Stop the Bail-Outs, I Want to Get Off 6 comments
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“The easiest way for your children to learn about money is for you not to have any.”
-- Katharine Whitehorn.
Stop the bail-outs, I want to get off. The trouble with flood-gates is that, once opened, they have a tendency to let the floods through. So along with the flotsam and jetsam of the banking industry, Detroit has now joined the queue for “emergency” assistance. The FT’s Lex column recently pointed to the rich irony of this, given that:
...less than two months ago, six of eight representatives in the Detroit area voted against the first iteration of Tarp [the Bush administration’s Troubled Assets Relief Programme]. Only too happy to play a game of chicken with the global financial system by scoffing at the concept of “too big to fail”, that is precisely the justification they make for rescuing car manufacturers and the dozens of suppliers and millions of jobs linked to the Big Three, whose “collapse” would be unacceptable.
Economist John Tamny is similarly sceptical, recalling the words of Ludwig Von Mises that the entrepreneur who fails to use his capital to the best possible satisfaction of consumers is “relegated to a place in which his ineptitude no longer hurts people’s well-being”. Detroit’s so-called Big Three are curiously vestigial entities – embarrassing, mismanaged throwbacks to the dawn of car-making. And there can be little doubt that any business (such as General Motors (GM)) that has posted $70 billion in losses over the past four years – versus a current market capitalisation of just $1.8 billion – is hardly a success story. President-elect Barack Obama has described US carmakers as “the backbone of American manufacturing”. This particular backbone has advanced osteoporosis.
Citigroup’s Hans Kullberg (“Reconstructing America: Why the US Government should turn a blind eye to US automakers.. and invest in the future”) has written an interesting piece in which he details the extent of the problems facing the US auto sector, but also puts forward a strategic alternative simply to shovelling money at them (in the form of investing into energy and alternative energy infrastructure):
Every time I see a commercial on television advertising a “0% APR No-Fees, No-Money Down” loan for a car, I cringe. The average American household currently owns 2.28 cars – how many of these are idle ? The days of “buy now and pay later” are over, meaning there’s no money left to buy cars, meaning there’s no money left to support the auto industry, meaning there’s no sales revenues to pay absurd pension plans, meaning there’s no reason for the US Government to extend a lifeline simply to postpone the inevitable future of a futile auto industry. Although politically appeasing, to do so would be a disservice to the American taxpayer, which is a much larger contingent than the 2 million or so odd jobs that would be saved. It’s readily apparent the “modest” loan would be used simply to renegotiate debt terms which are now trading at 25 cents on the dollar and yielding over 30% a year. To put off the day of reckoning will make the downfall worse when it finally comes.
But then, let he who doesn’t need government money cast the first stone. And the problem with government money is that in most jurisdictions the very term is a misnomer, because governments too are already heavily indebted, so it’s taxpayers’ money we’re really talking about. And this gets us to the heart of the debate: at what tipping point do effectively unlimited guarantees and capital support by governments start to become self-defeating, inasmuch as they start to erode belief in the very instruments (specifically, government bonds, and in due course fiat currency) from which they are constructed ? Or to put it another way, when does money start to eat itself?
It seems to be doing so already. As economist Willem Buiter points out, credit default swap spreads (the price of insuring against a default) have risen for the most seemingly credit-worthy sovereign entities, including the UK (5 year sovereign CDS at 0.46%), the US (0.33%) and Germany (0.27%), well above their post-war historical averages. Bloomberg reported that credit-default swaps on US Treasuries have risen by nearly 40% since TARP was signed into law in early October, “and are now about the same as Mexican and Thai government debt before the credit markets began to seize up in June 2007.”
Walter Wriston, former head of Citibank, famously observed that “countries don’t go out of business” – i.e., that countries don’t go bankrupt. That was before all of Latin America effectively did. And as Nassim Taleb pointed out in ‘The Black Swan’, after sovereign defaults in Latin America,
In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking – everything.
So systemic banking crises caused by doltish banking management are more frequent than commonly believed. What is more common is for banking crises to metastasise into currency crises – and (in UK Pound Sterling terms alone) we are arguably already there.
It seems perverse to be buying the US Dollar as a ‘safe haven’ currency given that the US was the epicentre of the current financial shock. Such is the by-product of being the world’s reserve currency. But can this really last? If one concludes that it can’t, gold is the natural next hedge.
And if the global currency markets end up becoming as dysfunctional and competitively devalued as, say, global equity markets are currently, then another perverse outcome of comparably counter-intuitive inflationary pressure further down the line would be that rational investors would stockpile equities as a natural inflation hedge. But we are getting ahead of ourselves. We are only just entering synchronised global recession. For the immediate future, bracing for further asset deflation and concentrating on capital preservation are the core priorities. But with every announcement of a further government bail-out to be paid for by future tax-payers, sceptics might rightly wonder whether a crisis brought about by easy credit is going to be resolved by more of the same. Never was true portfolio insurance more passionately and urgently sought, nor more difficult to come by.
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This article has 6 comments:
> jack
They voted against it because so many voters, like me, bombarded our representatives with calls, letters and e-mails urging them to vote against it.
Contrary to your comment, this wasn't about being "Only too happy to play game of chicken with the global economy."
While i can only speak for myself as to why, I expected that the feds would piss away this money on things that wouldn't "help."
They always... ALWAYS do.
It was clear in the original proposal that their intention was to limit/completely eliminate any oversight. And with the quality and caliber of the people we have in Washington, oversight means very little, anyway.
The second time around, the ill-informed, ignorant reps voted for the bill.
They sold this plan much like they sold the war in Iraq, only faster.
And now, we see the how well that's gone.
Yes, the people in our state are hoping for a bailout. What they don't seem to realize is that bailout or no, we're STILL going to lose a LOT more jobs in the auto industry and by extension, so will many others who think they are safe.
I wonder if the buggy whip industry responded similarly.
Here again, bailout or no, those jobs are going away.
You look at Delphi- they slashed their workforce, re-wrote their contracts, and replaced many of the previous workers with people who were willing to do the work for $14/hr. And there were THRONGS of people lined up for those jobs.
I believe that the Big 3 should follow suit.
To do otherwise is simply to waste more money, and prolong agony on the route to the same end result.
I vote no bailout again.
And I'm sure my rep will vote the other way.
Again.
On Nov 16 08:40 AM john s. gordon wrote:
> student loans require a bailout too.
Political pandering aside, the new administration should not entertain any sort of bail-out for automakers, since it would only enable the continued ineptitude of Detroit and delay the inevitable. I suggest that chapter 11 bankruptcy/reorganizat... may be a painful but proper long term solution for the sustained viability of American automakers, providing that they are willing to make the changes to compete in the global economy.
The big 3 automakers problems stem from their historically inept management, failure to re-tool and innovate, and union-driven legacy costs. The big 3 can't do anything without approval of the unions, who have essentially emasculated management.
Anyone remember the 1970's and the oil embargo? Gas prices climbed radically, shortages were everywhere, and long-lines were the rule whenever you were lucky enought to find a station that actually had gasoline. American automakers talked the talk about transitioning from huge, gas-guzzling V-8's to higher quality, fuel-effecient vehicles, but they never walked the walk: they failed to deliver on their promise in any meaningful way. They made token improvements while foreign automakers offered effecient/quality/high MPG products and grew marketshare at the expense of the 'big 3'. They watched as the Japanese, German, and Korean automakers opened factories in the US and made effecient, quality cars here using American workers. Fast forward to 2008 and look around at any parking lot or look around on the interstate, and what do you see? Tons of bulked-up, gas-sucking big 3 SUV's and pick up trucks.
Einstein once said that to continue to do the same thing repeatedly and expect a different result was the definition of insanity. If the new administration and Congress provide a bailout for Detroit, then we'll know that Forrest Gump's Momma was right: Stupid is as stupid does.