A Serious Aside

Didn't ride much this week but I did get some fun in. My legs were destroyed from 3 laps at BCA in the mud on the single. Destroyed! Doesn't mean I didn't think about some stuff this week. So I'm going to hit a serious item here and give you music in another post.

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GM is having trouble getting it's Initial Public Offering launched. When GM tanked, bond holders sought bankruptcy / reorganization proceedings, because the defining characteristic of a bond, secured commercial paper, is that if a company goes tits up, the bond holders are *senior* in bankruptcy proceedings. "Seniority" means "first in line to take hold of the assets offered as security for the loan." (My quotes). When GM and Chrysler hit the wall like two crash test dummies, the Car Czar determined that bond holders were no longer senior, and the U.S. (and Canadian) government along with the UAW would take control of the company.

Some people howled about the rule of law, and what about bankruptcy law and the Uniform Commercial Code and all that stuff. For their efforts to seize the machines that made the El Dorados, they were, unlike Pablo Picasso, repeatedly called assholes by various professional and amateur pundits. This left a persistent burning sensation in my mind. It struck me as wrong at the time, and still does.

Flash forward 18 months, and GM is now trying to launch an IPO. They are offering preferred stock, counting on this normally desirable investment to raise around 30% of their capital. The distinguishing characteristic of preferred stock is that the shareholders pay a hell of a stiff premium and in exchange receive small but regular dividends, and in a bankruptcy proceeding, preferred shareholders would have seniority, they'd be the shareholders most likely to recoup some of their investments. Shareholders in common stock would have no seniority; they would be last in line.

Maybe one of you smart guys who does finance can tell me why it would make good sense to purchase preferred stock in GM right now. I see the risk in it as roughly akin to playing a second hand of Three Card Monte. Sure, I could win... but experience tells me it would be a really, really bad bet.

Many of you long time readers know I have a thing for Friedrich Hayek, a total mancrush. One of the things he said that was a key to his anti-totalitarian philosophy was that the rule of law:

means that government in all its actions is bound by rules fixed and announced beforehand

If that sounds familiar it's because John Locke - the political philosopher, not the character on Lost - bequeathed it to the Framers, who scribbled it down in the Constitution:

No bill of attainder or ex post facto law shall be passed.

This seems pretty intuitive if you think about it. The legislature shouldn't be able to pass a law today, to outlaw your riding your bike on the road last week. (So if the cops show up to arrest you for that, they're wrong; it's an ex post facto law.) Nor should the executive be able to levy punitive measures through a decision-making process or fiat, where it goes contrary to pre-existing laws and regulations.

Consider whether it makes sense to apply the same principles to the protection / intermediation of property rights. Do you think it makes sense that the rules under which a banker makes a loan - the rules under which your money and your neighbors' money gets loaned out - should be enforced according to a set of pre-existing rules? Should you be able to rely on those rules when you choose how to invest? Should the government be able to change the rules mid-way, without new legislation or at least a rulemaking?

The reason a lot of people hit the wall over the GM bailout was not that GM got bailed out. It is so big that maybe it did need to be saved, for the country's best interests. What rankled was that the bondholders' property interests, commercial rights they had paid a premium to protect in reliance on very clear sections of the bankruptcy code - were disregarded by the executive branch. Maybe there were some good reasons and maybe it was morally or politically justifiable. But it wasn't consistent with the rules for disregarding the damn rules. I wouldn't have a problem with a court deciding that there was some exigent circumstance that required waiving seniority rules in this instance - there would at least be Due Process before the seniority rights were deprived and as long as the opinion wasn't blatantly bad, I could accept it. Nor would I mind an Act of Congress changing the law, even if the bondholders were injured by it when their pre-existing economic expectations were destroyed. That is democracy - and the rule of law in action. I can live with a bad result that occurs within the pre-existing framework. But it was all done by executive decision so I have heartburn.

For my trouble, I've been informed this week that Hayek's notion of the rule of law - a notion cribbed from the Framers, and Locke, among others - is some occult Tea Party fetish, a discredited ancient way of thinking. That's the most charitable thing I've heard about it; other explanations are that it's a racist dog whistle, too high flown for the [insert anti-Tea Party slur here] to understand, or whatever works to disregard a fairly timeless notion dating back at least to the days of the public posting of the Roman laws.

I don't think this way of thinking is outmoded. I hold this belief as a civil liberties / rule of law guy and come to it as a result of my worldly experiences. I have lived in bad places abroad, lawless places, where the only real law was power. The result was to convert me to an obsessive loyalty to the black letter of the laws. It seems to me that along with cultural habits, the written laws and the written decisions of magistrates are the only enduring defense against the state of nature, which is Hobbesian at best. As Beckett's Thomas More character noted, if you cut down the thicket of laws to do good, then you have no protection to rely upon when somebody else comes along to do you evil.

As always, I encourage people to read Hayek's Road to Serfdom because it is a defense of classic liberalism, of individual liberty. It's an easy read and it's not a partisan book; it defends liberty and argues against all the totalitarian leaning -isms. It's like John Stuart Mill for people who are pragmatic. If you can read it and not come out the other end a bigger fan of the ACLU and the NRA, and maybe the Tea Party, and Glenn Beck as well as Glenn Greenwald at the same time - then you probably didn't understand it. This isn't endorsing any of them, in fact I'm anything but a fan of some of those people I just named, just saying if you're a friend of individual liberty your education isn't complete until you've read this book. (And his Constitution of Liberty, but who's counting...)

Just remember - I geeked you on Hayek a couple years before Glenn Beck discovered it, and also before liberal bloggers discovered this week (just 55 years after publication) that this saint of right/libertarianism thought we do need a social safety net. Double extra bonus points: Hayek's early work forms the basis for a number of really sound information theories, including theories about the benefits of distributed information, and a theory about why centralized government and bureaucracies generally do not work very effectively and why they tend to slide to at least petty authoritarianism, if not the full blown type. Give it a read - even if you don't like it, it will give you a better understanding about how to argue with me, or if you prefer, the likes of Glenn Beck.