Browsing the archives for the Bailout category.



Why the Geithner Plan is Bad

Bailout, Economic Policy, Economy

Adam

Nobel Prize winning economist Joseph Stiglitz provides a solid and down to earth description of what will take place with the Geithner Plan in his NY Times editorial.

Its a worthwhile read and should help bring some clarity to the situation that will unfold.

I thought about running through the scenario for myself, but decided a comparison to a mortgage would be ridiculous. $12,000 on a $138,000 mortgage is a lot stronger than banks were accepting a couple of years ago. So I want to stay away from that comparison. Instead, lets say I am in Vegas and there is a heavyweight fight with 50/50 (never would happen, but lets imagine). Sure, I’ll put money down and see if I can double my money. But, what if there was a way for me to triple my money? Well, yeah of course I’ll take that. Even better, I can triple my money without taking on more risk. I just have to take a huge no risk loan out.

So, I take the loan, put up my 8% share along with the 92% loan and bet. If I win I can pay back the loan and take my tripled winnings.  If I lose, I lose the money I put up and forget about that l ever took out that loan.

Tough break on the guy who loaned me that money. Now, enough with betting on boxing, I’m off to the black jack table where the odds are REALLY in my favor…

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Can you fix a broken nation with a broken record?

Bailout, Barack Obama, Economic Policy, Economic Stimulus, Economy, Election, Infrastructure, National Infrastructure Reinvestment Bank, Obama, Politics, President Obama

Adam

I am going to say that it is probably difficult to fix our current situation with tax cuts.  I know…I know, the crazy liberal wants to raise your taxes and then spend all your hard earned wages. Not exactly.

I have a difficult time grasping the notion that the conservative chorus can only recite the same tune we have heard during a very recent 8 year administration.

“The only way to stimulate the economy is with lower taxes and tax incentives.”

Everyone is skittish now. Consumers, producers, and lenders. The argument that tax incentives will create job growth does not work.  Lets take a look at a couple of scenarios.

-  We create an incentive where an employer gets tax breaks for hiring new employees. (Currently part of the Obama plan, but really done for the purpose of appeasement)

So, under this theory, a company will hire a new employee for the purposes of expanding production of a good that a consumer is buying less of. Does not really work out in my mind.

- We lower taxes…

Well, with all of that extra money from lower taxes, companies will be able to expand production. Okay, so they expand production after borrowing to purchase what is necessary for the increase in productivity. They have to borrow because lower taxes do not mean available cash. This also seems to be a difficult challenge due to the well publicized reluctance of banks to give our money.

So why is it that the party that got a strong message from the American public this past election is grasping hold to its oldest idea?

I would like this cartoon to be an exaggeration, but right now it doesn’t seem to be.

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Detroit Broke City

Automaker Bailout, Bailout, Big Three, Economic Stimulus, Economy, Politics

Robert

Recently US Senator Carl Levin from Michigan stated that in regards to Honda locating in Alabama:

[Alabama] has cheaper labor, younger labor, no legacy costs (for retiree health care) — younger work force means lower medical costs. They have certain competitive advantages that are not the result of brilliance or greater skill.

Holy sh*t. Has Levin been smoking too much green or what?

I hate to keep throwing around the phrase “basic economic principles”, but I learned about competitive advantages on my first day of Econ 101. “If Country A can produce a widget for $1 and it costs Country B $2 to produce the same widget, Country A has a competitive advantage.” If Honda can produce cars in Alabama more cheaply than it can in Michigan, then why wouldn’t they build a factory in Alabama? It is really difficult for me to sympathize with the state of Michigan on this. 

For far too long the owners of the Big Three have been getting rich while at the same time producing inferior products. When a few companies have total control of the market, the average consumer can do little. I mean seriously, I am going to start riding a bike instead? Do you know how sweaty I get? I’ll just pull a quick hobo shower in office bathroom and be good. Via an open economy, foreign cars started to make an appearance on American roads. And you know what?  They were nice and, more importantly, they were cheap. They were cheaper because they were produced overseas where employee wages are substantially lower. They were nicer because without all of the overhead, the foreign car companies could put more money into the vehicle and still charge a lower price. An additional $2,000 is added to each car just to cover retirement benefits for employees. 2 Gs!!! Unfortunately, unions have a strangle hold on the auto industry. They have had far too much power for far too long; they have paralyzed the auto industry. They are just one more gigantic rock around the neck of the albatross that is the American auto industry.

Enter bankruptcy. Bankruptcy is the only chance that these companies actually have of recovering. Filing Chapter XI would give them a chance to break the shackles of many of their past poor decisions. They could renegotiate their union contracts, so that the autoworkers begin to earn wages that are more competitive. The new leaders would have to work in harmony with federal bankruptcy regulations that would prevent them from making bad decisions that would slow down the recovery process. As horrible as it is to see so many people lose their jobs because of greedy decisions made by those in charge, I see a basic purge as the most logical way to solve this problem. Break down the Big Three so that they can be built back up through the free market. Make them compete and they will either flourish or perish, but their success will hinge on the quality of their products and their company overall, not the artificial infusion of government funds.

 

 

Adam    

 

Robert…its bad news. This whole situation has been difficult to gauge my feelings. I have had somewhat unflattering things to say about the American auto industry for years. The market manipulation they have been able use to their extreme benefit is unbelievable. I don’t want to get into a history of how this industry (along with a couple of other cooperative industries) has brought our society to the slow and mind-numbing pace we found ourselves at now.

That being said, I should point out that the American consumer has a great deal of power and control in shaping the auto industry. Unfortunately price along with product choice can easily fool consumers.

Glad to get that bit out of the way. What about the proposed bailout of the Big Three? Well it sure is tough to advocate for some of the largest corporations on earth who have ignored the need to help themselves. The way I have thought about this issue is not in terms of “The Big Three”, but in terms of the Big Three Million plus who will lose their jobs if these companies fail.

In the economic stimulus package I wrote about in a past post, I advocated for investment in infrastructure to, partly, create millions of jobs. So, although it is beyond frustrating for me to advocate helping these slow and inefficient companies with a bailout, I have to. 

This $25 billion bailout is necessary to save jobs. In regards to the Big Three failing, Jonathan Cohn points out that three million people would lose their jobs in the first year after such a Big Three meltdown, swelling the ranks of the unemployed by nearly one-third nationally and leading to hundreds of billions of dollars in lost income.

A bailout of the Big Three could provide our country with a unique opportunity. One point to be made is the billions that would be spent in unemployment by the government if these jobs were lost. A bailout would mean billions of dollars saved in this context (I know…it’s a stretch). The other point is that the Federal government is in a unique position to put standards in place to force the Big Three to modernize and help the United States become less dependent on foreign oil.

It may be argued that the free market would force these companies to adhere to new standards without government intervention. This type of restructuring would take place in the Chapter 11 process described above. As pointed out at The 7-10 “Who wants to buy a car from a bankrupt company?” This is where the Chapter 11 scenario becomes a problem.

This situation is not similar to letting the airlines go into Chapter 11 in the 1980’s. A warranty is not necessary for me to fly from one part of the country to the other. It is, however, necessary for me to want to buy a new car. If any of the Big Three were to begin the Chapter 11 process their ability to continue to do business would be dramatically diminished.

So…where do we go from here?  I feel Robert Reich provides the best way to proceed in this brief summary:

In exchange for government aid, the Big Three’s creditors, shareholders, and executives should be required to accept losses as large as they’d endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.

Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.

We need the Big Three to continue to exist. We need the three million jobs to continue to exist. We need a better American automobile fleet. The bailout of these companies, if done properly, can help us achieve all three of these needs.

 

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