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Property Rights Take a Hit by Peter Schiff

“Crony capitalism” is a term often applied to foreign nations where government interference circumvents market forces. The practice is widely associated with tin-pot dictators and second-rate economies. In such a system, support for the ruling regime is the best and only path to economic success. Who you know supersedes what you know, and favoritism trumps the rule of law. Unfortunately, this week’s events demonstrate that the phrase now more aptly describes our own country.

On Monday, the Supreme Court refused to hear an appeal from Chrysler’s secured creditors based on the government’s argument that the needs of other stakeholders outweighed those of a few creditors. In this case, the Administration concluded the interests of the United Auto Workers outweighed the interests of the Indiana teachers and firemen whose pension fund sued to block the restructuring. Given the enormous financial support that the UAW poured into the Obama campaign, such partiality is hardly surprising.

When making their investment in Chrysler just a few months ago, the Indiana pension fund agreed to commit capital because of the specific assurances received from the company. In allowing this sham bankruptcy to be crammed through the courts, we have shredded the vital principal of the rule of law, and have become a nation of men, rather than one of laws.

The risk that legal contracts can now be arbitrarily set aside will make investors think twice before committing capital to distressed corporations. Oftentimes enforcing contracts imposes hardships. That’s precisely why we have contracts.

Without absolute faith that deals will be honored, it will be extremely difficult for U.S. companies to borrow money. This will be particularly true for those companies already struggling with too much debt. Without the ability to issue secured debt, how will such companies access the necessary capital to turn around? If secured creditors cannot count on the courts to enforce their claims, they will not put their capital at risk. What good is being a secured creditor if courts can allow the assets securing your claim to be sold for the benefit of others?

Read the rest:
http://www.lewrockwell.com/schiff/schiff26.1.html




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Seems this will

put a nail in new growth. Why have contracts if they are not honored?

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Republicae's picture

Exactly, why have contracts

Exactly, why have contracts when property rights, protected by those contracts, are usurped by the government judicial system. The entire economic system is built upon the right to create and enforce contracts, without that protection there is no confidence in the system.

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