Is America Turning into a Banana Republic During This Zombie Economy?

Don’t zombies come from places where they grow bananas?

Over a year ago (in a “Spengler” essay) I characterized Barack Obama as a third world anthropologist profiling the United States:

Obama profiles Americans the way anthropologists interact with primitive peoples. He holds his own view in reserve and emphatically draws out the feelings of others; that is how friends and colleagues describe his modus operandi since his days at the Harvard Law Review, through his years as a community activist in Chicago, and in national politics. Anthropologists, though, proceed from resentment against the devouring culture of America and sympathy with the endangered cultures of the primitive world. Obama inverts the anthropological model: he applies the tools of cultural manipulation out of resentment against America. The probable next president of the United States is a mother’s revenge against the America she despised.

Was that an exaggeration? We will find out, but Obama has gone a lot further than any of his predecessors toward making America a banana republic. I spent part of the late 1980s and early 1990s globe-trotting with the notion that the Reagan economic revolution could be exported. My then business partner, the late Jude Wanniski, had coined the phrase “supply-side economics” to characterize Robert Mundell’s economic recovery plan. Jude had sold the plan to Jack Kemp, as I wrote last week at the First Things blog after Jack’s sad passing.

We set out to spread the supply-side gospel everywhere. I spent months in Mexico and Russia, and shorter visits to Peru, Nicaragua and other venues. For the most part it failed miserably: what was lacking was the rule of law. Contracts mean nothing in banana republics, or rather, they mean what the top honcho says they mean. No-one will commit capital except on the basis of a political deal that establishes a monopoly. That’s why telephone calls in Mexico cost several times what they do in the U.S., and one of the world’s two or three richest men (telephone czar Carlos Slim) comes from a poor country.

Obama is proceeding on the banana republic model. As Edward Jay Epstein wrote last week at the Vanity Fair blog, “the Czar’s rules apply.”

Consider the sad case of Chrysler. Its troubles became manifest in 2007, when it was owned by the German auto giant, Daimler, and it was unable to come to terms with the United Auto Workers labor union (UAW). Rather than suffer more losses from an unfavorable union contract, Daimler decided to rid itself of Chrysler by handing over 80 percent of its ownership to Cerberus Capital Management, a private equity fund named after the mythical creature guarding the doors of hell…

Chrysler then borrowed $10 billion from a banking syndicate, led by J.P. Morgan Chase, Citigroup, and Goldman Sachs, to fund its operations. The loan was secured by mortgages on Chrysler’s real estate, manufacturing plants, patents, and highly profitable brand licensing rights. (Jeep alone earned $250 million a year licensing its name to toys, clothes, and other products.)

The lenders assumed (incorrectly, as it turned out) that their secured loan, which was senior to any other Chrysler debt, would be protected even if Chrysler went bankrupt, since the iron rule of bankruptcy held that secured loans get fully paid before unsecured loans. Without this rule, financiers would be reluctant to lend money to corporations on their assets.

What these lenders had not reckoned on was the political power of the UAW, especially after the 2008 Democratic landslide.

[snip] The solution that…the administration endorsed involved dividing Chrysler into two companies—an old Chrysler, which would be saddled with the debts, and disappear, and a new Chrysler, to which all the valuable assets would be assigned, including those that had been mortgaged to the senior secured creditors.

The major banks, of course, backed the administration. They are able to issue debt guaranteed by the FDIC at rates just slightly higher than the Treasury itself — a quarter of a trillion dollars worth to date. They have the TALF plan to unload securitized assets, and the Fed providing a backstop bid in the trillions for structured products. They remain profitable thanks to the administration, which in effect dictates how profitable they can be by telling them how much capital they need to hold. They look very much like banana-republic banks operating under a government subsidy.

What about the other secured lenders to Chrysler? As Michael Barone wrote in yesterday’s Detroit News,

But my sadness turned to anger later when I heard what bankruptcy lawyer Tom Lauria said on a WJR talk show that morning. “One of my clients,” Lauria told host Frank Beckmann, “was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight.”

Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the President Barack Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.

Non-cooperative lenders (that is, lenders not part of the big banking monopoly) received death threats. The White House is not making death threats, to be sure — only threats of destroyed reputations — but when the President of the United States denounces lenders as “speculators” in the midst of a painful economic downturn, he helps to create an atmosphere in which violence is not unimagineable.

It isn’t just Chrysler, of course. As I’ve reported before, loan modification, cramdown and so forth have destroyed investors’ confidence in the viability of collateralized mortgage lending.

Nothing like this happened under Roosevelt, let alone Jimmy Carter. Obama has traded the loyalty of captive commercial banks for the rule of law in capital markets. It will take many, many years to undo the damage.

Comments

[captainccs:]

I'm a citizen of a banana republic. Obama's economic policies mimic exactly how business is done in banana republics: populism on the left (caving in to the UAW) and special privileges on the right (hand taxpayer money to Wall St. banks like there is no tomorrow).

If I were part of the American middle class, I'd worry about being between a rock and a hard place.

May 12 06:45 AM

[D. McHattie:]

For a law professor, Obama sure doesn't have much respect for the rule of law (ie contract law).

May 12 07:42 AM

[yellowhoard:]

The White House isn't making death threats.

ACORN, the new brown shirts, are doing that on behalf of the White House.

Remember those guided tours of AIG employee houses? All organized, populated and paid for by ACORN.

Now that's community organization.

May 12 08:56 AM

[Living4Divi...:]

Certainly a populist, free-spending government that abrogates contracts is a cause for concern. America hasn't yet turned into a Banana Republic, not even close. Actions taken by the govt would have to be alot worse for that to happen.

May 12 10:19 AM

[relayer75:]

<<<Obama has gone a lot further than any of his predecessors toward making America a banana republic.>>>

Oh really. While I am not a supporter of what the White House did in the Chrysler deal, it absolutely pales in comparison to the 8 years of lawlessness on the part of Obama's predecessor, the leader of the junta that ruled the U.S. from 2000 through 2008.

May 12 10:39 AM

[Whippet:]

To have people running the country that recite this in their daily mantra:

"The second rule of the ethics of means and ends is that the judgment of the ethics of means is dependent upon the political position of those sitting in judgment."
"The sixth rule of the ethics of means and ends is that the less important the end to be desired, the more one can afford to engage in ethical evaluations of means" (Alinsky, RfR)

means a banana republic is riding their coattails.

May 12 10:40 AM

[Vuke:]

The author presents some serious charges, perhaps best suited for another site.

Should America ever become a banana republic the seeds for such were sown long ago by a Congress that allowed itself to be controlled by the highest bidder. It did not take long for special interest groups to exploit this opportunity.

The on-going debates today, over monetary policy and political direction, are welcome aspects of a healthy democracy that will, through greater involvement, strengthen the democratic process rather than weaken it (to the chagrin of lobbyists).

That said, the currency is weakening, so precious metals, oil and their good derivatives are the best protection for the investor today.

May 12 10:56 AM

[Jimbo:]

This article is remarkable for its' insight and clarity. Consider the spectacle of Hugo Chavez in Venezuela. Oil field service companies are unable to pay their employees because the state oil monopoly is in arrears in payments for services. So Chavez seizes the tangible property of said companies. I have had experiences investing in a rather "progressive" and "enlightened" Central American country. I lost 100% of both investments because property ownership is simply not respected. A gentleman with the remarkable name of Hernando DeSoto has written several books on the curse of Banana Republics. The way you "own" land in most Latin American countries is to post heavily armed guards on it. Land title, as understood in English speaking countries, simply does not exist. DeSoto says this is why prosperity eludes Latin countries. This article alarms me because is see a looming parallel here. The big money center banks look like the privileged oligarchs in Latin America and the average citizen is bought off with largess distributed by a benevolent figure in the White House. May God have mercy on us!!

May 12 11:30 AM

[Econ 101:]

"First they came for the ..." But you dont want to hear that, it is too painful, the truth does hurt. So how about, "No man is free until all men are free." MLK

For me it is clear, it is spring and "Let 1000 flowers bloom..."

May 12 01:18 PM

[Socialism c...:]

Of COURSE Reaganomics could be exported!! Capitalism and small government --> freedom. There is no place on Earth where the citizens do not want more control over their own lives and destinies! The only places where freedom and self-determination are not grasped for hungrily are where the people have lost the ability to self-actuate, having succumbed to philosophies and lifestyles that are in their essence hedonistic and non-productive, to the extent that they can be so and still prolong their binge. This was the downfall of the Roman Empire, and it is what we are seeing in America today -- a nation that adores models, condones drunkenness as long as one has a "D.D.", seeks to confer rights on those living in sin by redefining marriage, has rampant drug problems, defines sexuality as mere personal choice and is addicted to porn...and need I mention the unwed birth rates?. The result is entire classes -- fully 30-40% of Americans under retirement age -- who are more than happy to depend on government for their needs...because that means less work for them, as long as there are others to be siphoned off of.

Now, we look around, and see the resurgence of Marxist or totalitarian "leaders" in various countries around the world...and then see the President of the United States bowing to them or shaking hands with a big smile -- and we have a goodly chunk of the country who has bought into this lie that capitalism is to blame for our current woes, rather than our own poor moral choices and our way-too-large government!! It's unreal how so many have been snowed by the now-out-of-closet Marxist sitting in the White House. We used to be looked to as an example of goodness and freedom. Instead we are morphing into Yet Another Hegelian-Marxist state, with atheistic philosophies that lead to self-annihilation.

May 12 03:28 PM

[rosey99:]

As one who takes credit for the export of supply-side/trickle-do... economics I can only assume that the author is being ironic in referring to the transformation of the USA into a banana republic. I doubt Jon Stewart could have said it better.

May 12 03:37 PM

[Tony Petroski:]

After Carter came Reagan.
After Hillarycare and the attempted takeover of the health-care system came the 1994 Republican takover of Congress and the contract with America.
-
I hate to admit it, but the irrepressible Cetin has a point. America ain't done yet and is not yet a banana republic. I personally think that our nanny in chief, the citizen of the world, wants to stumble down the eurosocialism road.

After Obama comes...

May 12 09:14 PM

[EttU:]

Most of you are smoking pot, what are you talking about contract law. The laws were created to benefit the rich and powerful, the tax code is written to help the rich get richer at the expense of the rest of us. The basket of benefits which have been created to make the rich, richer at the expense of our middle class needs to be cracked. I hope that Obama is able to do it.

I have lived in several banana republics and third world countries. The actions of the Bush Administration have created the mess we are it will take a great deal of time to recover from the disaster they created. I think that Bush and the republicans never found a banana they did not like. Tax cuts to the top 5% and the heck with everyone else.
The capitalistic system was used by a few to wreck our nation for the benefit of the few.

May 13 12:20 AM

[Claque:]

It is so sad to see such a high level of self-deception in writing that is so fluid and with an obvious intelligence behind it.

One cannot even begin to engage with such dishonesty and the group think prevalent in the commentary that follows.

You are a first order partisan, unaware of cause and effect in the last eight years (or a blogger pandering to groupie constituents).

May 13 06:58 AM

[Claque:]

You are a first order partisan, unaware of cause and effect in the last eight years (or a blogger pandering to groupie constituents). It is sad to see such a high level of self-deception in writing that is so fluid and with an obvious intelligence behind it.

One cannot even begin to engage with such dishonesty and the group think prevalent in the commentary that follows.

May 13 07:03 AM