October 28, 2009

When the Obama administration declared pay cuts for Wall Street, it may have pleased many who now view executives at bailed-out companies as villains. And some of them clearly are villains.

Grandstanding politicians are jumping on the Obama pay-cut bandwagon. Congressman Barney Frank told Bloomberg that he didn't think there would be any charity cases on Wall Street and added, "This is a very good thing."

But it is far from a good thing when the White House tosses aside a fundamental rule of law and essential maxim of economics. President Obama and his czar brigade apparently have no respect for the notion of private property that is protected in our Constitution and a part of the bedrock of a free society.

When it came to the AIG bonuses, and the GM and Chrysler bondholders, the White House pandered to class envy.

It apparently has polls on its side. According to a poll conducted for the Economic Policy Institute, 54 percent of Americans said that “Wall Street investment companies” have benefited the most from the government’s stimulus efforts. Only 10 percent said their families have felt significant benefits. But in this case, the Obama administration is going after contract rights. In many cases, pre-existing contracts.

In America, we pride ourselves in our right to private property. Our right to own private property presupposes a right to make contracts concerning that property. The right to voluntary promises involving goods and services is essential to a free society. President Obama’s pay czar is snuffing out those contract rights, and doing so selectively.

Why use the term “selectively?” The Obama pay cut coercion will not target those firms that repaid the bailout money.

One firm that has paid off its loan is none other than Goldman Sachs. Yes that is the same Goldman Sachs that got a hold of $12.9 billion of U.S. taxpayers' cash — thanks to former Treasury Secretary and former Goldman Sachs CEO, Hank Paulson. Goldman converted into a bank, one of those the administration shouldn’t have bailed out in the first place, so it could get $28 billion in federally backed loans. Goldman made private investments in foreign firms. Goldman took their cheap money and lent it back to the economy at higher rates, making a profit on the spread.

The playing field for the company has been less competitive with former rivals Bear Stearns and Lehman Brothers now gone from the scene.

Let’s see, if a company has a low cost of funds from taxpayers, invests in foreign companies for additional revenue, and has its competition eliminated, it will probably do pretty well.

Everything fell into place for Goldman to pay back its bailout loans fast, make profits, and pay large bonuses without Obama interference. Now Goldman, along with foreign banks, can raid the talent and suck good execs away from the firms that Obama has targeted. Goldman can join with the European banks and pull the best executives from companies such as Citigroup and Bank of America.

The White House is, in effect, evicting the talent from U.S. financial firms at a time when it is needed most. Most of the pay that is being cut was freely contracted for between companies and employees, and many are pre-existing agreements. A contract is a promise between parties that the law enforces as a binding agreement.

In this nation, our right to own private property requires a right to make contracts concerning that property. The right to voluntary promises involving goods and services is essential to a free society. When government uses coercion to interfere with those rights, it sets in motion dominoes that can result in severe unintended consequences.

The law of contracts establishes a way to predict future business actions. When the government tears up contracts at will for political or other reasons it not only casts aside the rule of law but also detrimentally affects the economy. That’s because uncertainty is an enemy of economic growth.

Commerce cannot prosper if freely made contracts cannot be relied upon. Think of the variety of commitments that must be honored for any company to be successful. The shipment of your plasma television, the use of your cell phone and the repair of your car involve promises being kept. These are defined and enforced using contract law. If contracts are capable of being changed arbitrarily commercial transactions are become unreliable.

The consequences of what the Obama administration is attempting here have repercussions in far-flung parts of our economy. In one radical move what used to be ironclad agreements are no longer certain. New risks have now been inserted into an already weak economic structure. Risky business is more expensive and is slower.

Meanwhile, predictably, the Obama cavalcade of czars ignores the real culprits of the subprime meltdown. Barney Frank ignored the warning signs and promptings from the Bush administration when Fannie Mae and Freddie Mac were in intensive care.

Another was Chris Dodd, who was given below-market Countrywide mortgages while ignoring dangers to our entire financial system. And, of course, ACORN, an organization that used lawyers and the threat of litigation to push banks into lending to minorities with no credit worthiness.

We believe that the Constitution of the United States speaks for itself. There is no need to rewrite, change or reinterpret it to suit the fancies of special interest groups or protected classes.