Saturday, May 2, 2009

"You never want a serious crisis to go to waste"

According to a Wall Street Journal article November 21, 2008, Rahm Emmanuel, who is President Obama's Chief of Staff, said, "You never want a serious crisis to go to waste." At the time, I thought Emmanuel referred to policy goals such as health care and "green" energy policy. It now appears that he was also talking about overhauling contract law. In trying to keep Chrysler in business, the Obama Administration is putting non-secured creditors ahead of secured creditors, and calling those who complain "speculators." Of course, speculator is a new type of four-letter word.

Lest I be accused of drawing too hasty an inference from the Chrysler plan, one should recall that Obama has Joe Biden as vice-president. It was Biden who waved a copy of Richard Epstein's book, Takings, at the Clarence Thomas hearings and questioned Thomas whether he agreed with Epstein. At some point Thomas reminded Biden that there is a "takings clause" in the U.S. Constitution. (Takings has to do with the requirement that the government compensate fairly those who lose property due to government action. The phrase in the Fifth Amendment is, "...nor shall private property be taken for public use without just compensation.")

Hopefully, the bankruptcy court will follow the law and not the politically expedient. But, since we are in, "the worst crisis since the Great Depression," I fear that politics will decide the issue and the end will justify the means. The long-term threat is that the increased uncertainty regarding lending in the US will raise the cost of capital and reduce the long-run growth rate of the economy.

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