Who Do You Know Who's Been Saying This About Chrysler?

Good for Megan McArdle:

when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?  Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.

No, leave that aside for the nonce, and let's pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions.  What do you think this is going to do to the supply of credit for industries with powerful unions?  My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit.  Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit.  Though it may well be the last time they get it, on anything other than usurious terms.

I am not sure I agree with the last part.  While banks seem to have an unbelievably long memory when it comes to you or I trying to get a loan after we forgot to return those Columbia House records 15 years ago and couldn't pay our bills, major banks have goldfish memories when it comes to major losses.  Whether it be lending to Latin American companies or to industries like airlines that go bankrupt with clockwork regularity, banks seem perfectly capable of repeating the same mistakes over and over again.

This is in part due to something I was trying to tell folks waaaaay back in October with the threatened liquidity crisis -- banks have to lend.  There is simply no good business model for a bank that involves sitting on hoards of cash under the mattress.  And when you have tens of billions of dollars to lend, you can't just do it in $100 increments -- you have to lend big slabs to large institutions.  And given that lots of other banks are trying to lend to the same guys, someone is going to issue that $300 million line of credit to Chrysler a couple of years hence.

4 Comments

  1. Mesa Econoguy:

    The first part is clearly the most important aspect of the situation to date, as it completely renders bankruptcy claimant priority moot, and may in fact be criminal action by the Administration, as one of your other posters said.

    This sends a major message to any potential institutional investor that your investment might be subject to the rule of law as written, or it might not. We’ll see. That’s deadly.

    What it also does is shorten the list of who banks have to lend to. In other words, and in conjunction with TARP and it’s previously invisible strings, we are now in the arena of political allocation of credit, and that’s unbelievably dangerous.

    So in 3 short months, Mr. Obama and his borderline criminal enterprise has brought us to fascism, and is in the process of undermining contract law.

  2. Allen:

    Are you saying that what airlines have gone through has not stopped banks from loaning money nor has it seriously affected how they loan money to the airlines? Or how much? I don't know enough to say what the case is but it would seem odd that it hasn't changed. That at least some individuals in these banks wouldn't be taking into account the new risks at hand.

  3. The Dirty Mac:

    Banks do have to lend. But the price of credit can and will be adjusted to account for the increased political risk. Increased contributions to the DNC are likely to be viewed as a mitigant to that risk.

  4. trevor:

    Mesa-
    This country has been a fascist enterprise for decades, but Barry O certainly is turning up the heat.

    And as far as banks 'having' to lend, this is tricky. When the Fed loosens credit and creates new money, literally, out of thin air for the purpose of 'stimulating spending,' the banks are the recipients of this new credit.

    Combined with artificially low interest rates (so people will be enticed to gobble up the new dough) and 'recommendations' from the state that these lending institutions comply with central bank policies, it is virtually a formality that the banks disburse these loans.

    Craven, corporatist politicians and their cronies on Wall Street have been our undoing before, and they will be again.