Why CitiGroup is About to Be Bailed Out and Not General Motors
Citigroup was once the biggest U.S. bank. General Motors was once the biggest automaker in the world. Now, both are on the brink. Yet Citigroup is likely to be rescued within days. General Motors may not be rescued at all.
Why the difference? Viewed from Wall Street, Citi is too big and important to be allowed to fail while GM is simply a big, clunky old manufacturing company that can go into chapter 11 and reorganize itself. The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman's demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe -- a mistake that must not occur again. But GM? GM is only jobs and communities. Citi is money.
The Street's view of the world is fundamentally flawed. Banks are important to the economy because they're financial intermediaries. They connect savers with investors and borrowers. This is a vital function, but there's nothing magical about it. At any given time the world contains a vast pool of money that can be put to all sorts of uses. Financial intermediaries simply link the pool to the uses.
To be sure, savers need to believe that intermediaries are trustworthy; otherwise, savers will prefer the underside of their mattresses. That's why governments regulate intermediaries, insure deposits, and do whatever else needs to be done to make savers feel safe. What governments and societies fear most are "runs" on banks -- panicked efforts by depositors to pull their money out all at once, before banks can possibly collect the money from all those who have used it to borrow or invest. That's what happened in the 1930s.
But the current panic on Wall Street is not a "run" in this sense. It has almost nothing to do with banks' roles as financial intermediaries. It's about money that's been lent to or invested in the banks themselves, in order to profit off of the banks' profits. Lehman's demise cost many investors and creditors lots of money, to be sure, but they were investors and creditors in Lehman, not in the real economy.
Before the asset bubbles burst, financial institutions were generating whopping profits, so naturally they attracted many investors and creditors. After the burst, the profits disappeared. These days, you'd be hard pressed to find many people who want to invest in or lend to financial institutions. Citigroup had a market value of $274 billion at the end of 2006. Now its value is about $21 billion. That's awful news for Citi, its executives and traders, and its investors and creditors. But it's not necessarily awful news for the economy as a whole. Even if Citigroup were to go belly up, the real economy would not be seriously harmed. The mutual funds, pension funds, and deposits overseen by Citi would be safe; fund managers would find their way to other banks.
In other words, Citigroup is not much different from General Motors. It's a company that once made lots of money but, through a series of management blunders, is now losing money hand over fist. Just like the shareholders and creditors of GM, Citi's shareholders and creditors are taking a beating.
So why save Citi and not GM? It's not clear. In fact, there may be more reason to do the reverse. GM has a far greater impact on jobs and communities. Add parts suppliers and their employees, and the number of middle-class and blue-collar jobs dependent on GM is many multiples that of Citi. And the potential social costs of GM's demise, or even major shrinkage, is much larger than Citi's -- including everything from unemployment insurance to lost tax revenues to families suddenly without health insurance to entire communities whose infrastructure and housing may become nearly worthless. I'm not arguing that GM should be bailed out; as I've noted elsewhere, GM's creditors, shareholders, executives, and workers should have to make substantial sacrifices before taxpayers should be expected to sacrifice as well.
Nonetheless, Citi is about to be bailed out while GM is allowed to languish. That's because Wall Street's self-serving view of the unique role of financial institutions is mirrored in the two agencies that run the American economy -- the Treasury and the Fed. Their job, as they see it, is to keep the financial economy "sound," by which they mean keeping Wall Street's own investors and creditors happy.
Because the public doesn't understand the intricacies of finance, it's easily persuaded that this is the same thing as keeping credit flowing to Main Street. That's why the public and its representatives have committed $700 billion of taxpayer money to Wall Street and another $500 to $600 billion of subsidized loans to the Street from the Fed -- bailing out the investors and creditors of every major bank, including , momentarily, Citi -- only to discover, at the end of this frantic and unbelievably expensive exercise, that American jobs and communities are more endangered than they were at the start.
Why the difference? Viewed from Wall Street, Citi is too big and important to be allowed to fail while GM is simply a big, clunky old manufacturing company that can go into chapter 11 and reorganize itself. The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman's demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe -- a mistake that must not occur again. But GM? GM is only jobs and communities. Citi is money.
The Street's view of the world is fundamentally flawed. Banks are important to the economy because they're financial intermediaries. They connect savers with investors and borrowers. This is a vital function, but there's nothing magical about it. At any given time the world contains a vast pool of money that can be put to all sorts of uses. Financial intermediaries simply link the pool to the uses.
To be sure, savers need to believe that intermediaries are trustworthy; otherwise, savers will prefer the underside of their mattresses. That's why governments regulate intermediaries, insure deposits, and do whatever else needs to be done to make savers feel safe. What governments and societies fear most are "runs" on banks -- panicked efforts by depositors to pull their money out all at once, before banks can possibly collect the money from all those who have used it to borrow or invest. That's what happened in the 1930s.
But the current panic on Wall Street is not a "run" in this sense. It has almost nothing to do with banks' roles as financial intermediaries. It's about money that's been lent to or invested in the banks themselves, in order to profit off of the banks' profits. Lehman's demise cost many investors and creditors lots of money, to be sure, but they were investors and creditors in Lehman, not in the real economy.
Before the asset bubbles burst, financial institutions were generating whopping profits, so naturally they attracted many investors and creditors. After the burst, the profits disappeared. These days, you'd be hard pressed to find many people who want to invest in or lend to financial institutions. Citigroup had a market value of $274 billion at the end of 2006. Now its value is about $21 billion. That's awful news for Citi, its executives and traders, and its investors and creditors. But it's not necessarily awful news for the economy as a whole. Even if Citigroup were to go belly up, the real economy would not be seriously harmed. The mutual funds, pension funds, and deposits overseen by Citi would be safe; fund managers would find their way to other banks.
In other words, Citigroup is not much different from General Motors. It's a company that once made lots of money but, through a series of management blunders, is now losing money hand over fist. Just like the shareholders and creditors of GM, Citi's shareholders and creditors are taking a beating.
So why save Citi and not GM? It's not clear. In fact, there may be more reason to do the reverse. GM has a far greater impact on jobs and communities. Add parts suppliers and their employees, and the number of middle-class and blue-collar jobs dependent on GM is many multiples that of Citi. And the potential social costs of GM's demise, or even major shrinkage, is much larger than Citi's -- including everything from unemployment insurance to lost tax revenues to families suddenly without health insurance to entire communities whose infrastructure and housing may become nearly worthless. I'm not arguing that GM should be bailed out; as I've noted elsewhere, GM's creditors, shareholders, executives, and workers should have to make substantial sacrifices before taxpayers should be expected to sacrifice as well.
Nonetheless, Citi is about to be bailed out while GM is allowed to languish. That's because Wall Street's self-serving view of the unique role of financial institutions is mirrored in the two agencies that run the American economy -- the Treasury and the Fed. Their job, as they see it, is to keep the financial economy "sound," by which they mean keeping Wall Street's own investors and creditors happy.
Because the public doesn't understand the intricacies of finance, it's easily persuaded that this is the same thing as keeping credit flowing to Main Street. That's why the public and its representatives have committed $700 billion of taxpayer money to Wall Street and another $500 to $600 billion of subsidized loans to the Street from the Fed -- bailing out the investors and creditors of every major bank, including , momentarily, Citi -- only to discover, at the end of this frantic and unbelievably expensive exercise, that American jobs and communities are more endangered than they were at the start.
posted by Robert Reich | 11:34 PM
89 Comments:
Those Wall Street bloodsuckers love to quote Adam Smith when it comes to bailing out working class
people. But never when it comes to
them!
And Adam Smith never supported the
plutocracy anyhow.
All those bloodsuckers ever did was
convince many of us to borrow money
from China and use it to buy each
others houses. ...That was always
unsustainable.
In fact, the housing bubble was a
symptom of a bunch of money floating around with no where productive to go.
And that's because Bush 43 redis-
tributed so much wealth upwards
into the hands of wealthy people
who sit on their money, that there
wasn't enough consumer demand to
justify any other kind of investment.
And now that that bubble has burst,
we have all this investment money
"on the sidelines."
So now they want more trickle-down.
And trickle-down is the very root
cause of this train-wreck in the
first place.
Maybe some day those crony capital-
ists will sell us the ropes that we
can use to hang them with?
And thanks for being Jacksonian and
sticking up for the little guy who
has no pull, Mr. Reich.
You have no idea how much your efforts are appreciated.
I have lost faith in our country's banking system. I was charged $35.00 to withdraw money from my own savings account at US Bank. We are one paycheck away from unemployment. Our income has been in a steady decline this last year. The RV industry is in meltdown mode for 2 reasons: Gas prices and no available credit. My husband's boss is a sound businessman, any may close the manufacturing plant. Here is who is affected: Every part for a trailer comes from some other industry. Every dealership and it's employees will be out of work. States will lose enormous taxes and thousands of employees will be without health care. The only solution I can even fathom at this point is to nationalize the banks for a while. If these types of industries can get loans from banks, then so be it, and let wall street die. We are one of the few manufacturers still standing because we don't have to answer to wall street.
"I'll be gone - you'll be gone"
IBG-YBG
The investment banks sold crap (CDOs for example, read "The End" by Michael Lewis) to investors and banks around the world and now the entire global financial system is sitting on a foundation of sand...
While these very rich banking executives (multiple million $ annual salaries) and their moderately rich underlings (multiple $100Ks annual salaries) get huge bonuses paid for with taxpayer bailout funds.
Dr.,
I think this is an overstatement of your point. The fall of either of these institutions would be a big big disaster. The flow of money and the need for capital to grow and compete in order to innovate and thereby sustain employment in a competitive world is pretty important. If Citigroup fails it will indirectly cause a melt down of the system. Though indirect, the system experiences a meltdown. If GM fails, it will directly cause the meltdown of a huge sector of the economy which will indirectly domino into other sectors. Again, the whole system will suffer.
Both bailouts are absolutely necessary to stop the bleeding and save the patient and give us time to perfor the major surgeries needed to restructure the game of supercapitalism.
The price of Citibank's stock has nothing to do with the soundness of Citibank's financial position. If Citibank has substantial assets and a reasonable debt to asset ratio, it can continue to do its functions. If it is not overleveraged, it can continue to function as a sound financial institution. The one thing it cannot do is to raise money by selling more stock. And the stock options it gives to executives are worthless.
I don't see why the value of Citibank's stock has anything to do with whether or not the bank fails. Like Dr. Reich said, the only people affected are the investors in Citibank. It seems to me there was another bank (was it Wachovia?) that had an ample asset base, ample customer deposits and yet was bought out by Wells Fargo. Of course, this could never happen to a privately owned bank.
As Dr. Reich states, there is not a run on Citibank, there is a run on the stock of Citibank. And it has become obvious now that Paulson and Bernanke are only interested in bailing out investors with taxpayer money, that is, those who own Citibank stock. Perhaps many of those investors are foreigners who, if Citibank fails (in the sense of stock losing its value) will not continue propping up the entire US economy by buying Treasury bonds.
But there is a disconnect between bailing out Wall St and bailing out the economy. The latter would comprise housing foreclosure relief, job creation, balanced (instead of free) trade, and universal health insurance for starters.
Perhaps the meaning of TARP should be changed from Troubled Asset Relief Program to Troubled American Relief Program because in reality what they are doing now is TWIRP - Troubled Wealthy Investor Relief Program.
thank you, Robert. I wish Obama would read your advice. So far I am not sure he's doing anything better than Bush did. The economic stimulus he has offered of only bringing 2 and a half million jobs remaking infrastructure and energy conservation is only expected to come up to speed in two years. I doubt if the govt. will come up with the vast amount of funds already given to Wall Street to squander.
I support both liberals and conservatives who want to stop the next 350 Billion dollars expected to be doled out to Wall Street. Most of the Financial jobs are gone and they are not productive employment anyway. We need a big stimulus into the productive centers...the Midwest for example.
If David Brooks is so happy about Obama's appointments we maybe have to worry. Who is going to pay the unemployment benefits, the "welfare" of Millions (far more than 2 and a half) to be laid off in the next few monthes. If an Immediate stimulus into the Employment sectors isn't happening....the downward spiral of falling prices, falling unemployment, falling income, falling tax receipts is just starting. Roubini's estimate of a contraction of 8 percent per year is possibly conservative. (my approx. estimate of his many statements)
Extreme and unwarrented Leverage got us into the First Great Depression and here we are again. Why are fueling the same people that got us into this mess...the Wall Street (casinos) Banks?? They'll just keep the money and run. And who wants credit when we are losing income?
Fail to help the auto industry and we will witness the next Great Depression.
We ain't seen nothin' yet.
This just in from Huffington Post:
On Thursday, Saudi Prince Alwaleed bin Talal said he planned to increase his stake in Citigroup to 5 percent from less than 4 percent. The bank's largest individual investor called Citigroup's shares "dramatically undervalued."
So you see all the machinations and pleas for taxpayer money are to protect foreign investors.
And Citibank wants a ban on shortselling. Just as I thought: shortsellers are responsible for the drop in share price. So it's all about manipulating the financial system and getting taxpeyer money to further enrich foreign investors. Who will benefit from a massive injection of taxpayer capital? Why none other than the abovementioned Saudi Prince who will see his share value rise as the stock goes back up!
You need to tell Mr. Brooks that.
Better yet, why don't you go on NewsHour?
While we debate spending taxpayer money on Citibank or GM, spending on war and the military-industrial complex goes on unabated and undebated. Shovelling money out the door for war has no serious opponents although it is largely responsible for the lack of government spending on the domestic economy other than that part of the domestic economy which is funded by employees of the military-industrial complex spending their paychecks. War contractors are in no danger of going bankrupt. I guess nobody shorts their stocks. All you out of work financial sector workers, I hear Lockheed-Martin is hiring.
I believe that the automakers actually need help. The Citigroup problem has to do with the panic created by this crisis. It seems to me that they could actually make it.
So, I agree with you. However, Citigroup will be bailed out if it's felt necessary because of the precedence of the previous bailouts.
Don the libertarian Democrat
Please, could someone just once divert the attention away from Wall Street to Main Street as a means of fixing what ails our economy?
The problem is lack of reinvestment in America's industry. And that's a fallout of historically lowering corporate tax rates that create the incentive for profit-taking.
As a small business owner, I live that principle every day when I reinvest any potential distributions to me from the company back into maintaining a health balance sheet during these trying times. I choose other ways than layoffs to reduce expenses, if at all possible.
Wall Street needs a refresher course in business ethics.
Pauline
Paul Volcher and his Imperial Dollar guarenteed that Michigan and
Ohio would some day be on fire.
Clinton gave us a repreive.
Bush 43 litterally lit us on fire by threatening to veto any attempt
to stop China from propping up the
dollar; that made every Japenease
car, on average, $8,000 cheaper.
And Wall Street investors DEMAND
profit this quarter, this month,
this week -- today! ...Thus, its
no suprise that, in the days of
cheap gasoline, Wall Street made
the Big Three produce nothing but
huge gas-guzzling lemons that had
$12,000+ profit mark-ups.
And Generous Motors, Ford, and
Mopar all have suicide pacts with
their own workers.
A tragic situation with many scape-
goats and no easy answers.
But Wall Street is sure in its
answering:
Burn Ohio and Michigan down and no
one will care.
No one on Wall Street, that is.
AIG gets $150B while General Motors, Ford and Chrysler, upon whose economic viability literally millions depend, can't squeeze a paltry $25B out of the "bail-out fund"? What's wrong with this picture?
I think you've put your finger on it: Treasury is more focused on protecting the economic interests of highly-compensated bank executives and investors than it is in preventing a middle-class economic disaster.
America cannot afford to write off manufacturing jobs and the workers and their families who depend on those jobs for their survival. The Big Three need to be saved from collapse, but that doesn't mean they should be given the kind of blank check Mr. Paulsen has made payable to the order of the financial industry.
We need greener cars. We need to reduce our dependence on foreign oil. Throw the Big Three a lifeline, but give them incentive to produce the cars of the future, not more Hummers, Expeditions, and Ram pickups.
Jack White, had it right in 1999. Their ideas are stuck in the mud...
http://www.youtube.com/watch?v=c8lAjmor6bg
Well said Mr Reich. It is about Wall Street's perspective.
If we live i such a financial house of cards then perhaps we should start with a better foundation. Why should we sacrifice to prop up a system prone to failure? I should restate that - why should we prop up a system that makes citizens eat the losses but keeps the profits in 'good' times thru usury?
The Lehman bankruptcy was stupid a stupid move for sure. It started a global panic, unnecessarily, which really put us in a “run on any financial institution”. How can the Fed, Treasury, and Congress be so stupid to actually allow a global run and global mistrust, resulting in the beginning of the Great Depression II.
I have been in a psychological depression ever since Bush was first elected and now he has brought me to a financial/global depression.
I work for a large financial services company that held Lehman bonds in a money market fund. Our fund lost $800mm, so our company had to make the fund whole (not break the buck) and now we have a large employee layoff coming.
I am targeted as losing my job after the holidays (thank God not any sooner). My own Congress has approved the use of my taxes to save other financial services companies, but they did not save Lehman. I’m out of a job soon and won’t be paying too many taxes. In fact, I’m going on the Government support system. All of you can now support me and my family while your other taxes go to prop up other banks.
Many banks need to fail. They should be allowed to fail.
Thanks Bush (et al.) for taking me from a productive tax payer to a couch potato for the next 2 years.
"The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman's demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe"
OK, but... Can you make the case that they are wrong?
At the time of its failure, Lehman Brothers was counterparty to $729 billion in derivatives trades.
As of Sept 30, Citigroup was counterparty to $36.8 trillion in notional derivatives trades (10-Q page 40, last line). If there is any company whose bankruptcy would destroy the global financial system, Citigroup is it. With the possible exception of JP Morgan.
Institutions of this scale never should have been allowed to exist. But they do, and they are failing, and now the government has to decide how to respond.
Doc:
Paranoia is becoming the hobby de jour of the American populace. Not necessarily unduly.
Let me suggest to many of you that in a global economy - are there doubts that we don't have a global enonomy? - there are no "foreign" investors.
Though I tend to agree with John Lawrence's solutions, at least directionally, what seems missing from his and many other's views of our calamity, is that much of it is psychological. Notwithstanding Citigroup's current problems, which have yet to be fully explained, there is no liquidity problem in the banking world right now nor a solvency one. It is still, as you suggested posts ago, a "trust" problem and "trust" is not a tangible item.
I thought you spelled out quite clearly that letting Lehman fail was a huge miscalculation, by Messrs. Bernanke and Paulson. Not because tangibly it affected the money supply or thousands of jobs or the national economy but because it scared hell out of, not only, the financial industry but the business world in general. This scare was concerning what the future portended and was an abstract concern not a tangible one. In more normal times Lehman could have failed and it would have been a hiccup, a company which had reached the end of its life cycle, but in perilous times it was a harbinger of doom for the entire investment banking system and potentially the economy. It was the psychological impact that was damaging.
BTW, to all of you who want to claim that Bernanke and Paulson are only looking out for shareholders and investors, how did letting Lehman fail do anything for shareholders and investors?
Bailing out AIG, as I have stated before, is very likely because of their huge exposure in CDS's. No doubt CDS's are a looming creature in the swamp but the best way to limit their potential impact is to get the economy rolling again and attempting to limit failures or defaults that will kick into gear payoffs on them. No mean task but it is significantly dependent on getting attitudes more optimistic again.
There is no doubt that those who are unemployed are suffering real losses; that homeowners losing their homes or suffering large losses in values are feeling real pain; but the largest portion of our populace, to date, is feeling anxiety but no real pain. Someone mentioned the other day that during the Great Depression unemployment reached 25% but that meant that 75% of our employable workforce was still working. Anemic surely but catastrophic?
As John has stated, now is not the time to worry about national debt or annual deficits. Two major components of our GDP are not working so the one that's left has to make up the difference. Though it's always possible that others around the world will stop providing us with funds via borrowing it's highly unlikely. For once globalization is working in our favor. If we go down so does most of the rest of the world.
I concur that failures of GM, et al, will be far more unfavorable to the overall economy than if Citi fails. If our choice is either/or then I believe you have to go with the Big Three, preferably with provisoes. If we allow Citi to fail, however, we run the risk of scaring the financial markets all over again. I certainly agree that horror shouldn't prevail but likely it will. To your point, banks are facilitators. They add their share to the overall economy but they do not employ, directly or indirectly, massive numbers of employees nor do they generally support whole communities. And there are other banks who will pick up the slack, not even stopping to inhale. But they do represent one more dropped shoe that will add to the furor that the sky is falling. That I believe is at the crux of the Bernanke/Paulson dilemma. I would guess, as you state, that their perspective of the banking industry is somewhat prejudiced, not from self-interest but from a knowledge and experience base, and therefore they may view saving Citi as critical. I don't think that either of them does not feel similarly about GM, but at this point they believe that Congress should tackle that problem. Am not sure they are wrong. Bernanke has his own limits to what he can do. Paulson does have available funds that could be used to bailout the auto industry, with a little stretch to his charter, but for a variety of reasons he feels that using up his funds is not a good idea. It is probably a good idea to salvage as much flexibility as possible for the Obama administration since they will bear the brunt of turning this all around.
I am somewhat amazed that the Congress wants to see a restructuring plan before going further with bailouts for the Big Three. On the surface not an unreasonable request, and one that has been much discussed in your previous post, but could we think about it? Any restructuring plan proffered would contain confidential strategies about plans 4, 5 or 10 years out. If you were running a business in a very competitive industry, especially one in which you are bleeding market share, would you want to risk exposing your future plans to the world? Oh yea, we could discuss it in closed session but do you really think the Senator Shelby wouldn't let something slip out over corn fritters and brunswick stew with Mercedes execs in Alabama? We all know that Congress leaks like a sieve. GM, et al, might as well publish their plans on the internet.
For those who are already hanging Obama out to dry: Do you have any idea of the administrative effort required to employ even 2.5 million let alone 5 million? I have heard that many infrastructure projects are already designed and ready for bidding or implementation but it would seem a thorough review might be in order before unleashing a waterfall of funding. That will take more time and is likely necessary before we start hiring people.
All the possible solutions to our problems are complex. They cannot be started by flipping a switch. The initial benefit will be in announcing a planned approach which Obama has done regarding infrastructure projects. This, again, will alter attitudes from both consumers and businesses, moving from gloom to sunlight. Both may want to bask for a short while but soon activity will energize and we will be on our way, albeit likely slowly.
Anyone who has looked seriously at the US auto manufacturers' situation must have reasonable doubts that a taxpayer investment will actually save Detroit over the long haul,here meaning a couple of years. If there was a high degree of confidence in Detroit's prognosis for survival there would probably be far less hesitation to advance the $25 billion and impose some preconditions for change. But even the auto executives suggest that their successful recovery will depend on this current economic downturn being relatively short lived, with a noticeable improvement in auto sales by mid 2009. But there are widespread beliefs among many of those in the financial profession who see this recession going on for multiple years, so we have to ask what is a reasonable worst case analysis and how many times will Detroit return to Washington for near perpetual cash infusions? Will $25 billion keep them alive if the recession remains deep and protracted and we experience no significant increase in auto sales for another 2 or three years ? At the least the executives should be required to provide three projections, covering a best case with a short recession, a moderate recession and finally a worst case of a more serious slowdown lasting more than 2 plus years. Than project the actual financial needs for each case and than let Washington and the taxpayers decide what course of action to take. But right now it seems that the executives are just asking everybody to " trust them" , give them the money and don't ask any serious questions.
Generally, I agree with you. Regarding a possible bailout of GM, you believe, as I do, that GM's creditors, shareholders, execs, should have to make substantial sacrifices before taxpayers are called upon to make sacrifices. OK, fair enough. But what sort of substantive sacrifices do you have in mind for workers and their families? It just doesn't seem that they're in much of a position to contribute. And why, necessarily, should the workers be called upon to sacrifice when it has been GM's leadership who are largely to blame for poor decisions that have put them in this precarious position ?
Avoiding a debt deflation is the key issue here. By dismembering/restructuring Citi you are bound to get yet more credit contraction. That's not the case with GM. Saving Citi doesn't by itself stop the general credit death spiral, but letting it fail would accelerate it.
I believe we will find that an inflated structure of credit claims cannot deleverage. It simply can't, not without a substantial devaluation of all claims. This in turn means that ultimately all credit is public. Which in turn leads to the question, how can a public and collectively backed good, credit, be private in its creation, and especially, how can the profits derived from credit creation be private? It seems illogical.
And we never quite understood why my grandfather,throughout his life,unfailingly,took a third of his paycheck and bought a gold sovereign whenever he had accumulated enough cash.Month in month out,year in,year out.
Make no mistake,he certainly didn't keep the coins in a bank.
1930 taught him never to trust banks fully again.
If cash did'nt lose value,we'd all keep it in the back garden.
Perhaps a good thing will come out of this.
We just might start being our "own" bankers,just like the our old timers were.
Stupid Citi! Let them fail and take my IRA down with them! So what if I'm over 50 and in a poor economy for the next 10 years that won't have an opportunity to earn back even a fraction of the money? Screw 'em!
Face, there's the nose. You know what I'm going to do!
Though often sagacious, sometimes Prof. Reich can be short sighted.
Even IF GM et al receives a bailout/loan, its still just a matter of short time until they'll be back asking for more. The simple fact of the matter is that even IF they had cars people wanted to buy, most of these people will not be able to obtains car loans.
Throwing money at them is fruitless. They need to opt for the lesser of two evils which is Chapter 11.
Dr. Reich,
Big Three Cash Crunch: CAN CONGRESS SIT BY THRU XMAS?
What I have said to you on prior posts about the Bailout approach for the Big Three appears still relevant with following timing adjustments to reflect rapid deterioration of financial situation:
PHASE I:
(1) Provide BEFORE end December INTERIM Emergency help to all three firms to Buy Time to complete Viable Plans for long-term survival; deadline for Plan submission and presentation is February 15 (rather than March 31); interim funds provided for December thru April 15 period would be ±$15-25 billion per firm.
PHASE II:
(2) Independent Committee reviews Plans and makes recommendations to Congress by March 15 on following options: (a) Chapter 11 for either GM or Chrysler or both and total funds needed; (b) Chapter 11 and then merger of GM and Chrysler and total funds needed; (c) Chapter 11 for all three firms and total funds needed; (d)major financial assistance under certain conditions for all three firms without first taking recourse to a Chapter 11 process and total funds needed.
(3) By April 15 Congress approves appropriate option and funds needed to execute option. Funds could range form another ±$25-50 billion per firm in the form of a loan with an equity kicker or nationalization of firms with plan to go public with them in 4 or 5 years after ± $25-50 billion recapitalization per firm, and return to stabilized operations and cashflow.
The above is a much quicker timetable of decision making by all concerned than in my previous posts ... given the extreme cash crisis overwhelming these firms every day now, a crisis may have to be addressed BEFORE Obama is officially President.
This is all said with the main underlying goal to minimize having GOOD taxpayer money chasing BAD money ... as well as to insure taxpayers are reasonably rewarded for risks finally taken.
The ultimate total funds needed under each option must be brutally clear and frank concerning for Liquidity, Solvency, and Investments for turnaround in tooling, designs, losses from closed plant and dealership operations, worker unemployment compensation and retraining, etc.
Frank Thomas, The Netherlands
Silverfox:
Not a bad analysis nor bad suggestions but I might ask what would be the purpose of submitting the three plans?
Keep in mind that forecasts are guesses, no matter what economic forecast you are relying on. Now the Big Three have sophisticated employees and technology to do a better job but no one can see the future precisely.
Let's say they produce a most likely scenario which calls for car sales to rise starting in 2011 and they will need $75 billion to get by until then. Let's assume that Congress finds this acceptable and provides them with $25 billion today and another $25 billion next year. As we approach the last $25 billion we find that we are still where we are today, or only slightly advanced, and the future now looks like another couple of years with no appreciable car sales. What to do then?
We can, not release the final $25 billion and let them fail at that point, or we can consider our investment of $50 billion so far with perhaps only another $50 billion necessary to get them whole. Now accountants would tell you that the first $50 billion is a sunk cost so forget it as a judgment criteria for releasing the last $25B or an additional $25B. That ain't gonna fly with the taxpayers; it's a hard enough sell to business executives.
If the recession (depression) lasts that long we will have far greater unemployment, some of which will be from the Big Three and their networks, but adding even more at that point merely aggravates the economic problems. Essentially we would be at the same square one then that we are now. Always looking just over the horizon to make our decision.
Hopefully the good news in that scenario would be that during the two years the Big Three would have been taking actions that reduced their cash needs so the $25B might now be $10B or $15B.
We certainly need to exact some assurances and restrictions for any loans or investments Congress makes but predicating the decision on sales forecasts or the timing of an economic turnaround is a fool's journey. We can only live in the present and near term future. We are going to have to bite the bullet and if we commit to funding we will have to stay the course and then direct energies to trying to turn the economy around salvaging our investment in the Big Three as well as the rest of our economy.
If we force them to provide plans, will it just be the financial results or will we want to know how they propose to get there? If the latter we run up against what I asserted in my earlier post. If the former they won't be worth the paper they are written on. Better we get assurances that any excess funds, beyond normal necessary expenses, will be invested in R&D efforts to produce "greener" cars. Periodic financial updates could be provided without exposing too much confidentiality.
Chances are that some form of nationalization is the best solution, providing certainty for the Big Three futures and yielding the potential for decent returns to taxpayers in the future. That's really dicey and probably won't get past the Congress, even after Obama is sworn in, and it won't please a hell of a lot of the taxpayers. It also could lead to a bigger battle with foreign competitors. We could see filings with the WTO or foreign governments may start funding their US operations. If the recession gets that bad, Toyota and Honda, et al, will also be hurting badly.
All in all it's a huge conundrum and many problematic issues do argue for sticking with the market solutions of filing Chapter 11. I believe that will be a deathknell but what the hell do I know?
I do know, after 40 years experience in crafting them, that business plans ain't the answer.
I do think that all those opposing bailing out the Big Three should keep in mind that the objective is to salvage employment/communities and avoid exacerbating the economic decline. Everyone seems to forget that if the Big Three fail, in bankruptcy or not, our current situation will get much worse and we will all pay anyway. We don't really have options here.
How do you define "jobs" and why are you so concerned about them now? In the past years, you've been fully in support of offshoring and globalization. I remember your speech at North Carolina State University in which you mentioned child care, fire officials, police, and other customer facing roles that people in the United States will have to turn to for employment.
Jobs are leaving the US and not coming back. They're not being replaced. What if we have all the cars and trucks on the North American continent that we'll need for the next decade. We'll just keep repairing them and cannibilizing them for parts until we allow Tata Motor Services to import.
Maybe we should treat the US auto industry like smallpox: take a representative sample and lock them away someplace for future reference.
It's interesting that on some blogs people are wondering aloud about Iraq vets coming home fully armed and with combat skills, and that they may be the ones to take on bankers.
My two cents is that something close has already happened in North Carolina. Bill Friday's Friday night UNC-TV program, "North Carolina People" had a guest who was from some small town near the coast where tobacco was the chief crop. A fire started in one of the warehouses, and a couple of African-American Vietnam Vets kept the fire going until that year's tobacco crop, the drying barns, the market share, was destroyed, burnt to the ground.
Remember in March 2008, dimwit US Labor Secretary Elaine Chao was chirping to the Wall Street Journal video that "America's unemployment hadn't even hit 5% yet, so the recession was extremely mild. We had a way to go yet. At the same time, CNN website published an article that if you count part time workers who cannot find full time jobs, the unemployment rate is closer to 9%.
I'm not the only blogger who has been saying no middle class, no money for mortgages, credit card payments, auto payments. Where is the outrage? Apparently waiting for the Iraq Vets to come home and muster arms.
We just got the word at the small business where I work that we have 6 weeks of operating capital left. 55 years of business and 56 employees down the drain by the new year. So what do I do now? As a professional in the construction industry there is no work for us anywhere in the country. No one here in Texas ever thought we'd see the financial paralysis disease this round, but here it is. So I say if the feds are going to bailout wallstreet and big business then they should give a generous small-business stimulus package as well. Say $5,000 per employee to float small businesses until next March...wishful thinking I guess. Hello, unemployment: hello global depression.
Nemo makes a good point.
Citi's failure would cause mass hysteria in the credit markets in a way that GM default would not.
Such contagion would make present deflationary concerns immediate and real. Any sliver of confidence in the financial system would be lost.
It's the equivalent of killing the wife and child of a depressed patient versus cutting off an already broken and infected hand. Neither is a great outcome, but
The government should, if necessary, allow the equity holders to go to zero, break up the firm.
Dr. Reich,
Anyone's experience in making Business Plans is entering a new frontier in this level of crisis.
So I can understand some people wanting to throw all analysis to the wind in this emergency situation with so much at stake... and just let the taxpayers money fly! New Deal Roosevelt TODAY becomes the urgent admonition.
This sometimes subtly arises from a process of getting lost in a morass of "on the one hand and on the other hand" lengthy neutral reasoning that ends up taking the course of least resistence ... and short-sighting combination of immediate and fundamental problem solving.
We can do better with all the geniuses at Congress's call.
Some variation of my Phase 1 and Phase 2 approach to Big Three crisis reasonably offers the right balance of DARING for limited immediate help and a minimum of timely CAUTION to come to grips with apparently most structurally sound strategies (under a worst scenario and probable scenario)... all clarified and agreed to on a fast track basis Before getting sucked into committing major rescue funds that become a deadly, costly, endless breadline.
Sometimes in one's efforts to cover all the possibilities and not make an error, it's easy to get lost in a morass of "on the one hand, and on the other hand," reasoning that gives scant attention to creative options ... flexible options that may be equally cognizent of relevant risks -- but at same provide creative risk-aversion ideas to counter such risks.
Nouriel Roubini, the ecomist who was among the first to predict this crisis, is now sufficiently alarmed to advocate bailouts to every troubled player in the economy and massive stimulus on top of that. Disregard the national debt, inflation, moral hazard, corporate malgovernance, "socialism" -- perform triage before the patient bleeds out, and do it worldwide:
http://www.pbs.org/newshour/video/stnmodule.html?mod=0&pkg=21112008&seg=1
Yikes! But he's been right up to now. And he says failure to act boldly now will cost us even more in the long run.
Art a layman:
Art, I agree 100% with everything you say. Of course any projections are at best a guesswork of varying degrees of honesty or dishonesty. But Congress is in a position of being between the rock and the hard place. They don't want to be responsible for being blamed for the loss of all those auto worker jobs, but than again they can't risk being charged with blowing billions of taxpayer dollars on a hopeless case. Obviously we all hope and pray that Detroit can see the light, fix the problems, make the painful sacrifices that must be made, and turn a faltering industry into a thriving international success. But that is no where near a certainty, and so Congress is in the position of all those in positions of leadership; they must make value judgements that are not certainties. If the folks in Washington thought they had a 75% chance of success with only a $25 to 50 billion bailout they would probably be able to defend a decision to grant the money. But if they face a 75% probability of eventual failure, they have a better chance to defend a decision to refuse the money.
We have many problems with our economy, all of which will ultimately require painful adjustments as to how we see the world and our version of free market capitalism. But until we get closer to fixing some of these problems, we need to face the unfortunate fact that our nation is in trouble, and we may have to bail out Detroit for the short term benefit while acknowledging that ultimately the Big Three can not suvive far into the 21st century.
FDR took radical steps to save capitalism. Obama will take radical steps too, but he may not be able to save capitalism. As far as Citibank is concerned, all the government has to do is to make all the CDSs null and void . Why do perfectly good institutions have to fail or be bailed out to the tune of trillions of dollars just because of CDSs and other derivatives? I think it's impossible for the taxpayers to make good on all the trillions of dollars of derivatives out there so why not by mandate take them off Citi's and everyone else's books. Presto chango. No bailout needed, and Citi goes on with its business.
Obviously, the automakers in some form cannot be allowed to fail because of all the jobs at stake. Obviously, the management of these companies should all be replaced because they made horrible decisions and they don't deserve to go on in their positions. If the US government is going to put up taxpayer money to preserve the remnants of these companies, it should put in place its own managerial expertise and take an equity stake. These companies need to be turned around. Why not combine government investment to create new jobs with saving the auto industry and converting it to the green industry of the 21st century. But you can't let the same old CEOs and management team run the show. A government takeover (but not 100%)is called for.
Where's my bailout dammit?!
Why haven't Americans rioted in the street yet?
As for someone posting 25% unemployment wasn't catastrophic because the other 75% had work, are you smoking crack?
What has happened to the United States of America? Everything started falling apart back in the 70's, Reagan's policies have turned out to be disasterious (especially our INSANE trade policies with totalitarian communist China with 30 years of deficits!) Clinton delayed the inevitable, and Bush Jr. has been one of the saddest chapters of American history.
America in the winter of 2008/2009 is a profoundly depressing place, and I'm not referring to an economic depression.
Citigroup needs to listen to the financial community and the Federal government needs to create confidence among investors of banking stocks. The idea of moral hazzard is 180 degrees wrong. IMHO no bank (not BofA, JPMorgan, Goldman, etc.) will be safe if this type of stock spiral is a self-fulfilling prophecy. Here is a suggested 10 point plan for fixing the immediate problem (fundmental problems such as illiquidity in the mortgage market still of course need addressing):
10 Point Plan for Citigroup
1. U.S. Government first announces that if Citigroup's stock remains at distressed levels it will purchase it. Then it begins Tuesday to buy $1 Billion in Citigroup stock in the open market. This is a prelude for other actions that may very well provide the government with an immediate and appropriate paper gain.
2. At the same time as the first announcemnent, the Government and Citigroup explain to the public and financial community the outline of the following remaining steps to be implemented within a specific deadline, e.g. two to three months
3. Government invests $9 Billion in Citigroup and takes back common stock at higher-than-current-market price, say $10 per share, irrespective of price at time of investment.
4. Government buys from Citigroup $11 Billion of redeemable Preferred with a modest coupon
5. Government reinstates temporarily ban on short sellers for financial institutions and permanently reinstates uptick rule for, at a minimum, financial institutions
6. Citigroup reduces dividend to nominal amount just sufficient to avoid major selling by funds unable to hold stock in companies without a dividend.
7. Citigroup sells additional assets/businesses to raise an additional targeted amount, $5-10 billion (over and above current plans)
8. Citigroup makes detailed presentation to financial community as to how these measures provides Citigroup with well in excess of any notion of reasonable capital adequacy.
9. Government makes public statements saying it will do what is necessary to support the banking system in general and Citigroup in particular, including statement that it:
a. does not believe Citigroup is unsound
b. believes there is a dislocation in the equity capital markets regarding Citigroup based on opacity and fear and that is itself a cause not a symptom of the current problem but that it provides an opportunity for government support that will eventually be costless
c. in fact intends to make a profit off its investment in Citigroup (in that regard, the Government will appoint a prominent financial manager to oversee investment in Citigroup, including taking board seat).
10. Recognizing efforts to date have been inadequate, Citigroup creates and implements ongoing shareholder and financial community communication plan that emphasizes listening, transparency and frequent contact; Citigroup hires outsides advisors as necessary to address this plan.
Nice 10 point plan.
Do you appreciate the anger and rage in the Street? I'm not referring to Wall St.
Hot shots responsible for this mess, through incompetence, negligence and fraud ned to suffer serious consequences including prison. Unfortunately, the little guy will take the real hit, the people who caused this mess, at least most of them, are probably capable of retiring right now and living a comfortable life.
I of course realize my sentiment and emotion I stated above are laughed at by the many well placed sociopaths in finance and politics.
What's going to happen to the big 4 accounting firms? They played a huge role in this situation, are they going suffer like they should or profit from the chaos they helped create?
KPMG audits Citi does it not? Doesn't 30-40 percent of KPMG USA revenue come from bank audits? Isn't that much higher than any of the other big 4? Aren't they heavily involved in the morgage industry collapse also? Why aren't they taking a big hit? Now they're going to be given more responsibilty for oversight of the disaster they helped create? The fox guarding the henhouse
Doc:
Seems we've been visited by an amateur psychologist in addition to his many other skills.
The answer to this whole dilemma appears to rest in who writes the best Business Plan. Totally overlooked is the accountant's question to his bosses: What do you want the bottom line to be? Business Plans require assumptions and I can make whatever assumptions you need to support your numbers.
Further we have been told that these must be Viable Business Plans. Now that sounds really professional but what the hell is Viable? If I prepare the Business Plan who's gonna tell me it's not viable? I am not an amateur at doing this.
We are also told that at least one of the Big Three will not get bailout funding. That decision will be based on who writes the worst Business Plan. Decades of history in the car business; tens of thousands of employees, dealers, possibly suppliers, all down the drain because at least one firm didn't have me working for them to write their Business Plan.
There are basically two types of creative people working in the business world. The true creators who come up with fantastic ideas; proffer them and then others flesh out the models. Then there is the creative analyst, exemplified here, who fleshs out the model and thinks he has created something. He promotes the tools of his trade and suggests that anyone who disagrees with his approach must be confused. He pays little attention to the holes in his idea when they are pointed out. He just passes over them, tossing out a; not important or tough luck or some other such swatting of a pesky fly.
The creative analyst gets so fixated on his plan, his solution, that all the king's horses cannot ply him from his ultimate truth. His is the only answer. Oh, he offers that his is just an outline that improvements or better ideas could alter or amend it, but thats' a sham because he won't fathom major changes and can't even recognize flaws.
To a great extent he is, Corporate America, even as he resides elsewhere. Corporate America has evolved, to a great extent through graduate business schools, to believing that the naysayer is the enemy. If the naysayer does not buy into the plan he is part of the problem and can't possibly be part of the solution. It's all about "team" in Corporate America today and "teams" always follow the leader and don't make waves.
Often the creative analyst functions well in a normal environment. For instance if he were an Investment Capitalist looking at a potential investment his current idea would be boilerplate. Seldom are creative analysts good at crisis management. They need structure, they need rules. Decisions can't be made if we don't have a plan.
We are in a huge crisis right now and all the damn plans in the world are not going to make the answers simpler and certainly not more expedient. It has been pointed out that a Plan of the magnitude he proposes would require divulging a whole variety of proprietary information. "Balderdash!", he says - actually he didn't say anything about that issue - "it's just more poppycock conjured up by someone who can't come up with his own plan". Someone who is so confused by his, yes buts, that he can't see the miraculous solutions in Phase whatever.
He doesn't realize that in crisis you have to shoot from the hip, on the fly. You don't have time to piddle around with Plans and analyzing Plans and then arguing about Plans and then asking for more Plans or Plan revisions. Mistakes will be made. That always happens in a crisis unless you get very lucky. Quite often, even though a decision worked, in hindsight, a better solution is discovered. At that point it's moot, except as a learning tool for the next time.
Most historians will tell us, and I believe you have mentioned it more than once, that Roosevelt did a pretty damn good job, until. His major failing, that almost duplicated Mrs. O'Leary's cow, was in trying to get back to planning and balancing the budget. No doubt an action that any good creative analyst would have proposed. If I remember correctly, WWII played the part of the Chicago fire department.
The first kind of creator, listens, absorbs and considers critiques. If he cannot offer logical arguments to offset them he goes back to the drawing board and modifies or creates another idea. The creative analyst has too much invested in his creation. Giving in to, or even considering, criticism is admitting that his tools failed him; that there were holes that he should have seen, but missed. Anathema!
As the naysayer sits by, awaiting answers to his questions or revisions to the proposal that overcome its shortfalls, the creative analyst lowers his head and charges forward. Like a bull in a china shop he is oblivious to reason and logic. He attacks anyone who dares to get in his way, for his is the way.
What we need now is more New Deal. It's what you have proposed. It's what Obama has proposed. It's what many other economists and knowledgable business folks have proposed. We can't be worried right now about the national debt. If we don't turnaround this economy in short order, the national debt will be the least of our problems.
Of all the options available to our vaunted Congress, Chapter 11, loans (or preferred stock), or nationalization, the loan route appears the most viable and we dont' need a Business Plan to figure that out. Currently we are looking at $25B. Given our debt and deficits that's chump change. If the economy turns around and credit loosens up soon, we all win. The Big Three will remain in business and will muddle along. If they use good judgment they'll do better than muddle. It seems that many here forget that the wage disparity has existed since Honda opened their first US plant and the Big Three survived. In fact the wage disparity may have been greater a few decades ago.
Is it also possible that the Big Three were willing to cede market share in regular cars in order to maintain a larger share in SUVs and trucks? Did anyone listen to the testimony and hear that all the Big Three have been repositioning themselves? Cutting back on fixed costs, divestitures, a new union contract that will cut entry level wages in half, through early retirements and attrition. Have they made big mistakes? Is the Carolina sky blue? Businesses make mistakes all the time but generally we are never aware of them.
Net, net, we are in a crisis and we need actions not creating meaningless Business Plans. Maybe that's not the European way, but the American way has bode us fairly well in the past. I doubt it's time to cast it all away.
Great piece, Dr. Reich. What keeps me busy most is what to do about the big three. I think I can imagine what their plans for a bailout will look like (more of the same) and it's not a good idea. It will be throwing good money after bad.
On the other hand, they are fighting an uphill battle. They are not competing in a level playing field, because other manufacturers do not have the health care and retirement obligations they have.
I think we should look in that direction for a solution. First of all, the government should take over their health care obligations in anticipation of a universal health care arrangement. Of course, this will not give them five new energy efficient models they can compete with in 2009. For that they need time, so they will have to stop the arterial bleed they are suffering from now. Management will have to work with the unions to adapt the companies to the smaller market they have to operate in, in order to get rid of unprofitable models and brands and inefficient factories. Unions will have to be forthcoming when renegotiating salaries and benefits with employees.
When the situation doesn't improve, government may have to allow temporary unemployment of workers. But this will have to be an arrangement for the industry as a whole, not just for the big three.
"FAILURE" should not be an option. What is lacking is a "LEADER" who will own the mission and get this job done. The "BIG 3" need to work on a restructuring plan that shows profits at 10 million units annual demand(domestic). And yes, UAW must realize the absurdity of the current contract and agree to reasonable and equitable terms outside a Chapter 11 domain.
As far as the financial crisis goes, I believe this is a failure of the US government and the doctrines behind its policies and decisions. The invisible hand of Adam Smith is an amusing fairy tale but it does not work. There was lax regulation and lax oversight of the financial institutions. The whole system was designed for failure. Imagine a self-regulated society governed by a persoanl honor sytem and a personal code of conduct that does not require law enforcement!!!!! Many practitioners, scholars and enlighted interested people sounded alarm sytems often and many years ago. Unfortunately no one paid attention. I guess the US government policy during the past 20 years was a populist policy designed to create economic growth at any cost. And the people endorsed it because it was "party time". The cost is catching up now. Unfortunately, the little guys end up hurt the most.
I think every reasonable person knows the root and cause of this situation. The priority now is to move decisively and boldly to save the financial sytem and the industrial infrastructure. I belive that CITI and the BIG 3 can be made winners very quickly. The USA needs a great leader to own this mission. President elect Obama has a great opportunity to write the most interesting and critical chapter in history.
I believe that the American people will rise to the challenge and get through this crisis to emerge wiser, humbler and stronger.
Alex Joannou
Canada
Sir,
You have missed some important issues.
1. Citi's fall would couse a disruption of entire financial system, and through this system - of entire economy. GM fall would be a major shock, but not so disastrous.
2. Citi is a side of many derivative transactions - it's partners did want to invest in Citi, they actually wanted to hedge the risk, not to take the risk (companies with fx flows swapped to US$ etc).
3. GM is heavily unionize - Citi is not. In my opinion this makes any general bailout of GM a waste of money. A carefully designed plan to restructurize (devide? scale down? cancellation of some obligations towards employees for sure!) might work, but is subject to political risk.
Best regards,
Dr. Reich,
A $10 billion infusion in GM would disappear very quickly. That's why I think it's prudent, as I've said from the very beginning, to solve the short-term Liquidity crisis with an Immediate Bridge Loan (of $15-$25 billion to BUY a little time to determine what total realistic funds are needed, who needs them most and how (e.g., loans, government ownership, Chapter 11, and/or merger with Chrysler or not).
Industry reorganization and management changes can then proceed over time to get off Life Support through necessary major government assistance. Whether this takes a Chapter 11 course, simple lending, or a combination of nationalization and recapitalization warrants further fast track clarification of 4-5 year cashflow requirements.
Certainly, Chapter 11 would give GM considerable leverage with creditors and equally with the UAW. Certainly, a possible merger with Chrysler would result in billions of cost savings and would likely result in far less damage to economy long-term than allowing Chrysler or GM to fail. No one wants that, including yours truly ... therefore, the tactic of to infuse (and perhaps lose) near-term taxpayer infusion funds NOW (as has always been my suggestion) to base major rescue strategy and funding of same based on better (granted not perfect, but what is perfect) plans and related financial information submitted by Feb. 15 (not my originally suggested March 15) at latest.
Congress's term "Viability" I interpret as evidence of ability to survive not just this crisis but also to survive as a profitable entity in the automobile industry... and,if not, what then?
Obama has said it correctly recently:
"Government assistance must be conditioned on labor, management, suppliers, lenders, all the Stakeholders coming together with a Plan." And he added, "So that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere."
There are many urgent demands on our Debt funds which will mushroom the National Debt to well beyond $12 trillion over the next two years. Not to have some idea of the optimum way to go deeper in debt seems pretty reckless to this writer who's not alone in this judgment with most fellow Americans.
My Phase 1 and 2 steps are nothing more than a suggested timetable and tactic to achieve this sensible approach while paying IMMEDIATE attention to the serious industry fire now burning ... with no pretensions of having perfect answers by any means.
The obvious priority is doing what's right for Mainstreet now and for the long term ... and only by coming together with compromise on an open exchange of ideas will we meet this crisis challenge. No one in this process has a patent on exclusive critique or perfect answers.
It's going to be a rough ride no matter what happens. I agree 100% with Paul Krugman (and Art Layman) that the aim must be to at all costs stay from depression's
cliff-edge with no return possibilities. There's time to avoid such a disaster and it can be helped greatly by staying COOL.
There are strategy choices possible here requiring prompt, objective examination. Personalized outbursts or pretensions of having the final answers get us nowhere. In this respect, Obama is already demonstrating a focused objective coolness and wisdom.
Guarantee that GM can repay its loans by guaranteeing that GM will survive foreign brand competition -- the way other modern OECD countries (German, France) guarantee their high paying auto companies cannot be undercut by lower paying competition right inside their own borders: sector-wide labor agreements.
Mandate that Honda, Toyota, BMW, etc., pay the same wages as Detroit within our borders. They would have to pay more than they pay the un-unionized American south (our East Germany?) to their workers within their own borders -- and then they would have to ship them here. Cheaper to pay Detroit wages here than to pay them there and then have to ship heavy cars and trucks here. IF YOU BELIEVE THEY MAKE BETTER CARS THEY SHOULD HAVE NO TROUBLE MAKING A LIVING PAYING THEIR EMPLOYEES THE SAME.
Japan of course goes TO MUCH MORE BRAZEN EXTREMES to bar competition within her borders. Japan makes a deal to allow American cell phone service in -- Japan splits in two and American service is confined to hill country with no population while Japanese service takes the urban. Japan agrees to buy more American beef -- Japan buys American ranches to sell beef to itself. As a cab driver my Japanese riders from the airports without exception went to Japanese chain hotels. Japan even carries on the charade of being unable to expand Tokyo airport for decades now because of the crazy carrying on opposition of a few local farmers -- conveniently limiting foreign travel of domestic Yen.
Can't imagine Japan or German or Italy allowing American auto manufacturing to undercut and put their whole industry out of business the way Wal-Mart undercuts the opposition: by paying employees much less (Wal-Mart closed 88 big boxes in the German land of same pay and benefits for same job descriptions -- as are the majority of first world lands). Why is the American intelligentsia the only people in the world who blithely acquiesce in the loss of their flagship industries -- to sever wage undercutting yet -- is this their version of American exceptionalism (I know they wouldn't like to think that).
Sector-wide labor agreements are the way business is done in the most of the first, even some of the second and third world -- it is the modern and only answer to the race to the bottom, the underpricing of labor by the underpricing of labor.
Doc:
My bad! I didn't realize that some persons are allowed to make personal attacks while other persons must remain silent.
Could that, too, be part of creative analysis?
There is a difference between a restructure plan and a 4, 5 or 6 year, Viable Business Plan. Even at that a restructure plan would involve some delineation of strategies going forward, the exposure of which could be detrimental to the success of the plan. This is a risk with a Congressional solution or a Chapter 11 resolution.
An interesting dilemma is Delphi. GM is still obligated, contractually, to Delphi, which is currently in Chapter 11. GM set up a $3.6 billion reserve in 2005 to cover liabilities to Delphi, required to satisfy Delphi's bankruptcy court. A GM in Chapter 11 could escape any further liabilities to Delphi likely throwing Delphi's Chapter 11 to Chapter 7. Not sure if one court could overrule the other.
Now a Chrysler/GM merger makes sense? If we believe what we read these are two dysfunctional, poorly managed, on the verge of defunct, companies. Where would the synergy come from? Which of the inept managements would run the merged enterprise? The supposed economies of scale (actually they escape me) from such a merger could not be accomplished without a significant additional outlay of cash. Further it would require more asset sales at a time of depressed asset prices.
It should be remembered in all this that Chrysler, though perhaps making greater strides in cleaning up their operation, is owned by a private equity firm. Jobs are still at stake but should we be bailing out a private equity firm? Of the Big Three, Chrysler has always been the second cousin except for a brief period during and right after the Iacocca era. At GM's recent stock price it is doubtful any such merger would be a stock swap. Perhaps it could be structured with a long term debt package which GM, and/or Chrysler, could then escape in Chapter 11.
In the current malaise we need to simplify not compound the problems. If we can turn our economy around then the market will determine if a merger makes sense. Until then I doubt the government solves it's or anyone else's problems by forcing the issue.
Everyone weighing into this argues that labor, management, suppliers, lenders and all stakeholders need to come together with a Plan. How long will that take? Hard to argue with such a generic statement. Implicit in that statement is that while all will bear some pain it will be labor that takes it in the shorts big time. Suppliers and lenders will take losses but if a Plan is ultimately successful they will make it back in future profits. Management can take big salary and benefit cuts but a turnaround will find all the other stakeholders wanting to reward them for successfully maneuvering the storm. Shareholders will see stock prices rise and they will be on the road to whole again. Labor will suffer the slings and arrows and will never be made whole again. Chances are the upshot will be the demise of unions in the US. That's one of the goals of conservatives in this morass.
Mitt Romney does offer one possibility for labor and that would be to provide stock shares to labor to offset loss of wages. Promising but it dilutes future EPS and reduces future dividend payments thereby muting future stock price appreciation.
Now no one, me included, is suggesting that we just open the vault and let all takers help themselves. Some restrictions are in order, assurances as well. There will need to be a feeback loop to ensure that all agreements are being honored. But further encumbering management with a barrage of timetables and dog and pony show Plans diverts attention from one more sale and one more contribution to profits, or reduced losses.
Is our business wizard Congress going to pass judgment on the viability of these Plans? Are we going to engage one economist and/or financial expert to evaluate them? Do we need a committee of economists and financial experts? Tempest fugits! The success of any Plan is going to be dependent on when the economy turns around and that is a vast unknown. Nobody knows that answer. Ask Rummy.
We're at the dance and we're going to need to stay with them that brung us. The biggest assurance we need is that management doesn't milk the coffers and then let the companies fail. Beyond that, management must and will continue attempts to minimize cost exposures and increase sales. Likely labor will weigh in with help but it might be short of what they would suffer in a Chapter 11.
All these companies have been working on and effecting Plans for their survival. Perhaps the process has moved slower than it should have but only a handful of wise men saw this looming disaster coming. The general consensus was that those wise men were naysayers who were confused. Ring a bell?
Denis Drew:
Astute observations. One thing missing in all this condemnation of the Big Three is that the playing field is not level. Not here and certainly not around the world.
Our insistence on maintaining the aura of "free market capitalism" precludes direct government involvement in supporting our own industry. Not true in many other parts of the world.
The current dilemma has altered that somewhat and the rest of the world is rooting for our success but I can see the possibility that after things return to normal, assuming they will, there will be those around the world claiming foul because the US government bailed out some of its firms enabling unfair economic advantage. They will be especially ticked off that we did it with their money.
Bailing out Detroit is really bailing out the unions. The unions are drowning the car companies and will never let them up for air.
Get rid of the unions then start bailing.
The idea Denis Drew put forth to force foreign motor companies to pay the same as the unions have cornered Detroit into is just feeding the unions.
Auto unions are not needed and not at all sustainable.
Dr. Reich,
This auto-maker crisis has been building up for at least 15 years. Coming up now with an intelligent solution to it with taxpayer money certainly deseves and can absorb a minimum of 3 months ... while meanwhile providing adequate interim Emergency assistance.
I think the key difference between GM and Citi is who gets 'punished' by a failure, and how they modify their behavior as a result.
In Citi's case, the people who get punished are those who saved money and then lent it to a bank (often through a money market fund or bond). If these people lose a lot of money, they will be reluctant to lend to banks in the future (hence the TED spread), which will make it difficult for savers to fund unwise investments (like the housing bubble), but also wise investments (like education or technology).
In GM's case, the people who get punished are those who did not make necessary changes. The union is one example, but I think the dealerships are a more interesting example. There are around 750,000 people in the US employed by dealerships, around 350,000 of those by GM. That made sense when GM sold 50% of the cars, but now it sells only 20%. Yet it has not been able to change its dealership structure. The same inability to adapt is evident with the unions, the product mix, the quality, etc.
I think we have to be careful about discouraging savers from taking risks by lending money. But I am not sure we need to be careful about discouraging automakers from failing to adapt to changing conditions.
Dr. Reich,
While I mostly agree with your analysis I take issue with one of your statements "I'm not arguing that GM should be bailed
> out; as I've noted elsewhere, GM's creditors, shareholders, executives,
> and workers should have to make substantial sacrifices". Why should the workers of GM should again sacrifice to save GM and the economy in general? Haven't they done enough in concessions for the past 20-25 year? and isn't asking the working people of America to sacrifice again in direct conflict to fairness and your calls over the years for fair jobs and wages?
Dr. Reich whether one wants to call it class warfare or not we are in the middle of one. The ruling economic classes have been blessed with unprecedented gains during the last 28 years including the years you were part of the Clinton administration, while the working people and the middle class have lost substantial ground. For you to call for equity in sacrifices to answer the current economic woes is not only misplaced but also demonstrates lack of commitment to the fairness that you have been teaching about.
sincerely
Interesting; the comments as well as the article.
- This borrowing binge - a trillion here, a trillion there adding up to real money - this isn't one of those exponential growth thing-y's that ultimately crashes ... is it? Well?
- Why can't Citi be broken up into a bunch of smaller banks? Is it too hard? How many unemployed 'bankers' are out there with nothing to do?
- Why can't 'Bailout Central' shut down the Credit Default Swap market?
- Why can't hard working Americans have some real money for a change? Not debt- dollars, a real, hard currency? Is it because America isn't rich enough to afford a hard currency?
- Anyone over here heard of Matt Simmons?
- Why can't the auto industry start making streetcars? Every city and town (remember those) in America will have a streetcar system and soon. During WWII the auto industry made all kinds of things including bombers. Can't they do that now?
- Why does anyone think that the same people who got us into this mess in the first place can now get us out of it?
Doc:
Fixations die hard.
Now we release funds to tide the Big Three over for 3 months. Then we have them give us plans for how they will improve things going forward. Chances are, given everyone's forecasts, that the economy will be in worse shape then than now. Of what possible benefit are plans to improve things when we have no idea if, and when, the economy will afford implementation of those plans. Maybe it will help us sleep better but we may have to sleep for a long time.
If the plans appear viable, even Valhallic, does the Congress then commit to funding until the economy turns around, however long that takes?
Many folks for whom I have great admiration are demanding, even pleading, for a plan. A blueprint that proves the gash in our abdomen will heal. Why? Because that's what we've been schooled to believe is necessary.
If our government was worth it's salt they should be the ones coming up with a plan. As in the response to the Paulson request, the Congress needs to decide what level of risk they are willing to take and then write legislation that provides multiples of billions of available funds for the American auto companies.
Congress can establish payout periods, with minimal input from the auto firms, and then can predicate payouts on generic information regarding the use of previously released funds and simple reporting for what the next round of funds will be used for. I say generic and simple because I firmly believe we shouldn't force the industry to divulge to one another or their other competitors what their proprietary plans are.
Is it wise for government to commit $25B or $50B now, only to find out in a few months that it was a waste? We are talking risk here and while we all prefer to have as much knowledge as possible regarding risk before we invest, uncertainty obliterates useful knowledge.
If this turns into a years long depression do we keep the funding going up to $1 or $2 trillion? At some point do we decide enough is enough and pull the plug? Perhaps just as the economy was turning around and the additional unemployment throws us back into a downward spiral.
We are standing at the roulette table. We need to decide how much we want to gamble. We would love to know whether the ball will end up on black or red but there is no way for us to know that. We can take our handheld computer and calculate all the odds. We'd like to know the speed at which the croupier will spin the wheel but that is random, it is uncertain. We either have to place a bet or take our money and go home. We can risk a little and if we lose we can revisit the issue again but the rules of probability are not cumulative. Each new event is independent of previous events.
Suppose that none of the Big Three comes up with a viable plan. Does Congress then decide that letting them all fail, with the attendant unemployment and cascading bankruptcies, is the appropriate answer? Business Plans serve the same function in this dilemma as the infamous sugar to make the medicine go down.
Let's not comfort ourselves by believing that these managers are total oafs and don't have a clue of what to do. And if we hold fast to that comfort why would we waste time requiring them to prove it to us in a Viable Business Plan?
Maybe we should best recall, "in for a dime, in for a dollar". Maybe the European version is more apt, "in for a penny, in for a pound".
Anonymous,
Before we "get rid of the unions" please reflect that 15% of overall income has shifted from the bottom 90% to the top 3% (who were always well educated so it is not a matter of a higher tech economy) over the past 35 years. Did you know that 25% of our labor force now earns less than the minimum wage under LBJ ($10/hr adjusted).
Our so called leftist European counterparts really understand the free market a lot better than we do -- especially the workings of the labor market. Since the beginning of industrialization the default setup is employers as indispensable last lot seller and employee as desperate fire sale seller (just a matter of numbers -- whoever is much fewer in numbers is the last lot guy).
Without unions and/or the highest practicable minimum wage the price of labor becomes mostly about bargaining POWER and leastly about the measure of UTILITY.
If an employer can make a deal with anyone who comes along that sort of kills your ability to bargain. If a union requires the employer to make a deal with you then you can extract your maximum price -- an unhappy bargain for both side (when both are unhappy it is usually a fair bargain).
The same foreign auto companies that pay lower wages than Detroit on this side of the Atlantic and Pacific pay Detroit level wages in their own countries. Get it? American employees are the world's only labor market suckers -- and nobody ever tells them.
I don't blame you for not knowing because you live in a land of economic ignorance -- nobody around you knows the simplest facts either.
PS. Forgot to mention that average income has doubled since the minimum wage was $10/hr under LBJ. Must not be Malthusian at any time -- it's what Republican ideologues live on.
How come we can approve of a $ 700 BILLION bailout to Wall Street investors and executives with no strings attached and deny the auto industry the same considerations unless they agree to totally restructure their industry in ways that make them more profitable and hence be able to repay their loans? Speaking of repaying loans, tell me how Wall Street intends to repay theirs? Somebody needs to get their heads out of their a**es and start growing some b*lls. Time for negotiating is over. What we need is for the government to impose the rules of the game on all industries and let the chips fall where they may. Soft landings for everybody ain't in the cards. The sooner we realize this fact, the sooner we can recover from our wounds and move on.
Dr. Reich,
It is not only homeowners and the
unemployed hurting. Middle class
folks on Main Street
have lost about 50% of
their wealth due to losses
in stocks and mutual funds
all in a matter of months.
Unless the stock
market recovers the average
small business and the average
middle class person will
feel and be poor. For many
it is their retirement money,
the money put away for their
children's education, the money
saved to buy a home etc, gone
with the wind. I am counting
on President Obama and your
intelligent advice to help left
the stock market and restore
the value of stocks that will
enable Americans to go on with
their lives as if the stock
market crash and deep recession
never occurred.
Dr. Reich,
Walking in the dark with fists full of taxpayer money to confront long-lasting solutions to a broken auto industry model is reckless. A minimum of time to identify the best glidepath to steer decisions, energies and monies in the right directions appears highly desirable.
Obama knows this and that is why he maintains an equilibrium when focusing on a Plan First BEFORE "building a bridge that goes no where."
Harry Truman gave equally wise advice in a suggestive (and in almost a metaphorical) way when he said:
"Keep working on a Plan. Make the biggest Plan you can think of, and spend the rest of your life carrying it out."
Given necessity of this aggressive approach in our current multiple crisises, Truman surely would have added: "Make certain the Big Plan of Action is the best and is done with timely deliberation but not in panicky haste when much is at stake."
Idea fixations and explorations in such circumstances are healthy when done in the spirit of give and take ... but become dangerous when parties ignor their mutual fixations. Again, no one has the perfect answer of how to approach the GM (Big Three) crisis. All ideas must be on the table.
Doc:
By definition fixations are never healthy.
There are no perfect answers to the Detroit problem but some a clearly worse than others. Or at least less sensical.
It is not always good judgment to rely too heavily on the musings of politicians.
Bottom line is that Obama lied through his teeth to Michigan and Ohio.
Aides are hinting Obama may not repeal the tax break on the wealthiest Americans until 2010 or beyond. So far, he is back peddling on:
*raising taxes on the rich
*renegotiating NAFTA
*suggesting GM go bankrupt
*bailing out the autos
I'll guarantee you that wasn't his tune when he was campaigning in MI and Ohio.
He's just another lying neoliberal.
Many say that WWII was the only reason that The Great Deppresion finally ended, solving unemployment problem and increasing buying power. I look at it different way beside that it killed unemployed and increased war production. As of first thing it tied up huge excess of investments in war bonds, removed bubble creating investments by destroying the production (weapons), thus balancing the investments versus consumption. Exces unemployed were replaced by women who weren't part of employment pool before the war, so in that regard the war didn't have an effect on employee pool. It was more after the war that returning soldiers were put into schools and building new infrastructure and homes that ended the Great Depression in orderly fashion.
I suggest the same treatment of the crises today. Remove bubble creating investments from circulation by selling infrastructure and green bonds instead of borrowing more from China. Reeducation of prefered populus, like unemployed, and education of upper class on why is patriotic and better for themselves to give better pay to lower classes/ consumers.
It is not true that poor need to be educated on why they should strive for betterments. Do you think that they do not know that? It is their bosses that do not allow them to advance in this self interest world loooking for more money and more commission to gain. It is no wonder why biggest corporations constantly search for ways to make more profit. Biggest ones have enough power to move production out of the country and by that only get advantage of the smaller ones. This is not anymore an economy of size but an economy of cheaper labor while bosses keep profits for themselves. The reason why USA is having production jobless recoveries after every crises is that biggest corporations move production to another countries after a crises diminishes demand for a particular market. The big 3 auto companies would open a plant in another cheap labor country then ruin the same one in USA by oversupply and then close it. Difference in profits goes to planners/ CEOs and then we wonder why CEOs who destroy a company leave with huge bonuses. It is the same thing going on right now with Big 3 and they do not want bankrupcy solely for so public would not find out how much money they have saved in offshore accounts reserved for future outsorcing. They are real terorists, at least unpatriotic even tough they think they serve their investors. They do but only in the very short term. It is a big game for big president.
"I'm not arguing that GM should be bailed out; as I've noted elsewhere, GM's creditors, shareholders, executives, and workers should have to make substantial sacrifices before taxpayers should be expected to sacrifice as well."
So what want General Motors hard working auto workers to make even greater sacrifices than they have already made to "save" the domestic auto industry??!!!
Perhaps you're not familiar with the UAW 2007 contract with the Big Three. I would expect such calls for even deeper sacrifices from Wall Street and corporate America.
Sorry to see that you are now embracing their demands for economic sacrifices from working class people.
I guess my question is that of ability to repay. If GM is as capable of repaying the debts as Citi, if GM is as willing to give up stock and management positions, if GM is as agreeable about putting sallaries on a freeze, we should bail both of them out. THe problem with GM is that they are not willing to sacrifice anything. Whereas Citi took on excessive risk, which is easily fixed by replacing the management, GM has a fundomentally bad operating model that has been losing money like crazy even when the economy was good. That to me is the fundamental difference between the two.
The world would actually be better off, with a smaller, more nimble GM (more like 5-12 separate companies), whereas Citi is plenty nimble, just too agressive.
I live in Midwest and realise that failure of GM will hurt my area a lot more than failure of Citi. But on the other hand, if Citi survives it will likely be able to pay back the aid. On the other hand, even if GM survived it would continue losing money with every day that it is in business.
Toyota, Honda, Hyundai and BMW are hurting. Here in the Bay Area, every day cargo ships disgorge thousands of foreign made cars that are going unsold. Acres and acres of new foreign cars are sitting on lots with no buyers to claim them.
So what happens? Washington tells GM, Ford and Chrysler they are on their own and must compete or die.
Meanwhile, the governments of Japan, Germany and Korea bail out their cherished car manufacturers that provide jobs and incomes to their people and their nations and are symbols of First World status. GM, Ford and Chrysler are already locked out of those protectionist markets and now they can't compete in our own. The American government refuses to bail them out or protect them from aggressive foreign competition. American car manufacturers are allowed to die.
Toyota, Honda, Hyundai and BMW survive due to the intervention of their governments and have now successfully captured the entire US market--the most lucrative in the world.
The American media says, oh well, Toyota makes better cars and many of them are built here anyway. GM's CEO shouldn't have been flying around in a corporate jet while his company made V-8 fuel hogs like the Tundra and the FJ Cruiser that cause global warming. Oh, the Tundra and FJ Cruiser are Toyotas? Excuse me, I meant the F-150 and the Hummer.
So now American workers lucky enough to find employment in the much diminished American manufacturing sector work for lower wages without benefits and have foreign bosses who repatriate profits back to their home countries. Any American who whispers the word "union" is quickly canned. Car plants are built in white areas because the Japanese find whites easier to work with. All the good engineering jobs are no longer filled by Americans. We are just dumb workers with a failing educational system anyway. Toyota and Honda lobby to get the American tax payer to pay for health benefits and retirement so that they can continue to employ us in a competitive "flat world."
Boeing is their next target. After all, every great nation should be able to build jet planes, and obviously the US is a sinking ship. Its best days are behind it.
But, hey, $700 billion for the banks or the world is going to end, right? You think Wall Street spends all that money on lobbyists for nothing? Who do you think is financing our elections and who do you think owns our media? And who do you think is financing those emerging foreign economies with endless supplies of cheap labor that are providing such a great return on the dollar?
It's the banks that make the world go round, as every banker can tell you. And bankers drive Beamers.
Here's the real reason: financial institutions and their byzantine arrangements are a "black box" to the average voter; the situation at GM is "transparent" to use the vernacular. The wage and benefit package at GM is something the average blue collar worker can only dream about. All over New England manufacturing employees (who earn nowhere near what GM union employees earn) are being laid off. Voters are howlingly mad about the excesses of the UAW, to say nothing of the total and deliberate mismanagement by the executives, the likely consequences of which were predictable and understood for quite some time. The average person wants GM to go into bankruptcy because that would end the union contracts and force a change in strategy and management, at which time it would become acceptable to inject public funds and public control.
Oleg,
GM would be perfectly viable and perfectly able to repay -- if the foreign brands pay their American workers the same pay and benefits that GM pays -- if and maybe only if American adopts the same anti-race to the bottom labor law that is used almost universally in modern economies and is spreading to second (e.g., Argentina) and third world (e.g., Indonesia) labor markets.
It is called sector-wide labor agreements -- wherein everyone doing the same kind of work in the same locale (can be a whole country for some industries) works under a single collectively bargained contracts (I presume this ends the use of scabs who have no contract). That is the most comprehensive German version, anyway.
The French and French-Canadian "lite" version would be easy for the USA to adopt. Under it non-union firms simply work under conditions worked out with union firms. We could break it in with just certain industries (supermarket and airline workers would kill for sector wide -- if anyone would ever inform them of the possibility).
Pasted from a comment elsewhere:
Our main need is not to get into Japan (Europe actually welcomed American factories) but that we should not let them get into America unless they pay the same wages and benefits. If they supposedly can make better cars and trucks (our best engineers HAVE be doing defense and space while Europe got a free ride on defense) then they can for sure pay the same wages and benefits and still make a very good living.
American labor has to wake up and realize that the race to the bottom in any labor market -- competing by how little you pay your workers -- is the exact equivalent of monopoly power to the employees under pressure to take less and less. By law in modern Europe and around the world you can no longer compete that way.
Anonymous,
The money is there to pay most Americans more -- at least half a lot more. Did you know that 15% of income share has shifted from the bottom 90% to the top 3%, overwhelmingly to the top 1% over the past 35 years? AND THAT is with a lot more family members working for their shrinking share.
My way of looking at it is that GM is going under, not because of labor contracts but because it's competition is in much better shape without labor contracts. There is no healthy reason in an economy that has doubled average income over the last 40 years -- that grows income 15-20% every 10 years for labor to be taking a cut.
It's all about the race to the bottom -- a condition that is an epidemic in the American economy and not allowed almost anywhere else in the first world. Think sector-wide labor agreements.
Mr. Reich... hopefully, soon we can call you secretary Reich (maybe of labor again?)...
I certainly hope that Obama is still listening to you. I know you are part of his transition team... There has a been a disturbing shift in tone from the Obama camp where it sounds like they are going to do a 180 and now are about to stick it to Michigan and Ohio. I hope he remembers the hard working democrats in these states that got him where he is, and will not forget or abandon U.S. Manufacturing as David Axelrod's comments seem to indicate...
The tailspin continues and without rhyme or real reason we continue to throw good money after bad. Dr. Reich hits all the key points but sadly the bailout has already been announced and Citi has been "saved" for another few weeks.
Here's the deal:
What the financial engineering is doing is "black magic" and no one really knows the implications of failure of such magnitude whereas what the big 3 auto do is well known, ie. manufacturing of autos in principle by the Japanese. Hence the safe route of protecting the unknown instead, given the recent history of Lehman debacle.
Once the regulations of the financial engineering is in place, any and every financial company will also face the same truth as the current big 3 automakers.
Alright, I'll beat a dead horse and tell you guys one more time what the bankers and globalists don't want you to hear. I hope Mr. Reich is patient, because I am a big fan.
Look, you're importing what, 400,000? people on temporary visas. Then the USA is bringing in another 1 million people a year for general immigration.
With the exception of the temp visa holders all the rest are heading straight for the unemployment line.
So, STOP ALL IMMIGRATION NOW!
Hey, there was little complaint during the late 90s when jobs were booming. This is not some nativist plea but pure, unadulterated reason.
Too many people, too few jobs.
THERE IS NO SKILLS SHORTAGE! Universities have created this myth in order to line their own pockets.
Perfect article. I am not sure who said it (maybe Rothbard), but banks can't go bankrupt - they are already bankrupted from their definition! You exchange your products/work/knowledge/... for some pieces of paper and the only value they have is - that all other people believe they have value! Bank assets have value of maybe 1/10 of what the bank holds on fictive accounts. Bank run is question of psychology only, nothing else.
Any solution? Nationalization? Hardly. Once the trust in money is lost, no matter if it's private or public...
Take care
Elli
Mr. Reich, You wrote it even better and clearer then i did in my email to you. Thank you, i tought nobody else knew that. Considering Lehman bankrupcy i would say that Fed run out of money for more bailouts so they did not have an option to save it. And thats why they came to Bush to ask for more funds immidiately after Lehman colapse. Check out their books and that might be confirmed. I read in WSJ about crithical situation in Federal Reserve funds few days before Lehman colapsed.
I believe it is even worse then that with all investment banks on Wall Street, icluding citi which is a mix of deposit and investment bank. It is a very sofisticated piramid scheme where already existing bank is used as base for atracting investments. Investments are used as a base for borrowing with ratio of 10and then particled out as commision and bonuses. Borrowed money is lent to others also after a commission is deducted. Delayed bonuses were used as a basis for equity sale in way of stocks, also commission deducted. money from stock sales used as a basis for more borrowing from other investment banks who did the same. circle is hidden by short borrowing from Fed trough deposit bank part. On the upside, every lending was securitised and sold as further derivative to other investment bank. Original securities were used as asset, even tough their value was sold to others. The same securities were used to sell guaranties of payment in case of defaults, so called CDS (something like insurance). Additional investing was used to pay dividends instead to procure more business. The securities were sold all over the world. And since they did not carry the risk of default on their loans they could lend to anyone, And thats where NINJA loans came from. Once they had to pay up default cases to CDS owners it showed that they owe a lot of money since defaults were massive. And assets became worthless once rating agencies started doing their job.
Once investors became suspicious of this, new investments stoped. Let me remind you that piramid schemes work tremendously well as long as new wictims are comming.
This is so complicated that even me cannot fully follow the trail. It is just very sofisticated piramid scheme, nothing else.
'The 15% Solution"
One possible approach to dealing with the auto crisis -- The federal government would give any one who buys a fuel efficient car from the Big 3 US automakers a 15% instant rebate back on the selling price. This program could have an 18 month time limit. The total of the rebate dollars might then constitute a loan the auto makers would have to pay back.
If effective, this solution would immediately jump start US auto makers by giving them a huge advantage over the competition while they work on the remaining legacy issues. Auto makers would stay employed and no money would go directly to the car makers. I realize there may be issues in that the auto makers don't get a needed big $$$ infusion instantly, and that they may not be able to produce enough fuel efficient car because of the need to retool.
The feds might also think about underwriting an extended car warranty program for this period. Again, the total dollars to do so, could constitute a loan to the auto makers.
If the dollars don't proof out or if this approach does not infuse enough cash into the US automarers quickly enough because the pacing of sales and/or retooling not yet in place some concept is we worth exploring.
Joe Hare
Hingham, MA. 617 755 0898
More.....
A quick direct "15%" instant government rebate (say averaging around $3,000) from the Dept of Treasury paid to consumer with purchase of a US auto maker lower mileage car might make these cars especially attractive.
The problem with the fed using IRS tax return deductions is you only get indirect value (a lower tax payment) and but once a year (April 15)....and higher wage earners get more real dollar benefit.
If you could buy a Camry priced today at $20,000 for $20,000 versus a Malibu priced today for $20,000 for $17,000 (plus get a100K mileage warranty), which would you buy?
Giving a bailout just keeps them from going bankrupt while they try to get a higher % of americans to buy their cars. They have not suceeded in doing that over the last 20 years. Assuming Americans were motivated to buy fuel efficient Gm-Ford-Chrysler cars, the biggest stumbling blocks might be that the auto makers could not retool fast enough to produce enough low mpg cars to get profitable, that they could not get rid of their gas guzzlers, and that they can not work out union entitlements.
To me it looks as if the wealthy haven't been satisfied with how much they can get from looting the current economy. Now they've used debt to stake a claim to the lion's share of the wealth created by generations of Americans not even born yet.
Let me also join Cleveland Machinist in thanking you for always sticking up for folks like us Mr. Reich.
One last thought if anyone is still reading:
If implementation of silicon NANO wire technology eventually increases lithium ion charge holding ability by 10X as promised, then, we will have the choice of a 400 mile range (Cadillac?) for the same battery price or a 40 mile range (Geo?) at 1/10th the price.
The lithium ion battery now adds $10,000 to the price of a hybrid. If that price is cut in half over the years (battery prices don't drop at the rate electronic prices do) and you choose a 40 mile range battery it could cost you only $500.
http://news-service.stanford.edu/news/2008/january9/nanowire-010908.html
Thanks for the insights Robert. I don't know who else is reading either, but I wrote a long article that refutes all the arguments against the government loans for the Detroit 3. I put it here.
http://uh2l.blogs.com/things_ive_noticed/2008/11/weve-heard-a-lot-of-news-from-the-press-lately-about-the--dire-situation-the-american-automobile-industry-is-in-in-pa.html
UH2L
My feelings on the auto bailout are that simply handing GM this big loan will not result in sales at dealerships and production lines returning to normal operating levels. What I feel is needed, given the financial nature of the current downturn, are perhaps guaranteed loans, government to consumer rebates, tax incentives or other incentives to encourage consumers to purchase cars. More of a consumer up approach that would apply to the entire industry including foreign makes(though maybe lesser incentives for foreign makes).
nice post
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Deborah
Term Life Insurance
It is clear that Citi is being bailed out because it presents a systemic threat to our creditors mainly the Chinese. That is why Fanny and Freddy got bailed out. The Chinese are now our masters we are indentured servants to them and our industrial complex poses a threat to them. Thanks Congress, thanks American people that are clueless and not revolting.
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well. lets consider how the economy functions. product design company A designs a product and hires a factory B in china to make it. A must pay B by wire transfer. No other form of payment is acceptable. Citibank unfortunately is THE major facilitator of these international wires. An abrupt collapse of citibank prevents companies from being able to make their products. Bear in mind that the companies most affected are small ones. Mostly 1 person design companies barely scraping by already in their quest to make the good product. So suppose my designer friend cannot order her products from the factories because citibank is in the midst of restructuring. There is a 45 day lead time for production and that doesn't even include customs in china, customs in the US and the ocean journey. Inevitably her little company will be bankrupt. Now you might ask. Why doesn't she make her products in the US? Well, she can't make her products in the US because US consumers will buy her products if they are $8. They will NEVER be willing to pay $45 for that same product regardless of whether it is proudly labelled made in the usa.
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