Can Government Do Anything It Wants Without Consequence?

I pose the question because, so it seems in recent days. Our federal government is setting the salaries of bank executives, hiring and firing CEOs, reshaping boards of directors, and even buying up 72.5% of entire car companies.

Think beyond the massive debt that is being accumulated. Do any of these actions have other consequences in the future?

Historians pinpoint the beginnings of U.S. power at 1811, with the liquidation of the First Bank of the United States, founded by Alexander Hamilton. Amid the winds of the War of 1812, First Bank ignored political pressure and insisted that even British bondholders, from the nation the U.S. was preparing to fight, be paid in full. The debt was paid because that was the law.

This single act reverberated for years. Word got back to Europe that the word of this fledgling country was good, even with enemies. As a result, European capital to finance the great steamships, railroads and other engines of American growth flowed.

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Scroll to 2009. What’s good for General Motors is no longer what’s good for America. GM and Chrysler faced restructuring in a last-ditch bid to avoid bankruptcy. But unlike 1811′s British lenders, their bondholders have been treated like enemies.

In setting terms of the restructuring as a result of its $30 billion bailout, the U.S. government saw to it that the United Auto Workers got more than their share, shredding the claims of bondholders who normally have first priority.

Chrysler bondholders got 29 cents on the dollar and were pilloried as “vultures” by the very government sworn to uphold the law. And for their $27 billion investment, GM’s 1,200 bondholders, many of them small stakeholders, got an equity stake of just 9%.

By contrast, the UAW, whose only claim is the $20 billion the automaker owes in gold-plated employee benefits, got 20%, with the government ending up with the rest.

This may be a greater barrier to bringing investment back to the US economy than even President Obama’s proposal to double the tax on investment.

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