Beware Of Overpaying For Economic Recovery

I wrote a post late Saturday night suggesting that it was time to get on with the business of nationalizing some of our banks. There’s more discussion in the blogs today about the subject with most of it coming down on the side of proceeding with nationalization.

Krugman comes out pretty forcefully in favor as does Felix Salmon. Salmon’s post, I thought, was particularly useful as he took some time analyzing the arguments against the concept as well as pointing out the illogic/unfairness implicit in other regimes that have been suggested as solutions to the problem. A sort of semi-dissenter is John Hempton at Bronte Capital. He doesn’t argue against nationalization per se, just that if the lever is to be pulled it needs to be done in a lawful manner.

I think Hempton’s point is well taken. On the eve of the inauguration of a new president it might serve us well to stand back and take a look at how brazenly we have trumped the rule of law or are in the process of trumping the rule in the name of economic expediency. Since America is not shy about lecturing others of the importance a vigorous legal system to the economic development of a nation,  perhaps we should look into the mirror and see how well we take our own advice.

Lately, I would submit, not well.

Over a short span of time, we have watched the Fed engage in activities that stretch the limits imposed upon it by statute to the breaking point. The FDIC has embarked on a politically motivated program of loan modifications that arguably puts its responsibility to minimize taxpayer and creditor interests at peril in institutions for which it acts as a receiver. The Treasury and the Fed have potentially conspired with the management of Bank of America to withhold pertinent information from BofA’s shareholders relating to the Merrill Lynch acquisition. And the TARP program has been bent to the breaking point in an attempt to accommodate industries that were never intended to be included by the enabling legislation.

The current debate over loan modifications and more particularly the proposal to allow “cram-downs” of mortgage debt in Chapter 11 proceedings illustrates perfectly the extent to which we seem willing to compromise our principles. A respect for the sanctity of contracts has generally restrained our legislators when it comes to passing laws that substantially alter the legal environment that existed when  agreements were entered into. Most recognize that commerce relies on some degree of constancy in order to function, hence laws that reach backwards are rarely invoked. The proposal for “cram-downs” proposes to do just that;  to annul an exemption that investors from every corner of the world have relied on for over 15 years. The intent of the concept’s adherents may be noble but the ramifications may be quite negative indeed.

There is no doubt that we are in dire straits and unusual actions are warranted. That does not mean that  John Hempton’s call for honouring due process should be ignored nor does it mean that we have carte blanche to do as we please. We will live to see another day and it would serve us well to welcome those days with our legal system intact and respected by those who must rely on it.

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