Rich People Things: Our General Motors And The Bond Market

Welcome to the unthinkable: General Motors, which used to be the metric of what was good for America, is now a liability on the taxpayers' books. As long predicted, the flailing auto giant filed for bankruptcy yesterday, amid the sort of regimented pundit hand-wringing about the sinister Meaning of It All that you could set your odometer to.

The Wall Street Journal inveighed against the sweetheart deal that the UAW got in the restructuring-17.5 percent of the ownership share, compared to the 10 percent allotted to "hapless bondholders" who would have to wait in line behind the lazy, pinkie-ringed union leaders to see their shares redeemed in the remote and unlikely scenario of a company turnaround. Last Friday, James K. Glassman-he of the swashbuckling late-90s "Dow 36,000" prophecy-pronounced in the New York Times that the deal was "driving the bond markets to ruin" by giving workers a stake amounting to at least "four times as much of G.M. in return for claims that are, at best, equal" to the claims held by the put-upon bond-holding class.

With the government assuming an initial 72.5 percent, that makes for-shudder-"about nine-tenths of the shares" in feckless government and union hands. With that prospect in view, conservative pundits can readily fill in the Boschian vision of G.M.'s future with their paint-by-numbers palettes: "With substantial union co-ownership, labor costs won't be contained; and with government as the boss, politics may trump markets on such matters as where to put plants and whether to build big cars or small ones."

Never mind that the market has already delivered at least one verdict on the hotly debated big- vs. small-car question in favor of the preferences already held by government's insatiable social engineers-spinning off GM's foul, no-longer-profitable Hummer line to a yet-to-be-named mark… er, I mean, investor—representing at the very least a provisional gain in America's otherwise doomed battle against its own penchant for global self-embarrassment.

Never mind as well that GM's corporate brother in bankruptcy, Chrysler, has a provisional deal to be bought out at the end of its five-year turnaround plan by Fiat-a company that is, in turn, largely a plaything of the Italian government. And the curious thing is that Fiat's cheerfully nationalist business model seems to have inflicted very little ruin on investors: Until the global recession prompted the company to post a loss for the first quarter of 2009, it had enjoyed fifteen successive quarters of profit gains.

Indeed, if one squints beyond the gnat-straining preoccupations of the Glassman and the WSJ's right-of-Attila editorialists, the new global economy that is perennially supposed to cow American workers into terrified surrenders of wages, security, pensions and the like actually teems with welfare-state-backed investment plans. The biggest global competitor of Boeing, for example, is Airbus, a company jointly owned by the British and French governments. Earlier this year, Ireland nationalized its third largest bank-and Britain's wobbly banking sector was partially nationalized early on in last year's global meltdown. Even Glassman, seeking to drive home the true horror of a rampantly politicized GM management, winds up appealing to the delicate investor sensibilities of the Chinese government-a major investor all sorts of other U.S. funds and firms.

"The Chinese," Glassman solemnly intones, "could view things this way: If the United States is willing to skirt the law"-i.e., bypass traditional corporate reorganizations that put bondholders' claims ahead of union contracts-"to help some of the president's closest political supporters gain large pieces" of GM and Chrysler, "will Washington necessarily stand behind any Treasury securities we owe when it becomes politically inexpedient?" Whatever would happen then? Um, wait, I know: Chinese leaders would instruct the Blackstone Group, the U.S. private equity fund now partly in the Chinese government's hands, to repatriate investments to state-owned Chinese firms, right?

One supposes that one of the world's last standing Communist regimes would at least keep labor costs low-but is that the kind of market discipline that Mr. Dow 36,000 really craves?

Of course, the government-run handling of the GM bankruptcy is a gamble-and bondholders, who include many private and state pension funds in their ranks, have legitimate worries about its progress. But long before ideologues and hack columnists found profitable livings in excoriating the government for alleged ineptness and buddy-buddy bureaucratic turpitude, it wasn't at all uncommon for the federal government to step in as investors and managers of last resort.

It happened in 1976, when that well known crypto-socialist Gerald Ford put forward a plan to acquire troubled northeastern passenger rail concern Conrail. By 1981, after some federally administered production measures were instituted, the company was turning a profit.

Of course, by then, America had elected the father of latter-day government-bashing dogmatism as president and the whole embarrassing success story was promptly forgotten.

And the Tennessee Valley Authority, the project that helped launch the Glassman-esque cottage industry in high-profile frothing over government meddling in the economy, brought cheap electricity to Depression-battered rural South. It continues operating effectively, and for the most part, profitably, unto this day.

What's more, despite the Spenglerian howls of Glassman and the manorial hounds that Rubert Murdoch retains atop the Wall Street Journal masthead, the bond market is not teetering on the brink of ruin. Quite the opposite, in fact.

As of the end of May, some $640 billion in corporate debt has been issued, well ahead of the $926 billion logged for all of last year. The neat thing about being a no-government free marketer these days, actually, is that the movement's pundit retinue has frequently cited the new wave of freshly issued debt as a reason to roll back the TARP rescue plan and other government-funded efforts to jumpstart markets-while also citing out of the other side of their mouths the roiling doom that markets face when jumpy bondholders lose their pride of place in debtholder covenants.

Indeed, by a most inconvenient coincidence, federal courts approved the similarly structured Chrysler bankruptcy to proceed on schedule just as news of the GM deal broke-despite the near-identical chorus of rightist lamentations back in April that the Chrysler arrangement would be a grotesque and disorderly march into the collectivist abyss. If anything, it seems likely that the GM restructuring, which will unfold under economic conditions much more propitious than the Chrysler barons faced last winter, will be more attractive to corporate debtholders than its predecessor bailout was.

But actual market conditions are largely beside the point in these pundit tantrums. In reality, the routine jeremiads against the GM bankruptcy as yet another exhibit in the deadly sin of government ownership are part of another flailing, near-bankrupt enterprise: the discrediting of Keynesian economics that fueled the Reagan revolution in the first place.

To even theoretically descry any prospect of success in the GM or Chrysler plans is to deny that benefits and wages must always be slashed, that taxes should be cut, that the Securities and Exchange commission could be managed on something other than a national-joke basis, or that government rescues unfold without benefit of glaring and morally obtuse corporate double standards. Because if those kinds of concessions get made in the intellectual marketplace, a whole cohort of conservative pundits would have to join the ranks of the unemployed.

Previously: The Great Lie About Social Security And France