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What's Getting a Hearing This Week

Congress has scheduled a light week on the economic policy front, and the Sonia Sotomayor nomination continues to suck up most of the media attention. But the executive branch will have its hands full with the auto industry, where most of the action will be taking place in court.

By the time you read this on Monday, General Motors will probably have filed for bankruptcy in federal court, and the Treasury Department has been calling most of the shots. The game plan was already tested with Chrysler: use bankruptcy to gain the power to restructure the company, sell the valuable assets to a new legal entity with a new capital structure, and pre-negotiate the terms of the deal as much as possible, using the threat of liquidation to coerce agreement when necessary. Treasury is undoubtedly keeping its fingers crossed for Chrysler, which had its restructuring plan approved very early this morning.

With both companies, the key sticking point has been bondholders, who claim they are getting a raw deal compared to other constituencies, most notably the union's retiree benefits trust. In the Chrysler case, the administration successfully cajoled or pressured the overwhelming majority of bondholders to agree to the restructuring plan, which was probably a key factor in getting quick approval (assuming the plan is approved). With GM, a small majority of bondholders have accepted the government's offer, but a significant minority seem prepared to fight it out in court. They will argue that they could get more money in a liquidation of the company; but given the current overcapacity in the global auto industry - which would deter most potential buyers from bidding on GM's assets - that's far from a sure thing.

At precisely this moment, Treasury Secretary Timothy Geithner is in China hoping to do no damage to what may be America's most important economic relationship - and is certainly its most misunderstood one. The conventional wisdom is that the U.S. relies on China to finance our national debt; the conventional rejoinder is that China has no other place to put its national savings (Europe? Japan?) and cannot shift out of dollars without undermining the value of its own reserves. But there are additional dimensions to the relationship, including Chinese concerns about our national debt and the threat of inflation, the role of China in governing international institutions such as the IMF and the World Bank, the desire of each country for access to the other's markets, and even the Obama Administration's need for China to contribute to a reduction in greenhouse gas emissions.

I say "do no damage" because, with all the other balls up in the air, the Administration would likely be satisfied to maintain the status quo regarding China, and not have any new fears coming out of the meetings, which could push U.S. interest rates upward. With Geithner's extensive international experience - and the not unimportant fact that he is fluent in Mandarin - I expect he will be more than equal to the task.

By James Kwak  |  June 1, 2009; 8:05 AM ET
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