Tag: Bailout

Third Greek Bailout Is Not the Charm

Nearly a month ago Greek voters rejected more economic austerity as a condition of another European bailout. Today Athens is implementing an even more severe austerity program.

Few expect Greece to pay back the hundreds of billions of dollars it owes. Which means another economic crisis is inevitable, with possible Greek exit (“Grexit”) from the Eurozone.

Blame for the ongoing crisis is widely shared. Greece has created one of Europe’s most sclerotic economies. The Eurocrats, an elite including politicians, journalists, businessmen, and academics, determined to create a United States of Europe irrespective of the wishes of European peoples.

European leaders welcomed Athens into the Eurozone in 2001 even though everyone knew the Greek authorities were lying about the health of their economy. Economics was secondary.

Unfortunately, equalizing exchange rates cemented Greece’s lack of international competitiveness. Enjoying an inflated credit rating, Greece borrowed wildly and spent equally promiscuously on consumption.

Greece could have simply defaulted on its debts. However, Paris and Berlin, in particular, wanted to rescue their improvident banks which held Athens’ debt.

Thus, in return for tough loan conditions most of the Greek debt was shifted onto European taxpayers through two bail-outs costing roughly $265 billion. Greece’s economy has suffered, and the leftwing coalition party Syriza won Greece’s January election. Impasse resulted at the end of June as the second bailout expired.

Court Finds Government Actions in AIG Bailout Were Illegal

Ask any first year law student “what did you learn in school today” and you’ll probably get some version of the answer: “duty-breach-causation-harm.”  While this applies specifically to tort claims, it seems axiomatic, even for non-lawyers, that you can’t sue someone who hasn’t hurt you.  Or can you?

Former AIG CEO Hank Greenberg caused a ripple of shock in late 2011 when he filed suit against the U.S. government, alleging that the government’s 2008 bailout and subsequent take-over of AIG was unlawful, and claiming $40 billion in damages.  Despite skepticism throughout the legal community, the case not only survived dismissal, but went on to a full trial, during which such heavyweights as Tim Geithner, Hank Paulson, and Ben Bernanke took the stand. 

Throughout the trial, Judge Thomas Wheeler seemed sympathetic to the claims that Greenberg brought on behalf of Starr International Company, an AIG shareholder.  Few believed that AIG had any alternative to the government’s money, except bankruptcy.  In bankruptcy, shareholders (like Starr) are paid last out of whatever remains after all the company’s debts are paid.  Which typically (and most likely in AIG’s case) means not paid at all.  Would the judge really grant Starr a $40 billion judgment – against the U.S. government – when the alternative was bankruptcy?

No.  But that doesn’t mean the government got off scot free either.  Judge Wheeler found that the federal government committed an illegal exaction.  That is, it took something it had no right to take.  (This, the judge carefully notes, is not the same as a “takings” under the Fifth Amendment.  When there is a takings, the government lawfully uses its authority to take private property for public use and then must pay the owner “just compensation” for that property.  An illegal exaction means the government took properly unlawfully.) 

Hayek v. Krugman – Cyprus’ Capital Controls

Nobelist Paul Krugman has a propensity to spin and conceal. This allows for deception – the type of thing that hoodwinks some readers of his New York Times column. While deception doesn’t qualify as lying, it also fails to qualify as truth-telling.

Prof. Krugman’s New York Times column, “Hot Money Blues” (25 March 2013) is a case in point. Prof. Krugman sprinkles holy water on the capital controls that will be imposed in Cyprus. He further praises to the sky the post-1980 capital controls that were introduced in a number of other countries.

Prof. Krugman then takes a characteristic whack at all those “ideologues” who might dare to question the desirability of capital controls:

But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.

Fine. But, not once did Prof. Krugman mention that there just might be a significant cost associated with the imposition of capital controls – a cost with which Prof. Krugman is surely familiar.

Before more politicians fall under the spell of capital controls, they should take note of what another Nobelist, Friedrich Hayek, had to say in his 1944 classic, The Road to Serfdom:

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

When it comes to capital controls, I think the Cypriots – even the non-ideologues – might be inclined to agree with Hayek over Krugman.

An Insider’s Account of the White House’s Unseemly Tactics in the Chrysler Bailout

A Wall Street Journal editorial this morning points out that Indiana Republican Senatorial candidate Richard Mourdock is getting pounded by his Democratic rival for having opposed the Chrysler bailout.

Mourdock opposed the bailout on principle, but at that time he was also the Indiana state treasurer and fiduciary for several state pension funds, including two holding the retirement resources of Indiana police officers and school teachers, which owned about $42 million dollars of “secured” Chrysler debt in 2009. When Mourdock rejected the administration’s offer of $0.29 for each dollar of debt held, his position was publicly excoriated by President Obama as greedy, unpatriotic, and reflecting and unwillingness to ”sacrifice for the greater good.”  There’s much more to this story.

If you are interested in a first hand account of the strong-arm tactics, threats, and intimidation employed by the White House to get its own Chrysler bankruptcy plan rubber stamped through the process in 2009, you will want to see this video of Mourdock speaking at a Cato event.  It is truthful and chilling.

If the Auto Bailout Was a Success, I’d Hate to See What a Failure Looks Like

Sometimes it’s no fun to be an economist. Or, to be more specific, it’s rather frustrating to understand Bastiat’s insight about the “seen” and the “unseen” and to always be asking “at what cost?” and “to what effect?” when politicians make inane statements.

The GM bailout is a good example. Politicians want us to believe that it was a success because the company is still in business. Heck, the Vice President’s favorite campaign statement is that “Osama bin Laden is dead and General Motors is alive

But if you’re the type of person who recognizes the importance of tradeoffs and incentives, then it’s easy to see how a political success can be an economic failure. Which is the message of this new video from the Center for Freedom and Prosperity Foundation.

This is music to my ears. I’ve been saying for years that any company can be kept afloat indefinitely with taxpayers subsidies. So if that’s the definition of success, we can party until we hit the fiscal brick wall. But that wall won’t feel good, as we can see from the fiscal chaos in Greece and other European welfare states.

But this issue involves more than just inefficient subsidies. I’m also concerned about the corruption that inevitably exists when cronyism replaces capitalism.

It’s quite likely, after all, that GM is spending lots of money on the Chevy Volt because of pressure from Washington rather than demand from consumers. And when you have a car company executive endorsing higher gas taxes, it’s reasonable to think that he’s currying favor with the political masters in DC rather than looking out for the best interests of drivers.

The GM bailout may be a win-win situation for politicians and lobbyists, but it’s a lose-lose proposition for taxpayers and the economy.

P.S. If you want some auto bailout humor, here’s a spoof on the Chevy Volt, an advertisement for the new GM Obummer, a couple of good political cartoons, and a very funny video on the Pelosi GTxi SS/RT.

Details of the Auto Bailout You Won’t Hear in Charlotte

The central economic selling point of the Obama reelection team is that the president saved the U.S. auto industry. That such a contestable proposition serves as the administration’s economic headline does more to underscore its abysmal record than to inspire confidence in its continued economic stewardship.

The administration didn’t save the auto industry. The stronger case is that it damaged the auto industry along with several important institutions vital to capitalism’s proper functioning. However, it should be granted that President Obama’s commandeering of GM’s and Chrysler’s bankruptcy process saved jobs at those companies and elsewhere in their supply chains (and provided an opportunity to dole out spoils for politically favored interests). How many jobs were saved is impossible to determine because it’s not clear what would have happened to GM’s and Chrysler’s assets had a normal, non-political bankruptcy process been allowed to unfold.

Yes, jobs were saved for the time being in Michigan, Ohio, and a few other industrial states in the Midwest. That is what can be seen. And politicians are hardwired to tout the benefits—and only the benefits—of their policies.

But an informed citizenry should insist on a proper accounting of the costs of those policies, as well—not just the losses put on the taxpayers’ tab (right now taxpayers’ “investment” in GM is $27 billion, but the public’s 500 million shares of GM stock is worth only $10 billion), but the unseen costs.

Sure some jobs were preserved in some locations, but what about the less visible consequences and ripple effects? What isn’t so easily seen, but is every bit as important to assessing the auto interventions is the effects on the other auto companies and their workers (i.e., the majority of the U.S. auto industry). Will the public remember or know enough to attribute layoffs of American workers at Ford or Toyota or Kia during the next downturn in auto demand to the fact that a necessary reckoning on the supply side was precluded by the interventions of 2009?

The auto industry is plagued with overcapacity, which is a problem that demands a thinning of the herd. GM and Chrysler, through their own relatively poor decisions with respect to labor relations, product offerings, and quality management were failing by the market’s judgment and were the rightful candidates to be thinned. But that process was forestalled. In 2013, auto workers in Alabama, Tennessee, South Carolina, Indiana, and even Michigan and Ohio may lose their jobs because GM and Chrysler workers’ jobs were spared in 2009.

That is only one of the many unseen or under-rug-swept costs of the auto bailouts. The following passage from congressional testimony I gave last year identifies several others:

It is galling to hear administration officials characterize the auto bailouts as “successful.” The word should be off-limits when describing this unfortunate chapter in U.S. economic history. At most, bailout proponents and apologists might respectfully argue — and still be wrong, however — that the bailouts were necessary evils undertaken to avert greater calamity.

But calling the bailouts “successful” is to whitewash the diversion of funds from the Troubled Assets Relief Program by two administrations for purposes unauthorized by Congress; the looting and redistribution of claims against GM’s and Chrysler’s assets from shareholders and debt-holders to pensioners; the use of questionable tactics to bully stakeholders into accepting terms to facilitate politically desirable outcomes; the unprecedented encroachment by the executive branch into the finest details of the bankruptcy process to orchestrate what bankruptcy law experts describe as “Sham” sales of Old Chrysler to New Chrysler and Old GM to New GM; the costs of denying Ford and the other more deserving automakers the spoils of competition; the costs of insulating irresponsible actors, such as the United Autoworkers, from the outcomes of an apolitical bankruptcy proceeding; the diminution of U.S. moral authority to counsel foreign governments against similar market interventions; and the lingering uncertainty about the direction of policy under the current administration that pervades the business environment to this very day.

In addition to the above, there is the fact that taxpayers are still short tens of billions of dollars on account of the GM bailout without serious prospects for ever being made whole. Thus, acceptance of the administration’s pronouncement of auto bailout success demands profound gullibility or willful ignorance. Sure, GM has experienced recent profits and Chrysler has repaid much of its debt to the Treasury. But if proper judgment is to be passed, then all of the bailout’s costs and benefits must be considered. Otherwise, calling the bailout a success is like applauding the recovery of a drunken driver after an accident, while ignoring the condition of the family he severely maimed.

Here is the entirety of that testimony, and few other articles, op-eds, and blog posts on the topic.

‘Leavitt’ Is Republican for ‘Solyndra’

Mike Leavitt is a Republican, a former Utah governor, a former Secretary of Health and Human Services under President George W. Bush, and now owns a firm called Leavitt Partners, which makes money by helping states implement ObamaCare’s health insurance “exchanges” and take advantage of ObamaCare’s Medicaid expansion. Let’s stipulate from the outset that Leavitt and his staff are doing what they think is best for the nation. Still, as this article in yesterday’s New York Times explores, it’s odd that Mitt Romney chose as one of his top advisers a guy who’s profiting from ObamaCare:

If Republicans in Congress agree on anything, it is their desire to eradicate President Obama’s health care law. But one of the top advisers to Mitt Romney, the party’s likely presidential nominee, has spent the last two years advising states and private insurers on how to comply with the law…

Mr. Romney has named Mr. Leavitt — a longtime friend, former governor of Utah and former federal health secretary — to plan the transition for what both hope will be a Romney administration.

Mr. Leavitt’s full-time job is running his consulting company, Leavitt Partners, which is based in Salt Lake City and has advised officials in Mississippi, New Mexico and Pennsylvania, among other states…

Michael F. Cannon, director of health policy studies at the Cato Institute, said: “It is strange to see Mr. Leavitt, a former Republican governor and former secretary of health and human services, helping and encouraging states to carry out this law for which Republicans have so much antipathy. It deepens suspicion as to whether Romney is sufficiently committed to repealing the Obama health care law.”

Twila Brase, president of the Citizens’ Council for Health Freedom, a free market group that is mobilizing opposition to an exchange in Minnesota, said: “Mike Leavitt is an enabler of Obamacare. He has taken advantage of Obamacare to expand his own business, instead of helping governors resist a federal takeover of health care.”

Secretary of Health and Human Services Kathleen Sebelius has thrown nearly a billion dollars at states in a desperate attempt to bribe them into establishing Exchanges. We do not yet know how much of that cash has found its way to Leavitt Partners:

Natalie Gochnour, a spokeswoman for Leavitt Partners, said its work with states was only part of its business, but she refused to say how much the company had been paid for such work.

Perhaps some day we will, and “Leavitt” will become synonymous with “Solyndra.”

Also, by my count the Times article devoted eight column-inches to such pro-Exchange nonsense as the idea that an ObamaCare Exchange could “run on free market principles” or Leavitt’s claim that “continued inaction by states risks an Obama-style federal exchange being foisted upon a state.” Yet the Times cited no one who challenges those claims. I have no problem with the Times posing difficult questions to Romney. Why should ObamaCare get a pass?

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