The Bernanke/Obama Bankruptcy Myth

[johnkarls]

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Bernanke's STEALTH QE-3 and overt QE-4 both adopt, inter alia, President Obama's "Bankruptcy Myth"!!!

Bernanke is trying to fool the American public (to the extent he is even consenting to inform the American public) into believing that bankruptcy means termination!!!

In doing so, he is taking advantage of a myth that was created (and is now being perpetuated) by President Obama!!!

At the beginning of his term, President Obama refused to let General Motors and Chrysler go into bankruptcy. And now trumpets his false claim that his decision "saved 1 million American jobs."

Although President Obama was a law professor at the University of Chicago, he taught Constitutional Law. And although he graduated from Harvard Law School, he might not have taken a course in Bankruptcy Law like I did while attending Harvard Law School.

Nevertheless, President Obama should be ashamed of himself!!!

A short primer on Bankruptcy Law =

(1) Bankruptcy means an individual (or juridical entity such as a corporation) EITHER has insufficient liquid assets to pay current obligations OR ELSE has debts that exceed the value of total assets.

(2) In the U.S., federal courts have jurisdiction over bankruptcies. A bankruptcy lawsuit can be initiated EITHER by the creditors ("involuntary bankruptcy") OR ELSE by the individual/entity seeking protection from creditors ("voluntary bankruptcy").

(3) The first determination a Bankruptcy Court makes in the case of a bankrupt entity is whether it can survive if its debts are eliminated or reduced. IF YES, the court RE-STRUCTURES (aka reduces or eliminates) the obligations of the entity which then proceeds on its merry way, and IF NO, the court LIQUIDATES the entity and distributes any proceeds from the sale of its assets to the creditors in accordance with their seniority.

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In the cases of General Motors and Chrysler, the impending bankruptcy lawsuits would obviously have been RE-STRUCTURINGS with shareholders wiped out, union contracts voided, and creditors (INCLUDING UNDER-FUNDED PENSION AND MEDICAL PLANS) "taking it on the chin"!!!

President Obama simply hosed the creditors in favor of the employees, both current and retired. But otherwise, he had no effect on the continuation of General Motors and Chrysler in business except with regard to the identities of the parties to whom they still had obligations (but NOT with regard to the total amount of those obligations).

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Similarly, in the case of the insolvent European commercial banks (QE-4) and the Italian and Spanish governments (STEALTH QE-3), Bernanke would like to fool the American public into believing that those banks and governments would not survive unless Bernanke had acted!!!

And due to President Obama's demagoguery, Bernanke will probably be successful!!!

It boggles the mind to think that the Italian or Spanish government would not survive a bankruptcy!!! Even the German government in the 1930's and the Russian government in the 1990's survived the worthlessness of their currencies (in addition to the worthlessness of their bonds), and got down to the serious business of running their economies on someone else's currency = the British Pound Sterling in the case of 1930's Germany and the U.S. Dollar in the case of 1990's Russia.

And the insolvent European commercial banks would simply default on their obligations, which would then be re-structured, at least as to maturity. [Though I am not an expert on what would happen under European Bankruptcy Law if creditors would not accept the inevitable, at least with regard to extending maturity, it would be unthinkable that European Bankruptcy Law would not be similar, in broad outline, to American Bankruptcy Law.]

[In this regard, it should be noted that commercial banks each operate on razor-thin "Shareholders' Equity" and, as a result, are subject to extensive regulations and frequent examinations -- particularly in the U.S. since the federal government is "on the hook" for the FDIC guarantees for small depositors. And it should also be noted that because of the FDIC guarantees, banks do not enjoy re-structuring under the normal Bankruptcy Law but are subject, instead, to seizure by the FDIC which can then do almost anything it pleases!!! And in recent decades, it has pleased the FDIC most often to simply sell immediately the seized bank's assets to its competitors, pay off the small depositors (making up any shortfall because of the FDIC guarantees) and, if there is anything left, make partial restitution to the large depositors. And in the recent economic meltdown, the U.S. Treasury Department under TARP has not even waited for the FDIC seizures but, instead, forced sales of "troubled" banks to their competitors with TARP-backed federal government guarantees.]

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As for Bernanke's "banking on" the "Bankruptcy Myth" that his failure to act would have resulted in the termination of the insolvent European commercial banks, the American public should not be fooled!!! Instead, the American public should "take its cue" from French President Sarkozy and German Chancellor Merkel, both of whom obviously have a much-more sanguine view of the situation!!!