Two Income Trap, Time magazine wrote: “For families looking for ways to cope, Warren and Tyagi mainly offer palliatives. . . . Readers who are already committed to a house and parenthood will find little to mitigate the deflating sense that they have nowhere to go but down.” Like most of the establishment media, Time has been generally favorable to Warren in other contexts.

In the mid-2000s, Warren and some of her Harvard law students wrote a column called Warren Reports for the popular left-wing internet news site TalkingPointMemo.com. Warren Reports purported to be a deep-think collaboration like the libertarian-leaning opinion site Volokh Conspiracy; it ended up being less deep analysis and more hacky partisan spin.

But Warren’s hacky politics found an audience. On November 14, 2008 — days after Barack Obama had been elected president — she was appointed by Senate Majority Leader Harry Reid to chair the five-member Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act and its main product, the Troubled Assets Relief Program (TARP).

In other words, Warren oversaw the Wall Street bailout.

Through her term as chair, the Congressional Oversight Panel released monthly reports that evaluated the bailout and related programs. These reports — and videos that accompanied them — served as bully pulpit for Warren. She focused her regulatory enthusiasms on topics including: bank stress tests, commercial real estate, consumer and small business lending, farm loans, financial regulatory reform, foreclosure mitigation, government guarantees, the automobile industry, and the impact of TARP on financial markets. She also testified frequently before House and Senate committees.

From these unlikely venues, a star was born. Various left-wing internet news sites and new media outlets linked to her videos and reported on her congressional testimony. Like the campus radicals at UPenn and Harvard, they were entranced by the soft totalitarianism of her schoolmarm demeanor.

Throughout her various congressional testimonies and internet videos, Warren advocated for the creation of a new Consumer Financial Protection Bureau. In a December 2009 interview with Newsweek magazine, Warren said:

To restore some basic sanity to the financial system, we need two central changes: fix broken consumer-credit markets and end guarantees for the big players that threaten our entire economic system. If we get those two key parts right, we can still dial the rest of the regulation up and down as needed. But if we don't get those two right, I think the game is over. I hate to sound alarmist, but that's how I feel about this.

(Reread that last sentence, keeping in mind the famous negotiating aphorism: “Everything before the ‘but’ is a lie.”)

This quote embodies two essential traits of Warren’s political persona.

First, she identifies important issues but comes to illogical conclusions about them. She’s right that moral hazard had dulled the capital markets; government guarantees for banks that are too big to fail inexorably leads to more failure. But she doesn’t seem to understand her own point. She wants more well-intentioned regulation to cure the problems caused by previous well-intentioned regulation.

Second, she leads with her heart — which is good in love letters but not so great in governance. Most of her public policy statements are full of prefaces, parentheticals and sidebars about how she feels about things.

One challenge for a politician who has lots of stupid people cheering for her everywhere she goes is to avoid losing any connection to reality.

In time, Warren got her new (and additional) consumer protection agency. The Frank-Dodd Wall Street Reform and Consumer Protection Act, signed into law in July 2010, created the United States Consumer Financial Protection Bureau — which some in the Obama administration hoped would grow as large and powerful as the FBI.

Warren’s growing legions of collectivist supporters wanted her to be named head of the new bureau. She wasn’t. Some collectivists saw this as apostasy on Obama’s part — he’d caved to the Wall Street establishment by not appointing the woman who’d supervised the bailout of the Wall Street establishment. Others collectivists blamed “the Republican congress” for blocking her ascent.

Warren settled instead for the consultative position of “Special Advisor” to the Bureau. Which she kept for less than a year, when she quit to launch her U.S. Senate campaign. On her way out, she issued a farewell statement (surely one of the few Special Advisors to a non-cabinet-level agency ever to do so) that read, in part:

Four years ago, I submitted an article to Democracy Journal that argued for a new government agency called the Financial Product Safety Commission. I felt strongly that a new consumer agency would make the credit markets work better for American families and strengthen the economic security of the middle class. I leave this agency, but not this fight . . . the issues we deal with — a middle class that has been squeezed and business models built on tricks and traps — are deeply personal to me, and they always will be.

Again, rich subject matter and a jabberwocky conclusion. A “new government agency” will make credit markets “work better for American families”? Not likely. The lesson of the subprime mortgage collapse and the current recession is that statist abominations like the Community Redevelopment Act, TARP (the Wall Street bailout which, it bears repeating, Warren administered) and Fannie Mae/Freddie Mac create moral hazard and obstruct market efficiency.

And, again, the pabulum about her “deeply personal” feelings. Warren’s feelings are a big part of her public persona — as big as policy details or the effects they have on objective reality. This is an unexpected focus for a law professor. But Tip O’Neill would understand. Feelings work well at the retail political level. Paste-eating collectivists put maximum importance on “personal narratives”; they care less about logic or objective reality.

Warren has peddled her emotions with some success in the popular media. She appeared several times on the Dr. Phil TV show. She’s been a recurring guest on The Daily Show. She talked about Wall Street greed in Michael Moore’s documentary Capitalism: A Love Story. And she’s a staple on less popular TV talk shows hosted by the likes of Charlie Rose, Bill Maher, and Rachel Maddow.

Her focus on “personal narrative” also plays into some au courant gender-studies topics. But in a way that doesn’t play out well for gender equality. In short, some on the American Left believe that women prefer narratives to facts . . . and these types applaud Warren’s constant drumbeat of “feelings” that are “deeply personal” to her. But lost in all this postmodernism and academic jargon is the ugly and ancient assumption that women aren’t up to analysis of objective reality.

When Warren jabbers on about deeply personal feelings, she’s not so much different than the notorious talking Barbie doll who complained, “Math is hard!”

For those who are inclined to like Warren, these things don’t matter. They don’t even register. A quick survey of the reader comment sections of left-leaning internet news sites finds the following:

  • I'm 'blown-away' by Elizabeth: she's like a breath of fresh air. I watch this video every morning: its my Doxology!!
  • I love her!!!!!!!!!!!!!!!!!!!!!!
  • I love Elizabeth Warren! Such a breath of fresh air. I only wish I could vote for her. But, unfortunately, I'm in Ohio. We need more crusaders like her. You go girl.
  • If the Dems are smart they will highlight E Warren for the next 14 months and then give her a high profile role in the Senate because she IS 2016 staring them right in the face and challenging them to step up.
  • Love her. And I wish she were running for President now. But, she'll be no more experienced in 2016 than Obama was in 2008.
  • I love Elizabeth Warren. She saw the whole mess coming and did something about it. Her campaign now is the most valuable thing I can imagine for the Democrats over the next year.
  • Warren's courage has been contagious so far. Her clarion call to justice for the next generation of Americans can provide Democrats and progressives with an opportunity to reclaim the narrative about how to make America work again for everyone.

(from the Huffington Post)

  • I'm so JEALOUS... I live in Missouri and wish we had someone like Elizabeth Warren to run here. She is AMAZING and she's gonna kick Scott Brown's ass.
  • Getting rid of Scott Brown AND having a MA senator in the ranks of Bernie, Al, and Sherrod?!? Be still my beating heart...Elizabeth Warren will be a wonderful successor to Sen Kennedy.
  • a massive showing for the person who is probably one of the most effective leaders we have seen in a long time.

(from the Daily Kos)

In many ways, these comments are typical of political commentary of all political stripes on the internet. Personality-driven. Egocentric (note how many of the comments start with and focus on the “I” of the commenter). Infantile. At their best, such sentiments can be charming; at their worst, they’re moronic.

And, when Warren is observed in this light, she begins to resemble someone her fans at the Huffington Post and Daily Kos ritually hate: Sarah Palin.

On the surface, Warren is a sort of anti-Palin. Dowdy. Scolding. Harvard professor. Twice-married (the second time to a deferential fellow Harvard professor). Credentialed. Elitist.

But dig a little deeper. Oklahoma native. Scholarship student at a third-tier college. Married at 19. Less-than-gilded law school at University of Houston and Rutgers-Newark.

She’s like Palin in significant ways. They both have built bases of popular support on checkered histories in public service; they both welcome the biases and preconceptions of their supporters.

Here’s an illustrative anecdote: When I told one lefty acquaintance that I was surprised an academic of such modest background had advanced so far, my acquaintance replied indignantly: “What are you talking about? Elizabeth Warren went to Harvard.”

Warren fairly cried out for libertarian scrutiny with one recent quote. A supporter filmed some video of the candidate speaking at a fundraising event. Asked about the president’s ineffective attempts to raise taxes on the wealthy, Warren said:

I hear all this, “You know, well, this is class warfare. This is whatever.” No! There is nobody in this country who got rich on his own. Nobody! You built a factory out there? Good for you! But I want to be clear: You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You, uh, were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory and hire someone to protect against this because of the work the rest of us did.

Now, look: You built a factory and it turned into something terrific or a great idea, God bless! Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

The video became a sensation on the internet. Collectivists cheered Warren’s “full-throated” arguments for wealth redistribution.

But reread the quote — it’s not quite that. It’s a poorly-made argument about externalities.

Like a debater who knows she’s making a weak argument, Warren picks the easiest points to support her case for a social contract. Only the most rigid anarchist would deny legitimate externalities like roads and reasonable law enforcement. Those aren’t the things that are bankrupting America. Welfare programs, subsidized mortgages, “free” public services and defined-benefit pensions are the problems.

The promiscuous enthusiasms of Warren’s fans lead them to some genuinely bizarre conclusions.

As far as her talk of workers that the collective has paid to educate, Warren needs to talk to some actual employers. The failure of the American elementary and secondary education system is driving some firms to look abroad and in some cases relocate for competent employees.

Lastly, the notion of “pay it forward” as part of a social contract is dubious. A social contract should more modest than her ambitions for investment in future outcomes. Support of externalities and infrastructure aren’t about paying it forward — a phrase that has developed a popular connotation of karmic debt that people today owe people in the future — they are about paying for external goods in the here and now.

Warren’s fans aren’t likely to hear any of this, of course. In fact, their promiscuous enthusiasms lead them to some genuinely bizarre conclusions. Here’s what one halfwit fan wrote about Warren’s “pay it forward” quote:

She's wonderful, and dead on with her comments about public investments enabling private success. But she's wrong about "debt" and the national "credit card". Money is a public monopoly. The primary way it comes about is thru federal deficit spending. And US dollars precede US Treasury debt. So there is nothing for children or granchildren to pay back, and there is no "hole" in the budget.

A challenge for a politician who has lots of stupid people cheering for her everywhere she goes is to avoid losing any connection to reality. Life in an echo chamber can lead to bad choices.

Recently, the Daily Kos ran an adoring article on Warren that included a picture of a room full of lumpenprole women and pear-shaped men, cheering on their majestic crusader. To that crowd, and later to several media outlets, Warren bragged that she was the spiritual founder of the Occupy Wall Street protesters. “I created much of the intellectual foundation for what they do.” And:

. . . no one understands better what the frustration is right now. The people on Wall Street broke this country. And they did it one lousy mortgage at a time. It happened more than three years ago, and there has still been no basic accountability, and there has been no real effort to fix it. That’s why I want to run for the United States Senate. That’s what I want to do to change the system.

The National Republican Senatorial Committee jumped on that, issuing a quick press release noting that some of “her Occupy acolytes in Boston” had fought with the police. And ended up in chains.

At the same time, some wild-eyed Occupy Wall Street protesters have demanded that Warren “repudiate” — a totalitarian word — Obama’s bailout of big investment banks (which, again, she oversaw) before they will support her bid for the U.S. Senate. Doesn’t seem like a nice way to treat the lady who created much of their intellectual foundation.

Warren invites this lunacy. By throwing in with the Maoist protesters, she’s likely to have marginalized herself.

There’s a whole year in which candidate Warren’s signals to campus radicals will come back to haunt her. At the Daily Kos, people who “love” Warren are begging her to run for president, in 2016 if not sooner.

A rational person can only hope their love for Warren will be fleeting, just as their love for Obama was. In the mean time, the woman who oversaw the Wall Street bailouts will have talked a lot about her deeply-held feelings. And inched free people who build factories or have great ideas a little closer to slavery.




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More on Government Motors

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Earlier this year, President Obama went on one of his gloating tours, touting the wisdom of his nationalization of General Motors and Chrysler. Theirs was a corrupt bankruptcy that strongly rewarded the UAW, one of Obama’s major financial contributors. The new GM then posted a few months of improved sales, leading to much crowing by all the corrupt cocks.

But lately, the road for what is derisively termed “Government Motors” has become rather bumpy, as illustrated in a recent story. The report is about how the New GM is trying desperately to get a dismissal of a class action lawsuit filed on behalf of 400,000 Chevy Impala owners.

The suit, filed by one Donna Truska, argues that the Impalas — made between 2007 and 2008 — had defective rear spindle rods, leading to rapid tire wear. The plaintiff claims that GM has breached its warranty, and demands that GM fix the cars.

But the new GM argues that since the cars were made by the Old GM, it is not liable for the repairs, and the 400,000 Impala owners should therefore go to hell. Of course, the New GM was only too happy to take over the losses of the Old GM so it could stiff other taxpayers out of future taxes on the New GM, but it doesn’t want to assume any liabilities.

And of course, back in March of 2009, as GM headed toward bankruptcy, Obama promised that in any action he took to “save” GM, consumers would have their warranties honored. As he trumpeted at the time, “Let me say this as plainly as I can. If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired just like [sic] always. In fact, it will be safer than it has ever been. Because starting today, the United States will stand behind your warranty!”

Another Obama lie, of course. He stood behind GM warranties about as much as he has stood behind the American dollar . . .

Meanwhile, shares of the New GM hit a new low of $22 a share.




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Clowns of Industry

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This June, President Obama began celebrating the success of his auto industry bailout. In a speech at an Ohio Chrysler plant, he bragged that he had saved the industry from collapse. Under a brilliant "tough love" plan engineered by his Auto Industry Task Force (Team Auto), GM and Chrysler are turning a profit, hiring more workers, retooling for a "new age," and paying back TARP money — all at very little cost to taxpayers. Now, they are patting themselves on the back and taking bows before cheering media — for brashly spending over $80 billion in a hamhanded attempt to save two companies whose combined market capitalization was less than $10 billion. I can think of only one profession for which clumsy jokes, tricks, and illusions earn praise.

 The president's claims are hopeful pronouncements and disingenuous statements. GM and Chrysler are not hiring and paying back TARP money on the scale of his victory manifesto. The Washington Post (“The Fact Checker”), usually a staunch supporter of Obama's policies, said of the self-congratulatory speech, "What we found is one of the most misleading collections of assertions we have seen in a short presidential speech." President Obama's boasts of recovered TARP money (e.g., Chrysler has paid back "every dime and more") identify payments on TARP loans made only during his administration, but the reality is that to date only $39.61 billion of the official $80 billion TARP total has been repaid. Much of the rest is unlikely ever to be recouped by taxpayers, especially if GM goes broke awaiting the huge, future demand for green energy cars foreseen undauntedly through the rose-colored glasses of Team Auto. The bailout has been a circus run by elite bureaucrats to rescue unions more than auto companies and nudge us to an imaginary green economy more than to real prosperity. 

And the tinkering may make meaningful success permanently elusive. What is the long-term viability of an industry hastily restructured by a task force with no auto industry experience? What is the so-called new age, and when is it to arrive? Where is the brilliance in concocting what certainly must have been among the costliest and most insidious of bailout solutions?

Charged with overhauling the US auto industry, Team Auto was composed of cabinet members and Obama administration officials with extensive auto industry, well, inexperience and ineptitude. Headed by investment banker Steven Rattner, it included experts in energy, transportation, commerce, environmental protection, climate change, and “economics.” The team's industrial expertise resided in Ron Bloom, a former United Steelworkers Union advisor. According to the Wall Street Journal, team members underwent "a crash course in the myriad woes plaguing the US auto industry" and "spent days trying to understand the complexities of the hundreds of companies that supply the car companies with axles, seats and other parts."

Days! Imagine. No wonder they are patting themselves on the back. They learned in days what thousands from the executive ranks of American industry evidently failed to learn in decades — an extraordinary achievement, even for whiteface clowns. Unfortunately for taxpayers, the crash course didn't include a tutorial on Ford's recent turnaround. Ford not only succeeded, it succeeded with private capital and restructuring costs of less than $12 billion. And it succeeded quickly enough that, two years later, it did not need a bailout. To save GM, anyone but a Team Auto wizard might have chosen a similar approach. Then, by recruiting a CEO such as Ford's Allen Mulally and paying the restructuring costs from the $13.4 billion already allocated by the Bush administration, GM could have been rescued with money left over.

A successful GM bailout using $13.4 billion is barely commendable — after all, Ford did it with less. I would expect a truly qualified team to do it for much less. But with incompetence exceeding that of GM management and intransigence exceeding even that of its labor unions, Team Auto couldn't find a solution under $65 billion, which is $5 billion more than GM's highest market cap of $60 billion, reached back in 1999. Brilliant! And they are bragging about it. Perhaps,in a lapse of frugality, the madcap buffoons rejected even more wasteful, corrupt, and extravagant gags.

The recent ascent of the automobile industry is more a descent into the new "too-big-to-fail" abyss. Team Auto pranksters usurped the normal bankruptcy process, cobbling together daffy, impromptu rules to reward two American auto companies and the UAW for decades of foolery and an Italian auto company for its "valuable technology," while punishing legitimate creditors, private bidders, and taxpayers. The rights of creditors, including holders of secured bonds, were subordinated to those of the UAW. Private bidders for GM or Chrysler could not be found. That is, Team Auto could not find investors who would match its political favors, bankruptcy manipulations, and financial pratfalls. For example, GM was allowed to write off, in future years, up to $45 billion of past losses (an under-the-table write-off worth up to $15 billion), and more than $4 billion of Chrysler's debt was immediately forgiven (also under-the-table). All those years of losing money finally paid off — in a financial sleight of hand amounting to $19 billion, ratcheting the bailout total to $100 billion.

After more than two years of "tough love" spending, nine of the 12 vehicles on Forbes' "The Worst Cars on The Road" list for 2011 were from GM and Chrysler.

Team Auto had no trouble gaining Fiat’s cooperation, regaling the company with managerial control and 20% ownership of Chrysler, along with the ability to increase its share of the property to 51% and beyond. And the largess continued. A call option was granted allowing Fiat to buy up to 16% of Chrysler stock at a reduced price, provided Chrysler paid back at least $3.5 billion of the remaining $7.6 billion owed to the Treasury Department. At the time, private banks were afraid to lend Fiat more money. But audacious Team Auto member Steven Chu (Secretary of Energy) pulled a low-interest Energy Department loan out of his green hat for Fiat to develop fuel-efficient vehicles. Magically, it was just the right amount, $3.5 billion. As a result, Fiat will develop a green economy car for Chrysler. It is expected to get 40 mpg — almost as much as the economy car I bought in 1978. Such was Team Auto's assessment of Fiat's advanced technology. Unfortunately, its opinion of Chrysler automotive designers was lower than the demand for Fiats.

The call option giveaway and the sordid $3.5 billion Energy Department loan to pay the Treasury Department loan enabled Fiat to accumulate a majority stake in Chrysler (up to 57% by the end of 2011). Thus, Team Auto rescued Chrysler, an American company currently worth $5 billion, at a cost of $6.44 billion (the $4 billion cancelled plus the amount owed to the Bush administration) and converted it into an Italian company in the process. More brilliance, more bragging.

Splurging money on companies does not create pressure to build a quality product that people want. After more than two years of "tough love" spending, nine of the 12 vehicles on Forbes' "The Worst Cars on The Road" list for 2011 were from GM and Chrysler. None, it should be noted, were from Ford. This is an indicator of the malfeasance of Team Auto's intervention and is fraught with an irony appreciated, no doubt, by sad clowns everywhere. Equally important, it does not bode well for the sustained profitability needed to repay taxpayers. Nor does GM's market valuation. To recover the remaining GM bailout money, it is estimated that GM's stock price must reach $55 a share. Opening at $33 a share last November in Team Auto's IPO, GM closed at just over $29 a share on the day of president Obama's speech.

That GM and Chrysler have shown recent quarterly profits is clearly a favorable development. Nevertheless, the bailout hatched by Team Auto is an appalling mockery. With $100 billion, a group of professional clowns could have produced a quarter or two of profit after a run of two years, probably doing so without giving Chrysler away to a foreign automaker. But they would have had the decency not to brag about the tax money squandered. When I hear President Obama and Team Auto members boasting of their success, I hear a loud, obnoxious clown horn — much like the one I imagine they used to end each tutorial session and to inaugurate each brilliant idea they came up with in formulating the scam.

Ron Bloom boasts that the bailout will "ensure America wins the future." Steve Rattner is peddling the book he wrote about his experience and crowing, "The bailout was a bargain for taxpayers." Obama is so enthralled by his self-declared success he plans to use it as a centerpiece of his 2012 campaign. I imagine that as the election nears, there will be a highly publicized ceremony awarding Team Auto for its sterling performance. Task force members will arrive at the White House and, one by one, with grotesquely painted faces, ruffled collars and pointed hats, clumsily but endearingly emerge from a single, little green economy car.




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Assessing the Bailouts

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Here are some libertarian warnings about the government rescue of General Motors:

“The current restructuring plan calls for the U.S. Treasury Department to have controlling interest in General Motors, which amounts to absolute nationalization. In GM's headquarters in Detroit there is a cluster of bureaucrats from the government's task force telling GM how to run its business. . . . Furthermore, the White House fired General Motors Chairman and CEO Rick Wagoner. When the executive branch intervenes in a private business and ousts management, bailout or not, it is a staggering violation of the American ideal of free enterprise. This sets a precedent for unlimited government trampling over the private sector. On March 30th, Obama said, ‘Let me be clear. The United States government has no interest in running GM. We have no intention of running GM.’ If that's the case — and we know it's not — then why scoop up majority ownership?” (Karen DeCoster, LewRockwell.com, May 23, 2009)

And:

“Will GM be run as profitably and efficiently as Amtrak? Will GM be paid not to produce, like the agricultural sector? Will it feed into an economic bubble like Fannie Mae and Freddie Mac? Will it boast the negligible oversight and waste of the so-called ‘stimulus’ package? Will it feature the fiscal irresponsibility of Social Security? Or will we see the runaway costs of Medicaid?” So many options. (David Harsanyi, Reason.com, June 3, 2009)

And:

“GM’s bankruptcy announcement today . . . might well be remembered as the company’s last act of capitalism. If GM emerges from bankruptcy organized and governed by the plan created by the Obama administration, it is impossible to see how free markets will have anything to do with the U.S. auto industry. With taxpayers on the hook for $50 billion (at a minimum), the administration will do whatever it has to — including tilting the playing field with policies that induce consumers to buy GM or hamstring GM’s competition or subsidize its costs — in order for GM to succeed.” (Daniel Ikenson, Cato@Liberty, June 1, 2009)

And:

“The more the Treasury lends, the more GM will come to be Government Motors. In Obama's America, that will mean becoming a development project for electric cars, plug-in hybrids, or whatever it is the politicians want. The result might be wonderful, but the history of state-controlled companies suggests boondoggles are more likely. The best thing is to let GM do what failing companies have always done: reorganize if possible, liquidate if necessary. . . . Let it go, and let investors put their money where the odds are better.” (Bruce Ramsey, The Seattle Times, April 1, 2009)

That last excerpt is, of course, by me. I didn’t condemn the firing of Rick Wagoner, because I would have fired him, too. But on the main point — that so much government money risked turning GM into a money-losing government pet — I agreed.

It hasn’t happened that way. As I write, the new GM has had three quarters in the black, the latest one earning five and a half cents of operating profit on each dollar of sales. That’s quite respectable. In November 2010, GM became a public company again with a stock offering. GM planned to offer the stock at $26 to $29, depending on the market, but demand was so strong that it sold the shares at $33; and as I write, the stock is trading above that. The stock offering reduced the Treasury’s stake in GM from 60.8% to one-third. If the US government can sell its remaining stock at $53, it will break even.

Chrysler hasn’t done as well, but it is also in the black, and looks like it will make it.

Of course, disaster could yet strike and turn the pessimists into prophets. But let’s be honest: so far, the affair has turned out much better than we feared. We ought to know why, especially if we expect to oppose the next bailout.

One place to start is Steven Rattner’s book, Overhaul, subtitled An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry. Rattner, 58, was President Obama’s “car czar” on the GM and Chrysler rescues. Rattner is a Wall Street guy; he was a founder and partner of the Quadrangle Group, a leveraged buyout firm. Before that he was a reporter for the New York Times, which explains why his book reads so well.

Of course, you are free not to believe his account. I haven’t seen it contradicted, so I take it at face value. Reasons may come along to change that. So far they have not.

I don’t share Rattner’s politics. He is an Obama man. He has raised money for Democrats, and his wife Maureen is a former national finance chairman of the Democratic Party. He says in the book that he is a Democrat because “the Republicans had favored the rich at a time of growing income inequality, abandoned fiscal responsibility, and held unfortunate positions on social issues such as a woman’s right to choose abortion.”

The GM affair has turned out much better than we feared. We ought to know why, especially if we expect to oppose the next bailout.

As “car czar,” Rattner was leader of Team Auto, a group of people, mostly from outside government, whom he recruited. His bosses were Larry Summers, President Obama’s chief economic adviser; and Tim Geithner, Obama’s treasury secretary. Rattner says his task “was not designed to further a particular economic theory,” but was strictly to save those parts of GM and Chrysler that could be made economically viable. He says that in his meeting with Obama on March 26, 2009, the president told him, “I want you to be tough and I want you to be commercial.”

Rattner focused on GM. When his work began, in January 2009, the company already had been given billions by the Bush administration and was burning through it at a bonfire rate. The economy was in panic. The Dow Jones Industrial Average was shriveling to 6,600, the figure it would touch in early March. GM was no longer a viable enterprise. On his judgment of GM, Rattner sounds much like the libertarian accountant Karen DeCoster, who had been saying on LewRockwell.com for several years that GM was an ongoing industrial disaster.

Rattner is no partisan of unions; he recalls his days at the New York Times when the Newspaper Guild defended featherbedding and incompetents. But he does respect unions, and he doesn’t blame them for what happened at GM. It’s management that runs a company. As a leveraged buyout guy, he had expertise in firing, hiring, and evaluating managers — and at GM he was appalled by what he saw and heard.

“From Wagoner on down,” he writes, “GM seemed to be living in a fantasy.” To executives, the problem was entirely the recession, not the GM product line or the way the company was run. GM management’s idea, Rattner says, “seemed to be to trim only what was easily achieved and absolutely necessary, and use taxpayer dollars to ride out the recession.”

But GM had been bleeding market share continually for 33 years. After rebates, its cars sold for thousands of dollars less than their European and Japanese counterparts — a market measure of the people’s esteem for the products. For management not to see that was a kind of sickness. GM had a culture of excuses, of institutionalized failure.

Rattner’s killing comment: “No one at GM thought like an owner.”

Team Auto’s idea was that government money would come only with big changes to make GM viable, including sacrifices by management, labor, bondholders and creditors, and with a major mind readjustment at the top. The place to begin was the CEO.

There was a hullabaloo in the press because the government fired Wagoner. So it had; but the government was the investor, and an investor may put conditions on his investment.

“After nearly a decade of experience as a private equity manger, I believe in a bedrock principle of that business: put money behind only a bankable management team. To my mind, no private equity firm on the planet would have backed Rick Wagoner or GM’s current board. . . . A CEO who leads a company into a state in which its only recourse is a government bailout shouldn’t be in his job.”

And that’s right. There was a hullabaloo in the press because the government fired Wagoner. So it had; but the government was the investor, and an investor may put conditions on his investment. He who pays the jukebox calls the tune.

The critics wanted GM to be put into bankruptcy — either Chapter 11, in which creditors are partly stiffed and the company survives, or Chapter 7, in which the creditors are given the carcass. The critics tended to gloss over the fact that each of these procedures involves the government, in the form of a federal bankruptcy court. Each involves the breaking of private contracts. The difference is that in a bankruptcy the decisions are made by a judge (appointed by other judges) rather than by a politician or direct political appointee. The other difference is that a bankruptcy judge does not have a pipeline to public money.

Those are important differences, but it’s still the government.

An ordinary Chapter 11 would have taken perhaps 18 months, and Rattner says there was no way GM could get debtor-in-possession financing from a bank for such a period. Wagoner had waited too long, and GM was too weak. Wagoner told Team Auto that once the company was in bankruptcy, he believed nobody would buy its cars, because customers would be worried about warranty coverage. Because of that, Wagoner said, he had done no preparation for a Chapter 11. The warranty problem was real, but this was also a self-excusing argument from a guy lining up for a bailout.

There was a different kind of Chapter 11 called a Section 363. It had never been tired on an industrial company the size of GM or Chrysler. A Section 363 allowed Team Auto, the new investor, to fashion a new GM from the assets of the old, leaving creditors to fight over the bones of Old GM. In that way, Team Auto brought out what Rattner calls “Shiny New GM” in a little more than a month.

Maybe that tells something about bankruptcy. Critics write as if bankruptcy were a fixed thing, like the Ten Commandments. But it is a human institution, and may be changed so that it works better or worse.

In the GM case, the stockholders would get nothing, which is what they would have gotten anyway. The bondholders would get a share of New GM worth about 35 cents on the dollar — an amount Rattner says was more than they would have received in a straight liquidation and therefore too much, because the government wasn’t intervening on account of them. The workers’ medical benefit trust would get a piece of the new company in exchange for releasing the new GM from all of its retiree medical obligations, which, unlike pensions, are not guaranteed by the Pension Benefit Guraranty Corp. The United Auto Workers would get a seat on the GM board. The Canadian government, also investing capital, would get a 12% stake.

Given the choice, taking the equity was the right decision. If you’re going to pay the money, you may as well get something for it.

And the US Treasury would get almost 61%. That was a problem. Contrary to all the muttering about Obama being a socialist, the president didn’t want the government to own GM, nor did any substantial constituency in the Democratic Party. And yet, when the decision came about taking shares of stock, it was this, according to Rattner: “We can either get nothing for something or we can get something for something.”

Given that choice, taking the equity was the right decision. If you’re going to pay the money, you may as well get something for it. The Treasury did, and the result of that decision a year and a half later is that the taxpayers have been made one-third whole, and have a chance of coming out entirely whole.

And compared with things two years ago, that is an economic success.

Rattner wants to say there were no politics involved in these decisions, but he can’t quite do it. The choice to undertake the project in the first place was political. And always there was what Rattner calls “the Washington Post Test”: don’t do anything that you don’t want to see written about in theWashington Post.

But the bounds of the politically possible left a large space, and within this space Team Auto had discretion. Rattner writes, “No one in the Obama administration ever asked us to favor labor for political reasons.” Indeed, one of his chapters is called, “F**k the UAW,” a quotation he attributes to White House Chief of Staff Rahm Emanuel.

Organized labor took its lumps in the rescue — at GM it lost almost one-third of its North American jobs. But it came out ahead of where it would have been with no rescue, and it preserved its pensions and high wages for older workers by pushing pay far down for new workers.

With GM, Team Auto assumed from the start that there was a commercially viable core. This wasn’t obvious with Chrysler. It was smaller than GM, and Rattner says the economic case for saving it was much weaker. Obama’s economist, Austan Goolsbee, argued that Chrysler ought to be liquidated: the net loss of US jobs wouldn’t be so bad, because many of Chrysler’s customers would buy their cars from GM and Ford. Better to have two strong companies than three weaker ones. At one point Team Auto considered a plan to transfer Chrysler’s top brands — Dodge Ram, Jeep, and Chrysler minivans — to GM, and shut down the rest.

The political interference after the deal was announced came from Congress, on behalf of car dealers.

Team Auto was divided on whether to subsidize a deal with Fiat to save Chrysler. Rattner voted to do it, but he sounds as if he wished he hadn’t. The matter finally went to Obama, who said to do it. That is when Obama told Rattner to be “tough” and “commercial”—advice that Obama was not exactly following, himself.

The main theme of Rattner’s book is that the GM deal — the big one — was done much as a private investor would, if the investor had decided already to do something. Team Auto’s aim was to make the company profitable. That meant a new CEO, a new chief financial officer, a new chairman, and several new members of the board. It meant shedding Pontiac, Saturn, Hummer, and Saab, and narrowing the product line to Chevrolet, Buick, Cadillac, and GMC Trucks. It meant shedding almost 30,000 jobs. And it meant cutting out 1,124 GM dealers.

The political interference after the deal was announced came from Congress, on behalf of dealers. Each member had imperiled dealers in his district. Sen. Kay Bailey Hutchison, Republican, held up a war-funding bill on behalf of Texas car dealers. House Majority Leader Steny Hoyer, Democrat of Maryland, went to bat for a dealer who had sold only three Chryslers in all of 2008 — and later told Rattner he’d let the companies keep too many dealers alive. Or so Rattner says. Rep. Gabrielle Giffords, Democrat of Arizona, went to bat for a Chrysler dealer, Rattner writes, and “repeated her talking points over and over.”

The intervention by Congress, Rattner writes, was “an enormous, pointless distraction for the two companies at a critical time. Its interference left me wondering what in the auto rescue Congress might like to micromanage next — choosing factory locations or deciding which executives and workers stayed and which had to go?”

That’s politics. The incentives facing elected officials are alien to the imperatives of business. Of course, members of Congress would not have had the ability to intervene so easily if there had been no intervention by the executive branch.

Which gets back to the original question. Obama is an elected official. Why did he let this be done in a mostly businesslike way?

Rattner doesn’t ask the question, but the answer that floats to the surface is that Obama is responsible for the whole country, not just congressional districts with GM and Chrysler assembly plants.

But it was more than that. Probably the strongest reason why Obama didn’t politicize the bailouts to the extent that libertarians feared — and a reason not in Rattner’s book — is that the American people, Republicans and Democrats included, hated the bailout. The polls were clear about that. The first demos of the Tea Party showed it. So did the rise in the reputation of Ford, which became America’s most popular car company because it never took a bailout. There simply was little political gain for Obama in creating Government Motors, and much political hazard.

Probably the strongest reason why Obama didn’t politicize the bailouts to the extent that libertarians feared is that the American people hated the bailout.

So he didn’t do it. By the standards of capitalism — the standards of the market — the bailouts have turned out well. The new General Motors and the new Chrysler are viable companies. Libertarians have to admit that.

When they do so, they should also point out that much of this was due to luck, and not anchored in the nature of things. This time it worked out; but once you allow politicians to run about fixing broken industries with public money, all sorts of bad incentives are created. There is the bad incentive to be a Rick Wagoner, and wait to be saved. There is the bad incentive for the bailers-out not to be tough and commercial, but to be political instead, in order to get votes. In the spring of 2009 Obama wasn’t over a barrel for the electoral votes of Michigan and Ohio, but a future president might be. Rattner alludes to these problems, but his book is about the specific case, not a general case.

A car company rescue also gives the politician a chance to be tinkerer-in-chief. Obama isn’t a car guy, but I can think of politicians who would use the opportunity to push the Chevy Volt, or to go beyond it. Rattner is blunt about the Volt: it costs $40,000 to make, and it competes with cars that cost half as much. He writes, “There is no scenario under which the Volt, estimable as it may be, will make any material contribution to GM’s fortunes for many years.”

In his epilogue, Rattner compares the auto rescues, which resulted in two viable companies, with Obama’s “stimulus” package, which cost 10 times as much and spent the money “without anything like the rigor that private equity or venture capital investors apply.” He says that Americans “we will be disappointed by how little lasting benefit we got for those dollars.”

That is so. It is also a low standard for measuring government spending.

Libertarians still have strong reasons to oppose corporate rescues generally. But each case has its own facts, and sometimes a bad idea delivers good results.

I’m glad it came out well — I guess.

/p


Editor's Note: Review of "Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry," by Steven Rattner. Houghton Mifflin Harcourt, 2010, 320 pages.



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