Big 3 Automaker Bailout

[JohnHenry]

I'm surprised that there has been no discussion about this on DC. (Maybe I missed it?) What do you think?
I have mixed feelings.

Pros:

1- The rest of the economy probably hangs in the balance.
2- Saving these companies may prevent a full blown economic depression.
3- Lots of human misery will result from the failure of any car company.
4- Recovery of these 3 will speed up recovery of the US and world economy.

Cons:

1- The bailout may not/probably won't be successful.
2- This is capitalism... sink or swim.
3- There is not enough money in the country to save every faltering industry.
4- They (Ford in my case) treat us like pure crap when we have serious service/warranty problems.
5- They deserve it because of poor management.

???

[Bunky]

After spending $10 Billion a month in Iraq, I feel like we might as well waste in something more American than a Iraqi bailout plan. For just 3 months of spending in Iraq, we could make detroit happy..they wlll not learn their lesson but that is another story.

Waste money in America, not in Iraq!

[Ronkh]

Originally Posted by Bunky

After spending $10 Billion a month in Iraq, I feel like we might as well waste in something more American than a Iraqi bailout plan. For just 3 months of spending in Iraq, we could make detroit happy..they wlll not learn their lesson but that is another story.

Waste money in America, not in Iraq!

apples - oranges

[jaybs02]

Businesses have failed in the past because they made poor choices.
So why now are we bailing out so many.

The big question is when do we stop

[holland_patrick]

No one knows what the future holds, or do they? It looks like celebrated investor Peter Schiff might have a crystal ball.

The Prediction

Almost two years ago he predicted that the financial markets were heading for crisis. At the time he told CNBC, "We're on the verge of a major, major recession that's probably going to start by the end of this year, maybe early next year. The housing market is just beginning to unravel. We're seeing the tip of the iceberg here.”

In fact he went on to compare the economy to the Titanic then added, “I am here with the lifeboat trying to get people to leave the ship.”

According to Schiff, investors believed asset prices, real estate prices, and stock prices would go up indefinitely. But, as you know, it was a bubble. Now, markets are correcting for these imbalances.



What's Next?

Of course that begs the question, what’s next?

On Thursday’s Fast Money Schiff tells us, “For the past several years people thought we had a real economy and we didn’t. We had a bubble. All we did is borrow a trillion dollars from the rest of the world and now we can’t pay the bills.”

And he prescribes some bitter medicine.

He feels we need higher interest rates, not lower. And he recommends allowing bankruptcies to occur, and the liquidation of debt. “That probably means companies go bankrupt and people lose their jobs.”

The Trade

Seems like a tough thesis to trade. But Schiff has a few suggestions. “I’d be buying some of these dips in commodities and buying stocks abroad and getting out of the dollar. Because the dollar is going to fall like a stone.

[holland_patrick]

and a little more...

The Humpty Dumpty Economy


Before the current economic crisis became apparent to all, the most popular fable used to describe America’s uncanny economic resiliency was the story of Goldilocks. It was argued that our economy was skipping down a sunny path of moderate growth, low inflation and rising asset prices. However, a much better parable for our economy over the last decade would have been the story of Humpty Dumpty: a bloated, fragile shell perched on the top of a dangerously high stone wall. This week, all the government’s horses and all of its men scrambled to put Humpty Dumpty back together again. Here is a look at some of this week’s highlights:

The Mother of all Moral Hazards

No doubt prodded by the administration, Fannie Mae and Freddie Mac announced a new attempt to stop the fall in home prices and foreclosures through a loan modification program that would cap mortgage payments so that a homeowner’s total housing expenses would not exceed 38% of household income for home owners who are 90 days delinquent.

In a classic case of unintended consequences, the plan will encourage a massive new round of delinquencies and household income reduction as homeowners will jump through hoops to qualify for the program and maximize their benefit. Those who could conceivably economize to meet their existing obligations will now have a strong reason to forego such sacrifices. Those who are not 90 days past due will intentionally become so. In many cases, dual income families may decide to eliminate one job altogether as reduced mortgage payments combined with lower child care and other work related expenses will likely exceed the after-tax value of the lost paycheck.

Unfortunately, the last thing our economy needs is falling household incomes and even more bad debt. But that is precisely what this plan will give us.

To Bail or Not to Bail

With the Big Three auto makers now in a plainly visible death spiral, the automotive bailout debate is kicking into overdrive. The disagreement hinges on whether a bailout is necessary to support an important industry or whether the unprofitable dinosaurs of the past should be allowed to fail as America focuses on an information-age, service sector, and alternative energy future.

As usual, both sides have it wrong. The government should let the Big Three fail not because we no longer need an auto industry, but because we desperately do. What we do not need is the bloated, inefficient auto industry that we have today. By allowing the Big Three to fail, their capacity will be turned over to new owners who will be able to acquire the means of production at fire sale prices and hire workers at globally competitive wages. The result will be a more efficient auto industry making cars that people around the world actually want to buy at prices they can afford. Such auto makers could conceivably be profitable and could become the cornerstone of a manufacturing renaissance in the United States. In contrast, Ford, Chrysler and GM are never ending money pits that threaten to swallow a good deal of our economy.

We Shopped and Dropped

This week, the bankruptcy filing by Circuit City and a profit warning from Best Buy, served as proof positive that America’s national shopping spree is over. As I have long said, the business model of importing cheap goods for Americans to buy with credit cards was unsustainable. We were told to “Shop till we dropped,” and we did.

Americans two primary sources of spending money, home equity extractions and unlimited credit card availability, have been shut down. With only dwindling paychecks to rely on, Americans are justifiably economizing. As a result, many more retailers will file for bankruptcy over the next few years, and those that remain solvent will only do so by drastically cutting their capacity.

In a desperate move to arrest this necessary process, Treasury Secretary Paulson announced his intention to use part of the $700 billion TARP (Troubled Asset Recovery Program) funds to re-liquefy consumer lending.

Paulson observed that “illiquidity is raising the cost and reducing the availability of car loans, student loans, and credit cards”, “creating a heavy burden on the American people” and reducing jobs. While all of this is true, this is precisely what needs to happen. Americans need to reduce their spending on all of these things, and market forces are in the process of bringing that change about. By encouraging even more borrowing, Paulson’s plan will aggravate the crisis.

Along those lines, our nation’s various bank regulators issued a joint press release this week that “encouraged” banks to make more loans and to reduce their lending standards if need be. Since lax lending standards are one of the primary reasons that those banks “needed” to be bailed out in the first place, it is lunacy to now encourage them throw good money after bad. More risky lending (and currently nearly all lending is risky) interferes with the market’s attempts to rebalance our economy along the lines that Paulson himself admits is necessary, and sows the seeds for even bigger bailouts in the future when this new crop of loans go bad.

Bait and switch

Reminiscent of his Bazooka maneuver, quick draw Paulson reversed course quickly with his decision to not use any TARP funds to buy the assets that the plan was specifically funded to procure. Instead, he will simply dole out the loot to his buddies on Wall Street and use it for whatever seemingly worthy initiative strikes his fancy.

Although Congress loves to grandstand about oversight, it has thus far shown no courage to interfere, or even question, the change in strategy. Paulson claims that he is simply rolling with the punches. The truth however, is that the original plan was flawed from inception, as I clearly pointed out in a string of commentaries following his proposal. How could the Treasury Department, with all its funding and PhD’s, not make similar predictions? Paulson is either a liar or completely incompetent. My guess is he is both.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

[Poorboy]

I think they all need to be down sized .. the years of GM having so many brands is over ... there is no need to have GMC, Chevrolet, Pontiac, Cadillac , etc to make the same vehicle with a slightly different look and different name badge ... same goes with Ford with Lincoln and Mercury ...Chrysler, with Doge and Jeep ...

yes there would be job losses but would it be better that the whole industry fail? We certainly would see lower costs and better service as only the cream of the crop, (as far as dealers and service) would survive. We could also see better quality as the older plants would be gone and the newest high tech plants would get more resources.

Wouldn't it be great if GM dropped all the lines but Cadillac, so everyone could drive a Caddy

[Bunky]

I do believe in helping them but they do need to reform.

GM needs to shed brands. Instead of using money to develop better smaller cars they spent it on the Hummer brand. I would merge Chev/Pontiac, drop Buick (fold into Cadillac), and drop Hummer. They really only need two basic brands and maybe a truck line (GMC covering large trucks). Chrysler just needs one brand and Ford could eliminate Mercury unless they bring in euro cars and sell under mercury brand.

[Bunky]

Originally Posted by Ronkh

apples - oranges

It may be different if you say we are bailing out a mistake in Iraq and bailing out a mistake here. The current leadership was at the wheel for both. I know the blame is pointed at a group not managing two branches of government.

[holland_patrick]

The whole problem that we are dealing with started before bush even got in to office...