Bastiat Demonstrated

The recent discussions between the Obama Administration and Government Motors Corporation (the car company formerly know as General Motors) raise some interesting questions about corporate finance. Fundamentally, there are three interest groups in the discussions about how to "save" the company - the UAW, the bondholders and the stockholders. From my perspective it looks like the deal that has been cut has simply abrogated the rights of bond-holders.

Bastiat was one of the first economists to discuss the "seen" and the "unseen" - what some modern economists would call externalities. The way this "bailout" has been structured could have longer term implications for all corporate bondholders. Why would anyone lend money to an American company with even a chance of going under government control? If they did lend money why would they not demand a tremendous risk premium. Either way this "fix" is likely to tighten up the markets for corporate finance. The immediate claim is that the company has been saved. That looks increasingly doubtful. At the same time the unseen effects which will be much larger than whether GM disappears or not could be huge.