Discussing "Rule of Law" on Strategy Room

On FoxNews.com Strategy Room recently, I had the opportunity of being on again with my friend Eric Bolling, Host of the Biz Hour of the popular web based program (M-F at 3 PM EST). We dove into the subject of the arbitrary nature of government. We asked the fundamental question about whether it was appropriate for the government to change the rules on the way they do business with companies. For me, it was the more basic question of, "should the government be required to abide by the same contracts as the rest of us?"

Bolling gave the example of the "retro tax" on insurance giant AIG executives who lost approximately 95 percent of their bonuses after the bailout. At the time of the bonuses, there was no such sweeping tax on such bonuses. This was designed for no other purpose but to be vindictive on an institution that had reached a very low popularity level. Some loved it because it "felt good" to take money from those who "took money" from us taxpayers. It was, unfortunately, a slap in the face to the concept of "rule of law." One of those things that separate modern economies from the Third World.

Businesses succeed in countries where the risks are predictable. The decision to attack AIG executives in their bonuses may have felt "good," but has far reaching and negative implications. Since the government owns around 80 percent of the company, does it not make sense that we would want it to prosper? If that is a goal, wouldn't it be difficult to hire quality people if they will not be able to offer bonuses like others in the industry? Furthermore, if the government can arbitrarily change how much people are paid, people begin to wonder the reach of government, especially if it is not required to abide by contracts (like the one that allowed AIG executives to get bonuses).

For example, what if the government decided to fire the CEO of a company it was invested in? A couple of years ago this would have seemed impossible, but not any more. Simply ask Rick Wagoner, the former Chairman and CEO of General Motors. Obama's speech to the American people on why Wagoner "had to go" should have been a wake up call to everyone who wonders if it is good policy for the government to intervene in such a profound way. It makes for a more confused market place, not a more efficient one. It makes economies worse, not better.

Is this a defense for AIG executives who had their bonuses taken? Not at all, there is a side of me that is actually pleased because I hope it proves to be a cause for pause for any businesses that might pursue government solutions to problems. What I am trying to defend, however, is the idea of "rule of law" that contributes to stable and strong economies. Everyone, including government, must abide by the rules if our nation is to remain prosperous. Economic recovery itself rides on the idea that government must play by the same rules as everyone else.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

AIG Is Begging for More

I have long contended that the $800 billion bailout of financial institutions would not be enough. By the time the process was finished, it would be closer to $1.5 trillion. There is more evidence of that contention in light of the fact that AIG is about to enjoy a "do over." You remember "do overs," where you got a bad roll of the dice when playing a board game and you beg your friends to let you go again. AIG has done the exact same thing, but there is much more than monopoly money at stake.

CNN Money notes that "troubled insurer American International Group got a reworked $152.5 billion deal from the federal government Monday, as the Federal Reserve and Treasury Department made significant changes to the terms of the company's original bailout."

"The Fed announced that it will reduce AIG's original $85 billion bridge loan to $60 billion, cut the interest rate by 5.5 percentage points and extend the borrowing period to five years from two years."

"In addition, the Treasury will use its special authority under last month's $700 billion bailout law - the so-called Troubled Asset Relief Program - to purchase $40 billion in preferred stock."

So the burden on the federal government is to make sure its new investment -- banking and insurance-- succeeds. This slaps "moral hazard" in the face because the government, which is suppose to be an impartial referee, now has a vested interest in this and the many other insurance and financial institutions in which it has invested our tax dollars.

The reality is, some of these businesses simply need to go under. The government should allow such with almost cruel fanfare. Get the business to the point where it appears it is about to get a check and pull the rug right from underneath it and declare "no more." It should declare that if the business is worthy of an influx of revenue, people would provide such in their stock purchases. If it isn't, it would let the market speak and send a loud message to all businesses that are beginning to see the government as a safety net.

If businesses can't fail, they have every incentive to reach ever newer levels of mediocrity. Failure is as important a function of free enterprise as is success. Failure teaches businesses and individuals how to do things better, it maintains competitiveness, and drives economic and technological progress. Bailouts undermine this important factors in business and economic success. It is time to hold these businesses accountable, close the pig troughs, and restore capitalism to our economy.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.