“If you don’t return it on your own, we will do it for you.” So warned Sen. Chuck Schumer (D-NY) referring to the $165 million in bonuses paid to employees of the 80% taxpayer owned insurance company AIG. And how did Schumer plan to force those employees to give their compensation back? With a specially targeted 91% tax. Rep. John Dingell (D-MI) later upped the bidding to 95% but Rep. Steve Israel (D-NY) refused to be out demagogued and proposed a full 100% tax. Speaker Nancy Pelosi (D-CA) then demanded that the House Ways and Means Committee draw up legislation by the end of this week.

But these suggestions pale in comparison to what Sen. Charles Grassley (R-IA) wanted to see happen: “But I would suggest the first thing that would make me feel a little bit better toward them if they’d follow the Japanese example and come before the American people and take that deep bow and say, I’m sorry, and then either do one of two things: resign or go commit suicide.” Ritual suicide seems a little harsh considering the $165 million in question makes up just .09% of the $173 billion the taxpayers have spent bailing out AIG.

But this is what happens when the federal government chooses to not just set the rules for free market competition, but to become a full fledged market participant. And under the Obama Administration, direct government participation in the market is expanding fast. Setting AIG and Wall Street aside for a moment, the Obama Administration has also seen fit to take over the auto industry, double down on Fannie Mae and Freddie Mac’s participation in the housing industry, and fast-track government control of health care.

Returning to the banking crisis, the White House’s willingness to abrogate contracts outside of lawful bankruptcy proceedings is guaranteed to undermine their plans for stabilizing the banking sector. The Washington Post reports: “The attack by lawmakers on AIG pay has provoked renewed complaints from some financial company executives that federal involvement in business decisions is making it difficult for struggling firms to return to profitability. … A senior executive at one of the nation’s largest banks said he had heard from several hedge funds that they would not partner with the government for fear that lawmakers would impose retroactive conditions on their participation, such as limits on compensation or disclosure requirements.”

This past Sunday, National Economic Council director Lawrence Summers told ABC News: “We are a country of law. There are contracts. The government cannot just abrogate contracts.” This is exactly why government participation in the market, and all the political considerations it necessarily entails, undermines the rule of law which is the foundation of our success as a free market nation. As one executive at a private-equity firm told the Washington Post:

Why do you think Hong Kong is a better place to do business than Shanghai? Because of the certainty of the contracts. Once the uncertainty factor goes up, the less interested you are in doing business because it becomes a more risky proposition.

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