Distorting Schumpeterian Dynamics

Tuesday's Wall Street Journal carried an editorial by Scott Sperling, a partner in a private equity firm, defending the administration's intervention the Chrysler bankruptcy by using intimidation and the coercive power of government to force secured creditors to accept less than unsecured creditors, i.e., the administration's favored party, the UAW. It is grotesquely misleadingly entitled, "Obama's Auto Plan Is Capitalism at Work."

The author has an impressive biography, and currently functions as co-president of Thomas H Lee Partners, now renamed THL Partners.

Mr. Sperling defends the strong-arming of Chrysler bondholders by contending,

"Many probably bought these loans at prices below the 29 cents on the dollar that the government is offering since this debt often traded below that level."

That's a pretty raw view of how the rule of law is supposed to function. The context in which bondholders legally became so doesn't, so far as I know, affect the rights which they acquire with those secured debt instruments. Sperling seems to think that motive affects how one's legal rights should be viewed.

Further, it's interesting to note that this defender of the administration agrees with the president regarding his view of Chrysler bond investors as 'speculators.' However, the administration seems to want speculators in its PPIP initiative, where they are supposed to buy toxic financial assets, and hope Congress or the administration don't change their minds when the speculators actually profit from the purchases at a later date.

But perhaps the most amazing paragraph in the editorial is this one, near its conclusion,

"Far from harming capitalism, the Obama administration's policies concerning GM and Chrysler are very much in line with the process of "creative destruction" that the economist Joseph Schumpeter described as the active heart of capitalism's success. The government has been willing to support an important industry -- but only on the condition that all stakeholders make the tough choices necessary for the companies to succeed in the long term. This is capitalism at work."

I don't know what Sperling's motives are for writing this public love letter to the current administration. Perhaps to curry favor as financial institutions such as his line up for a generous serving of federal gravy in the disposition of impaired assets that the government has acquired in the past few months?

I do know that Mr. Sperling makes a mockery of Joseph Schumpeter's theories and essays, many of which I have read. Schumpeter's work from the 1920s would not square well at all with Sperling's contentions.

To even employ the phrases "government has been willing to support an important industry" and "necessary for the companies to succeed in the long term" smacks of a blatant misinterpretation of Schumpeter's viewpoint.

Schumpeter's point, in this regard, was that companies which failed were rightly cannibalized by other firms, the better to recycle resources in more profitable, productive enterprises. No company, in Schumpeter's view, was going to succeed in the long term.

Yet, thanks to two consecutive administrations committed to propping up failed US auto makers, we have no appreciable recycling of inefficiently-employed resources, nor the appropriate treatment of management, workers and investors, in a failed enterprise. Nothing has really died at Chrysler or GM. The weak and inefficient are simply being given new leases on life.

A bankruptcy court could have easily presided over the sales of healthy divisions to other auto makers, the spinoffs of others which could survive on their own, and the dissolution of the remainder.

Instead, as Howard Davidowitz so clearly noted in the video in this recent post, the Obama economy is all about investing in inefficient enterprises.

Hardly Schumpeterian dynamics. More like bastardized fascism to repay unions, while stiffing the capitalists who legitimately acquired secured debt, and the protections and legal rights which go with it.