The End of Capitalism as We Know It
Arguably the most fundamental, crucial element to a civil society is the rule of law. A corollary to this notion is that of contract rights – when two or more people enter into a valid agreement that they intend to be honored, the agreement should indeed be honored. In the U.S., contract law is sacrosanct and it would not be facetious to say that the entire world’s economy depends on America’s respect for its laws and contracts.
All contracts are important in some way, but credit contracts are particularly important to a functioning capitalist system. That’s why Article V of the U.S. Constitution prohibits states from interfering with the obligation to pay debts. And Article 1, Section 8 reinforces this point by delegating to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”
Under these long standing bankruptcy laws – enacted and enforced by the federal government under the Constitution – a secured creditor is entitled to first priority. Other nonsecured creditors have “junior” priority. The purpose of this rule should seem clear. When you offer credit to some one or some thing, and do so on the condition that it is secured by an asset, you should be first in line to collect before those providing credit without such security. Unfortunately President Obama’s actions throughout the Chrysler bankruptcy have trampled over these well worn bankruptcy laws, contract rights, and even the rule of law.
One of Chrysler’s secured creditors was the State of Indiana, or more particularly, pension funds administered by the state. But now that Chrysler has filed for bankruptcy, Indiana and other secured creditors are being forced to the back of the line so that unions can proceed to the front. For every dollar of some secured creditors’ claims, they’re receiving only 30 cents. Compare that the the United Auto Workers union, an unsecured junior creditor, who will get 50 cents on the dollar.
Why? It’s not because any contract, agreement or bankruptcy law calls for it, but because the federal government decided it was politically convenient. Of course, we’ve become far too familiar with the government robbing Peter to pay Paul, but in this instance the government is violating the rule of law to do it. The arbitrary whims of Obama’s administration threaten the very foundation of capitalism.
Henceforth lenders will hesitate to provide credit, and eager entrepreneurs and businessmen will struggle to find it, because any credit can now apparently be confiscated by government greed regardless of the law or the existence of a binding contract. Simply put, the price of borrowing will now go up because lenders must account for a new risk – government intervention.
Obama has assisted the UAW in this instance, an entity which just so happened to be crucial to his election. But how many union workers in the future will be laid off – or never hired in the first place – because their employer couldn’t find credit or loans for expansion?
Thousands upon thousands of people are getting steamrolled by this outrageous affront to the credit system, but only Indiana has objected, and its efforts appear to be fruitless thus far. I fear that President Obama’s actions in the Chrysler bankruptcy signal the dawn of a new era in which powerful political interests trump capitalism and the sanctity of contracts. May God have mercy on us all.
16 Responses to “The End of Capitalism as We Know It”
While I think Josh engages in some uncecessary hyperbole and exaggeration (for example, I don’t think this is “the end of Capitalism as we know it”), I think this is a terrific post.
Obama has been more moderate as President than I had expected. However, Obama has shown very little respect for the rule of law. The Chrysler bankruptcy is one EGREGIOUS example. Another example is Obama’s comments regarding his appointment to the SCOTUS. Obama has basically said that he wants a “sympathetic” justice.
“What I do want is a judge (sic) who is sympathetic enough to those who are on the outside, those who are vulnerable, those who are powerless, those who can’t have access to political power, and as a consequence, can’t protect themselves from being dealt with sometimes unfairly.”
I interpret the above to mean that a little bending of the rules in the name of helping the little guy might be ok to Obama. Of course it is not ok to anyone who believes strongly in the “Rule of Law”.
The rules of the game should stay the same regardles of who is in charge of running it. Obama doesn’t seem to mind departing from those rules. I guess this is the kind of thing I should expect from a politician from Illinois.
Really well written, and expressed far more eloquently than what I wrote on the matter.
I’m not sure that I like what’s happening to the teachers and cops of Indiana, either. However, I disagree with Josh on this point, at least for now. I believe the Administration’s intent is straightforward: to try to restructure and reposition Chrysler for the future. But…an awful lot of Chrysler’s workers are gonna get hurt too, when they get laid off as part of that restructuring and repositioning. Meanwhile, there’s no guarantee that Chrysler can stillsurvive. I also understand that some of these midwestern places are already at Great Depression levels of unemployment and misery, so I don’t know that the best option here is obvious. I can only hope that the WH has something concrete in mind in the way of offering incentives to those affected parts of the Midwest to move towards new technologies/industries so that these people have some kind of shot at a new kind of work. Although that seems a little pipe-dreamy at this point.
Regarding Paul’s reference to Obama’s showing “very little respect for the rule of law.” I call baloney. Here’s a reminder, all this is playing out in U.S. District Court. Attorneys for Chrysler and from the Indiana state pension funds have to argue their respective cases before presiding Judge Arthur Gonzalez, and it’s he who will make the final decisions regarding the Chrysler bankruptcy (unless there’s an appeal, of course).
It seems that whatever the law dictates is of minor importance to you, Jerry, and that is a big part of the problem.
Indeed, your last statement suggests you struggle to understand this concept. The law is not whatever a single district court judge says it is.
I wasn’t aware that the law is so cut and dried, Josh. I thought that what is playing out in Judge Gonzalez’s court is deciding when the “absolute priority rule” takes a back seat to the “fresh start,” rehabilitative policy of chapter 11.
If “absolute priority rule” does rule the day, that should trump the Administration’s/Chrysler’s position, no?
Umm Jerry, Chapter 11 is not about “fresh starts”. I think you are confusing Chapter 7 with Chapter 11.
http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter7.html
I could also discuss why “rules” (i.e. actual laws) in “Codes” should trump “policies” (theories and purposes that are not binding law), but I would rather just point out that you don’t know what you are talking about.
Then take it up with the Bankruptcy Litigation Blog that Josh linked to, Paul:
I’m not a lawyer, so I’m at a bit of a disadvantage here. My understanding is that lawyers for the Indiana pension funds have mounted a legal challenge claiming, as Josh has written here, that the government has exceeded its authority and is using the bankruptcy process to advance its own agenda, and that the District Court will take the issue up some time next week. If lawyers for the Indiana pension funds are correct, I would expect that would be reflected in the judgement in District Court.
[...] Joshua Claybourn summarizes why the Chrysler deal brokered by the Obama administration is much, much scarier than you think. (Link fixed!) [...]
[...] Joshua Claybourn summarizes why the Chrysler deal brokered by the Obama administration is much, much scarier than you think. (Link fixed!) [...]
[...] I’ve alluded to already, the ramifications of these lawless policies are enormous, but one short term consequence is that investors will refuse to invest in companies owned (in [...]
Doesn’t the fact that the federal govt gave Chrysler billions in bailout money change the equation at all? I understand and agree with the concerns the post raises, but is it really legitimate to say that the govt can give them this amount of money but has no say in how it is used? It’s not like this is a good investment on our govt’s part and ‘bailout’ is probably a more accurate term. Is the issue that since this is an unusual situation and there are no laws specifically addressing it then we should default to the existing bankruptcy laws? Or am I just way offbase, which is probable, in mistakenly thinking that the assets that are being fought over is partly the money handed out by the govt?
In other words, Justice will no longer be “blind”?
Will we have to remove the blindfolds and scales from all the statues, etc of Lady Justice?
Sad, sad, sad.
Of course, most Americans have no clue what the constitution is, much less what it says about justice or about the powers and duties of the Chief Executive.
[...] Joshua Claybourn summarizes why the Obama regime’s management of the Chrysler bankruptcy is wo… It violates the most important aspects of a sound legal system: the sanctity of contracts and the rule of law. Under these long standing bankruptcy laws – enacted and enforced by the federal government under the Constitution&38212a secured creditor is entitled to first priority under the “absolute priority rule.” Other nonsecured creditors have “junior” priority. The purpose of this rule should seem clear. When you offer credit to some one or some thing, and do so on the condition that it is secured by an asset, you should be first in line to collect before those providing credit without such security. Unfortunately President Obama’s actions throughout the Chrysler bankruptcy have trampled over these well worn bankruptcy laws, contract rights, and even the rule of law. [...]
One could say that our economic system is a by product of our legal system.
If the legal system is fundamentally changed (contract law) at the whim of any branch of the government, the division of labor which we depend upon for our entire economic well being is affected.
Most notably the US has always been a safe haven for capital. This may not continue to the be the case with more actions such as the one just taken by the Obama Administration in the case of Chrysler.
Also I doubt very much that Chrysler will be able to raise further capital from the markets based on this precedent or as previously mentioned they will pay a premium for such debt.
Also if this had just been handed over to the bankruptcy courts this matter would have been handled differently and perhaps the company would have been able to finally start fresh without the UAW contracts and start competing again instead of being hampered by union contracts which state details about every level of production that are so backward it boggles the mind the company has even made it this far.
Cory
[...] week in a post titled “The End of Capitalism as We Know It,” I wrote about Chrysler’s bankruptcy and its implications for the rule of law and our [...]
[...] Indiana and the Chrysler Bankruptcy By Doug Some of my fellow Hoosier bloggers (h/t Abdul and Josh Claybourn) have been following the Chrysler bankruptcy, particularly with respect to Indiana’s unexpectedly prominent role in the matter. Josh, in particular, has strong feelings on the issue, calling the proposed reorganization (presumably with some degree of hyperbole “The End of Capitalism as We Know It.”) [...]