Obama Drags Recovery With Raw Deal for Contracts: Amity Shlaes

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

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

Gibbs is right about the unintended consequences. But thoseconsequences aren't the ones he means. By making foreclosureharder for lenders, the president makes it possible that bankswill lend less next time. The Obama action is part of a modernbipartisan trend, a lack of respect for contracts in general.

"Contract" isn't even a word you hear much on the newsthese 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 themis a shift for the U.S. Just how much becomes clear when youlook at an era that achieved the quality of recovery the U.S. islonging for now: the 1920s. Contracts were especially holy underPresident Warren Harding and the president who actually inspiredthe vetoed notary bill, Calvin Coolidge.

Consider the current period. The Bush administration'sbailout of 2008 favored certain banks over others. that wasn'talways a direct abuse of a contract. But it was always anindirect one. Counterparties in deals with companies that wererescued did better than counterparties in companies that werenot. Contract holders don't like political change.

Yet "change," whether Bush or Obama change, was deemedmandatory because of the crisis. The Chrysler rescue that theObama administration's chief adviser for the auto industry,Steven Rattner, oversaw favored unions over senior creditors ina fashion that markets had not expected.

The federal intervention to prevent home foreclosure, ofwhich the notarization bill veto is just one example, has causedtrouble for lenders. Even the low interest rates that ChairmanBen Bernanke and the Federal Reserve Board have imposed haveimpinged on contracts by changing their value — especially thecontracts called bonds.

Lower than Coolidge

The 1920s provide a contrast. due to the Teapot Domescandal, Harding ranks very low on the presidential charts, evenlower than Calvin "Silent Cal" Coolidge. But Harding wellunderstood the importance of stability for commerce andcontracts. In his inaugural address, Harding promised thecountry a predictable environment for business deals in languagefar different from the current political discourse: "Any wildexperiment," Harding warned, "will only add to theconfusion."

There was no "change" in the Harding plan. "Our bestassurance," he said, "lies in efficient administration of thecurrent system." A sharp recession gripped the country in theearly 1920s, leading to unemployment as high as 20 percent insome months in the cities.

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

Once president, Coolidge repeatedly made sure thatcontracts and property were honored. Coolidge did this first ofall by keeping government out of the way and curtailinggovernment expansion. His favorite vehicle for blockingCongressional plots was the one that President Obama used: thepocket veto, when a president vetoes legislation by allowing itto go into a Congressional recess unsigned.

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

As Time magazine reported, Coolidge said of the agonizingGermans: "They hired the money, didn't they?" Time commented:"He did not want the U.S. taxpayer to cover Germanreparations." Banks failed routinely in the 1920s, and by thethousands. As for the dollar, the Fed and Treasury of thoseyears protected it so well that Cole Porter included these linesin 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 — 4percent or more under Coolidge. Unemployment fell below 5percent and stayed there.

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

(Amity Shlaes, senior fellow in economic history at theCouncil on Foreign Relations, is a Bloomberg News columnist. Theopinions expressed are her own.)

To contact the writer of this column:Amity Shlaes at amityshlaes@hotmail.com

To contact the editor responsible for this column:James Greiff at

Obama Drags Recovery With Raw Deal for Contracts: Amity Shlaes

contracts, home foreclosure, white house