woody_zimmermanIf you wanted to destroy business, what would be the most damaging thing you could do toward that objective? Well, you could corrupt law enforcement so businesses would have no protection against thieves. Or you might inflate the currency so merchants would be afraid to wait for payment. (This would destroy credit, since everything would have to be cash on the barrelhead.) Or you could pass a law that let merchants welsh on delivering the goods they promised when you paid them. (A refrigerator you paid for is never delivered, and you can't get anyone to acknowledge that you bought it.)

Other examples are easy to imagine, but they all come down to the same thing: trust. It is the foundation of business. If you destroy trust, you have a good chance of destroying business.

When you think about it - every business transaction involves trust. When a plumber works in your home, you trust that he will not take your water system apart, leave the pieces lying on the floor, and never come back. If he is bonded, you trust that the bonding agency will make good any damage he might do. Or you trust that the car-dealer will return your car in good shape when you hand it over for repair - indeed, that he'll return it at all. He and other tradesmen trust you to pay the bills they submit, and you trust them to make an honest accounting, use sound parts, etc.

These fairly obvious examples of trust are so commonplace that we rarely think about what things would be like without that critical underpinning. Almost nothing in modern life would be possible without it. Who would send their children to school if we didn't trust the schools to take proper care of their health and safety? Would you pay your taxes if you found that the government just took your money but didn't credit you for payment?

Of course, trust underlies financial transactions far more complex than just getting your pipes repaired correctly. When you borrow money to buy something expensive, like a home, the bank trusts that you will make the scheduled payments, as promised. The bank also trusts - subject to reasonable verification - that the item you are buying is worth what they are lending for its purchase.

If any party to such a transaction is dishonest, the entire system breaks down, as we saw on a large scale in recent months. Some defaults on mortgages were probably not caused by intentional dishonesty, but were simply due to economic contraction or personal misfortune. But a goodly number of defaults seemed to involve dishonest representation of either personal resources or value of the property - meaning that trust was broken on a large scale. It's not surprising that this did serious harm to the country's economy.

Lending money to companies for expansion of business is another area where trust is vital. Banks make loans, of course, but bonds are the more general instrument. Businesses issue bonds that can be bought by the general public. Often they are issued in "shares" which cost $100. The bond-contract consists of a set interest rate, a schedule of interest-payments (typically either quarterly, semi-annually or annually), and a date on which the original principal amount will be repaid.

Corporate, municipal, state and federal bonds are also traded in the public markets at prices that investors are willing to pay for them. These prices might be either lower or higher than the bond's face value, depending on the degree of confidence the investing public places in the individual companies or government institutions. No matter what market price attaches to a particular bond, however, it still pays the original per-share interest stipulated in the bond contract. Thus, a bond share that cost $100 and pays 8% a year (i.e., $8), will still pay that interest even if its share-price hits $10 on the bond markets - much as General Motors bonds have done.

Moreover, that bond is still redeemable for $100 at the redemption date, as long as the company is still viable. Market price does not affect redemption value, although companies sometimes try to retire their debt cheaply by buying back their bonds at depressed market prices. Government overseers watch such transactions carefully to ensure that companies are not "gaming" their financial profile in order to buy back their debt at depressed prices.

A bond is completely a matter of trust, since the purchaser hands over real money in return for nothing more substantial than a piece of paper. That paper says he is entitled to the stated interest, paid at the stated intervals, and the return of his principal on the promised date. Laws protect bondholders, but laws can be changed and sometimes ignored. Trust is the main thing. If the company that issued the bonds goes into bankruptcy, certain laws govern payment of the company's debts to the greatest degree possible. Bondholders head the list of creditors. Officials are legally bound to try to obtain the highest possible value on the dollar for bondholders in a bankruptcy proceeding.

So if you truly wanted to destroy business, you could hardly do better than to undo the trust that supports everything. I mention bonds, in particular, because changing certain bond-contracts is something that is going on at the present time, under the sponsorship of the federal government. On center stage is Chrysler, currently the weakest member of the Big Three American carmakers. Word has come out that government pressure is being put on Chrysler's bondholders to take common stock in return for their bonds, at a low rate of 30¢ on the dollar. Details are sketchy, but complaints of federal arm-twisting are leaking out.

By law, these should be legal proceedings under the control of an impartial court. The intrusion of government influence to "protect" union workers and shortchange bondholders is a new wrinkle that augurs ill for the nation's business. It is a fundamental breach of trust. A similar scenario could be played out in the case of General Motors as well, in the near future.

Millions of Americans will shrug over this, thinking that it has naught to do with them. But they are mistaken. It affects all of us because we depend on orderly business to support the way of life we are used to. If trust is broken with bondholders, investors might hold back from new investing because they doubt that their bond-contracts will be honored. Without those investments, business will not obtain the capital it needs to expand, hire new workers, produce goods and services, and pull the economy out of recession. Legions of government officials will run around jawboning investors who will refuse to be burned twice, and the Obama recovery will fizzle.

More than that, government-sanctioned weaseling on bonds will damage ordinary people by stealing their wealth. The popular notion is that banks, hedge funds and high rollers hold bonds, but this is not a wholly accurate picture. Millions of small investors hold bonds as investments for their families' futures and as retirement savings. The loss of that wealth will hurt the country.

If we think we must prop up car companies and other industries, the single most responsible action the federal government could take would be to redeem all bonds of troubled companies at face value. The funds used to redeem the bonds would be loans those companies would prepay as they regain strength and profitability. Temporary removal of the burden of bond obligations would do much to enable those corporate recoveries.

Investors lent to those companies in good faith. If the companies fail, the investors deserve the protection afforded by bankruptcy laws. There must not be some "political solution" that circumvents laws and gives investors the short end of the stick.

Whether Mr. Obama and his anti-capitalism brain trust like it or not, private capital - not government - is the great engine of economic growth in America. Until the present moment, investors have implicitly trusted the American business climate. Political tinkering with mortgages has damaged that trust. If that trust is destroyed, investors' money will go elsewhere. Mr. Obama can declaim, orate, jump up and down, kick over his teleprompter, and set himself on fire over the flight of capital, but it will do no good. Investors will not risk their money without trust. Our dashing young president will be sorry if that trust is broken by his government in an effort to protect union pay and benefits. It will be the defining blunder of his presidency.