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Obama Drags Recovery With Raw Deal for Contracts

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
October 11, 2010
Bloomberg.com

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U.S. President Barack Obama recently pocket-vetoed the Interstate Recognition of Notarizations Act, which aimed to smooth over the processing of business that involves contracts written in several states. One sponsor of the bill was a fellow Democrat, Senator Patrick Leahy.

But White House spokesman Robert Gibbs explained that the bill might make home foreclosure too easy for lenders, with “unintended consequences on consumer protections.”

Gibbs is right about the unintended consequences. But those consequences aren't the ones he means. By making foreclosure harder for lenders, the president makes it possible that banks will lend less next time. The Obama action is part of a modern bipartisan trend, a lack of respect for contracts in general.

“Contract” isn't even a word you hear much on the news these days, having been dropped for another “con” word: “consumer.”

But contracts, the deals between non-government parties, are crucial to recoveries. And the cavalier attitude toward them is a shift for the U.S. Just how much becomes clear when you look at an era that achieved the quality of recovery the U.S. is longing for now: the 1920s. Contracts were especially holy under President Warren Harding and the president who actually inspired the vetoed notary bill, Calvin Coolidge.

Favored Banks

Consider the current period. The Bush administration's bailout of 2008 favored certain banks over others. That wasn't always a direct abuse of a contract. But it was always an indirect one. Counterparties in deals with companies that were rescued did better than counterparties in companies that were not. Contract holders don't like political change.

Yet “change,” whether Bush or Obama change, was deemed mandatory because of the crisis. The Chrysler rescue that the Obama administration's chief adviser for the auto industry, Steven Rattner, oversaw favored unions over senior creditors in a fashion that markets had not expected.

The federal intervention to prevent home foreclosure, of which the notarization bill veto is just one example, has caused trouble for lenders. Even the low interest rates that Chairman Ben Bernanke and the Federal Reserve Board have imposed have impinged on contracts by changing their value -- especially the contracts called bonds.

Lower Than Coolidge

The 1920s provide a contrast. Due to the Teapot Dome scandal, Harding ranks very low on the presidential charts, even lower than Calvin “Silent Cal” Coolidge. But Harding well understood the importance of stability for commerce and contracts. In his inaugural address, Harding promised the country a predictable environment for business deals in language far different from the current political discourse: “Any wild experiment,” Harding warned, “will only add to the confusion.”

There was no “change” in the Harding plan. “Our best assurance,” he said, “lies in efficient administration of the current system.” A sharp recession gripped the country in the early 1920s, leading to unemployment as high as 20 percent in some months in the cities.

Harding died suddenly in August 1923. Vice president Coolidge was vacationing at home in Plymouth Notch, Vermont. Coolidge's father, John, a Vermont notary, swore him in. This was partly expedience. But the idea that a humble notary could assure the security of the U.S. presidency appealed to Coolidge and, apparently, more recently, to Senator Leahy, who mentioned Coolidge when he sponsored the unfortunate notary bill.

Pocket Veto

Once president, Coolidge repeatedly made sure that contracts and property were honored. Coolidge did this first of all by keeping government out of the way and curtailing government expansion. His favorite vehicle for blocking Congressional plots was the one that President Obama used: the pocket veto, when a president vetoes legislation by allowing it to go into a Congressional recess unsigned.

Coolidge likewise denied bailouts when he could, sometimes in a manner that would appall today. The Greece of those days was Germany, which had been forced into a horrendously unrealistic reparations contract: the Versailles Treaty. Germany's terms were rewritten, but Coolidge was skeptical.

As Time magazine reported, Coolidge said of the agonizing Germans: “They hired the money, didn't they?” Time commented: “He did not want the U.S. taxpayer to cover German reparations.” Banks failed routinely in the 1920s, and by the thousands. As for the dollar, the Fed and Treasury of those years protected it so well that Cole Porter included these lines in a famous song: “You're the top. You're an arrow collar. You're the top. You're a Coolidge dollar.”

The result of this callous inhumanity was highly humane: The economy grew an average of more than 3 percent a year -- 4 percent or more under Coolidge. Unemployment fell below 5 percent and stayed there.

So, sure, contracts may be necessary casualties in recessions. Still, it's possible that ours has been a contracts recession. Defending humdrum deals may in the end be the only way to get more of them.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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