My first weekly column for American Issues Project appears today, and it looks at how financial markets will act when “madman” rule becomes the norm in Washington DC.  Senior creditors from Chrysler told Business Insider that White House threatened them with the “madman theory of the Presidency,” or in more practical terms, that holdouts from Barack Obama’s bankruptcy plan couldn’t count on him to act sanely and rationally if crossed.  It reminded me of a scene from a passably entertaining movie that may seem more unsettling now:

In one scene from the movie, “Speed,” Dennis Hopper cackles with glee when a news reporter describes his hostages as being held at “the whim of a madman.” Hopper’s character repeats it twice, clearly delighted by the description, and at the sheer power of being allowed to act as irrationally as he desires.

Unfortunately, that scenario played out in real life, only not in a runaway bus with a bomb on it. This past week, it played out behind the scenes during the negotiations to salvage Chrysler from the scrapheap. And the madman whose whims could get unleashed was the one person tasked by the Constitution and mandated by the voters to enforce the laws his representatives were attempting to pervert.

Two separate reports from the negotiations accused the Barack Obama administration of threatening senior creditors with public humiliation if they did not relinquish their contractual rights to Chrysler’s assets in the bankruptcy, by exploiting their connections to the White House press corps. The first report came from an attorney representing these creditors, Thomas Lauria, who first alleged the threats during Frank Beckman’s WJR radio show. The second came from Business Insider, where two other sources confirmed Lauria’s allegations.

Business Insider actually went a little farther. Their two sources, both of whom said they voted for President Obama, said that the White House representatives in the negotiations threatened them with what they called the “madman theory of the presidency.” That meant that Obama could act in irrational ways if thwarted by Chrysler’s senior creditors, a threat that the one creditor took “very seriously.”

I’d take it seriously, and apparently I’m not alone.  Last evening, Thomas Cooley at Forbes explained why capital remains firmly on the bench despite government attempts to partner with them:

Government interference in the normal conduct of business has had a chilling effect on financial markets and threatens the progress of the recovery. The Treasury and the Fed have created many new programs to provide liquidity to the financial system, to help banks restructure their balance sheets and to re-invigorate securitization markets.

So far, the interest in these has been distinctly muted because potential participants fear the longer term consequences of getting involved with any of these programs. …

Investors, other than the banks who desperately needed TARP funds for survival, are leery of any program that uses them. Anyone who took TARP funds has been subject to government interference in managerial decisions. The restrictions on bonuses and executive pay have been widely discussed in the media. Less well known are restrictions on the banks’ ability to hire foreigners, and the constant harassment by Congress over internal management decisions on everything from the use of private aircraft to the locations of conferences. Some of these concerns are well justified, of course, but it wasn’t clear ex-ante what all of the rules were and it isn’t clear ex-post either.

If Cooley isn’t describing the “madman theory of the Presidency,” he’s at least explaining that governance by whim does not instill the kind of confidence investors need to assume risk in the marketplace.  The nation was founded on the rule of law, precisely to keep people from using political clout to pervert contracts and marketplace decisions.  Be sure to read both columns.