The Senate is discussing a $25 billion or so bailout for the 3 three automakers. Like the $700 billion bailout to financial companies, and the $300 billion or so for AIG, Freddie, and Fanny, this bailout rewards reckless management.

Senator Feinstein of California believes a loan should not be made unless the industry agrees to produce more competitive, fuel efficient cars. However, the American auto industry has had years to compete with the Japanese on reliability and fuel efficiency and with the Germans on performance and they have failed miserably. Their short sighted management refused to deal with the increase in the price of oil. Instead they continued to produce gas hogs for short term profit. Management has made unsustainable agreements with unions that has added to the their inability to compete. Management has chosen to produce cars that are far less reliable than their Japanese counterparts. They refused to innovate in the hybrid electric market until the Prius was flying off of Toyota’s lots. Loaning these completely ineffective companies money doesn’t change the fundamentals a stitch and simply postpones the inevitable.

I also don’t believe that a symbolic replacement of management will be able to transform the auto industry’s culture of mediocrity – although it will help the politicians look like they’re playing hard ball, even though the move is unlikely to have any real impact.

The best thing for the industry is bankruptcy. Yes, the shareholders and management will lose their entire investments, lenders will lose some of their investment, and union contract will be renegotiated (probably a net loss for union workers). However, this is the best option for restructuring the American auto industry. It doesn’t use tax payer money to pay for it (assuming congress doesn’t make some asinine move like bailout the UAW pension plan). It is the most sustainable long term for making America globally competitive and keeping manufacturing jobs here.

I subscribe to John McCain’s, Barack Obama’s, and Bob Barr’s supporter news letters (i.e. propaganda).

Today I received an e-mail regarding the bailout from John McCain. Here is an excerpt:

If we do nothing, many businesses may fail. Sonic Corporation, a drive-in restaurant chain based in Oklahoma, learned on Thursday that one of its lenders, GE Capital, had stopped extending new loans to the chain’s franchisees. That will block plans to rebuild restaurants, add equipment and open new locations. 

When financing dries up, students can’t get loans. In Wisconsin, more than 100 Milwaukee Area Technical College students couldn’t access private loans to fund their education. Fortunately the school was able to come up with emergency loans, but this temporary arrangement cannot continue. Markets need to work so that people can get financial help and students can be educated.

What pathetic fear mongering! And baseless too! Take the first example, Sonic. Supposing that Sonic does actually want to expand at this point in time (seems like a wise time to put expansion plans on hold), all McCain has said is that ONE of it’s lenders has stopped extending loans. How is that bad? Perhaps GE is overextended and wants to ensure it is adequately capitalized. That is a good thing. Lack of adequate capitalization is what got us into this mess in the first place.

Now take the second example. First of all, John McCain doesn’t give a rats ass about this issue – he’s just using it because he knows the people who may vote for him do care. The student loan industry has been a mess for at least 6 months now. Funny that the issue should pop up now, since McCain needs support of the common man to bailout Wall Street. McCain also fails to mention that tuitions, which have risen much faster than inflation and wages over the last 8 years, will fall as a result of higher borrowing costs – otherwise the school will not have enough students who can afford to attend.

The house rejected the first bailout bill. I don’t expect the powers that be to accept that result. They most certainly will continue to try to get this horrible misappropriation of taxpayer money passed no matter what. We’ve got to keep on them.

I also read an excellent opinion piece on CNN written by Jeffrey A. Miron. In it, Mr. Miron explains the benefits of allowing the failed financial institutions to fall into bankruptcy. He also touches on the problems the government is already causing the market – by keeping the market in limbo while it waits for a bailout it shouldn’t get.

The Senate is supposed to vote on a new bailout package Wednesday. I encourage you to call your Senators and let them know you oppose the bailout. I’d also include a link to the CNN article above to help them get some perspective. I also encourage you to call your congressperson and let them know you still oppose the bailout. Apparently, ordinary citizens have been calling to complain about the bailout not passing after their stocks tanked on Monday – I guess they think it’s okay for the government to prop up their investments just not the investments of large financial institutions. Let me be clear: there is no good bailout! Bailing out individuals will hurt us in the long run and bailing out large financial institutions will hurt us in the long run.

I find it extremely odd that so much trust is put in Secretary Paulson’s opinion of the current financial mess. According to his bio on Time, he was CEO and chairman of Goldman Sachs from 1999 to 2006. He was at the helm of the most prestigious investment bank that was making these horrible investment decisions. Obviously the guy is smart – but smart doesn’t equal right – just like he wasn’t right to allow those risky investments to be made under his leadership. He also sees the world through an investment banker’s eyes – and that world is in crisis at the moment. But guess what Secretary Paulson! America doesn’t need a bailout! Our businesses are strong and we will pull through this mess. Just because Goldman operated on credit and leverage doesn’t mean every business in America does.

Here is a letter I’ve sent to my congresswoman and both my senators. I encourage you to do the same. Feel free to take this and use it as your own.

Dear Senator/Congressman/Congresswoman,

I STRONGLY oppose the Emergency Economic Stabilization Act of 2008. Please vote against this bill. This plan puts too much power in the hands of the executive branch, puts 700 billion taxpayer dollars at risk, encourages unbridled risk taking in the future by financial institutions, and will not help me out a stitch. Sure, my 401(k) and stocks are going to be severely beat down over the next several years as we go through a recession but I don’t care. The stock market does that sometimes and I can handle it. Credit will be available, but it will probably cost more, which is good – look where cheap credit has got us! And yes, home prices will continue to fall – and so they should! They are still way too high. Where I live most first time homebuyers cannot afford even a 2 bedroom condo – even with two incomes.

There is no good reason you should support this. You are being rolled by the administration. Not that I think they are being malicious, just that they are blowing the problem completely out of proportion.

Let me reiterate how strongly I feel about this issue. In the long term, this plan is bad for working class Americans. It is bad for me and my family. If you vote to pass this bill, I will hold you accountable at the polls and do everything in my power to convince everyone I know to do the same.

Thank you.

This morning I received an e-mail update on the recovery package from my congresswoman, Anna Eshoo. In it she writes:

Each of us is outraged about the circumstances that have brought our financial system to near collapse. In my view, the Administration has practiced “cowboy capitalism”, saying the markets must be allowed to run free, but they instead let Wall Street run wild without accountability, without transparency and without enforcement or regulations to protect the American taxpayer.

First, she claims we are all outraged about the circumstances that led up to this without naming specifics that we probably would disagree on. Without government created institutions like Fannie and Freddie that artificially encouraged home ownership, the current problem would have been less significant. Without government subsidies to home owners that renters don’t get (i.e. mortgage interest is tax deductible but rent is not) home prices would not have inflated as high as they did – and thus the total cost of the problem would be less. Congresswoman Eshoo, on the other hand, seems to view “cowboy capitalism” as the source of the problem and tries to wash her hands of the problem even though she’s been in office since 1993. Take some responsibility yourself, congresswoman.

She goes on to say the current administration let companies run free with no accountability. Give me a break. How about letting them fail? There’s some market based accountability for you. You, Congresswoman Eshoo, are removing the ultimate accountability by endorsing the rescue package.

Towards the end of her letter, congresswoman Eschoo enumerates elements she’s hopeful the legislation will include, the final point is:

Protection of School District and City/County Investments

• Assist school districts, cities and counties who had investments in failed institutions.

Why should school districts and local governments who made bad investments be bailed out? This is so typical of big government arbitrarily picking the winners (in this case government investors) and losers (private investors) based on their personal biases of what is good and what is bad. This kind of federal government hand holding of local governments only encourages the behavior of local governments continuing to invest without considering the catastrophic case (i.e. large reduction in home prices). She is also pandering to fearful parents. Everyone wants their kids to have a good education, so her suggestion is to give the schools with the worst financial management the most money. Great idea.

In acknowledgement of reality (i.e. congress is going to pass this bill regardless of the public’s opposition), congress could make it a lot better than it is. They are trying to pass this thing way too fast. Mark Cuban wrote a good post with some ideas for making it more effective. If congress is going to turn this bad idea into reality, they should seriously consider some of his suggestions.

In my previous no bailout post, I encouraged you to call your representatives. One of my senators, Dianne Feinstein, sent me a response this afternoon that contained a statement she made on the Senate floor yesterday. She said:

My constituents by the thousands have made their views clear. I believe they are responding to the original 3-page proposal by the Secretary of the Treasury.

Let me be clear, Senator Feinstein. I do oppose Secretary Paulson’s 3-page proposal. But I also oppose any any other taxpayer funded rescue plan. You are misrepresenting your constituents and trying to use us as political capital for furthering your agenda for the rescue plan.

In her statement, Senator Feinstein also said:

Hurricane Ike shut down refineries on the gulf coast 2 weeks ago, and now, today, people are waiting hours in lines for gasoline in the South. Similarly, the collapse of the financial sector would have severe consequences for Americans all across the economic spectrum: for the person who owns the grocery store, the laundry, the bank, the insurance company. Then, if the worst happens, layoffs. And even more than that, somebody shows up for work and finds their business has closed because the owner of that business can’t get credit to buy the goods he hopes to sell that week or that month.

This is classic FUD. It also appears Senator Feinstein doesn’t know how businesses work. The kind of credit you use to purchase goods does not require financial institutions. It is called Net 30 (or some variation) and there is no bank or financial institution involved. It works like this: Suppose you sell computers. You have a Net 30 agreement with the computer manufacturer which allows you to get the computers for 30 days before you have to pay for them. This gives you a chance to sell them before your bill is due.

That Senator Feinstein is married to investment banker Richard C. Blum gives me additional concern that she is seeing this crisis from an investment banker’s point of view – a point of view that sees the current financial mess as such an important problem that it will affect everyone.

So let me be clear, Senator. Do not go through with any financial rescue package. Do not buy or insure “toxic loans” or other difficult to value securities. Do not invest taxpayer dollars in failing businesses (or any other businesses for that matter). Do not provide lines of credit to high risk institutions (or any institutions for that matter).

Reader, I encourage you again to call all your representatives and let them know you oppose any financial rescue plan. It’s time to keep the pressure on.

As if the AIG, Freddie Mac, Fanny Mae, and Bear Sterns bailouts weren’t bad enough, this last week congress has been considering a wide scale financial rescue plan proposed by the executive branch that will require 700 billion taxpayer dollars to fund. Congress is debating what this money will be used for and what kind of oversight they want (the executive branch wants a blank check with little or no oversight, of course). One use of the money could be to buy up “toxic loans” to help cleanup bank balance sheets. It is possible the government will actually make money on this entire deal, but that is far from certain – and it is also beside the point.

The financial institutions that are in crisis have put themselves in that situation over the last 8 years by making loans to unqualified home buyers – a lot of times requiring neither a down payment nor income verification (i.e. liar loans). These lenders loaned money to people at the height of the housing bubble, didn’t make sure they could make their payments, and didn’t give themselves a safety cushion by requiring a 20% or so downpayment. What where they thinking?

The irresponsible borrowers, on the other hand, lied, in many cases, on their stated income loans, bought houses they couldn’t make the payment on once the adjustable rate kicked in, and in some cases bought multiple houses to try to flip. This is risky investing. I don’t expect anyone to pick up my losses in the stock market. Likewise, they shouldn’t expect everyone else to pick up their losses in the real estate market.

So what can you do to stop the government bailout? Make your voice heard. Here are some steps you can take to make your opinion known:

• Call or e-mail your congressperson. Go to the house of representatives web site and then enter your zip code in the upper left hand corner to find your congress person.
• Call or e-mail both your senators. Go to the senate web site and select your state in the upper right hand corner.
• Sign the Tax Payers Against a Wall Street and Mortgage Bailout petition. Press the button that says “Click Here to Sign Petition”.
• If you’re on Facebook, join the Americans to Stop the Bank Bailout! group.

When you call your representatives, you can simply say to the staffer who you talk to “I oppose the financial rescue plan. Please let the senator (or congressperson) know. Thank you.”

Please leave a comment if you have other ideas for opposing this bailout.

CNN is reporting on the government bailout of AIG.

What is going on? I feel like I’m living in a Twilight Zone episode where America is a socialist country. What happened to the “private” in private companies? Maybe the Fed and Treasury are confused and believe a publicly traded company means it’s really owned by the government.

The media continues to justify the government’s actions as necessary to prevent a major financial crisis, though in my estimation it is better in the long term to let AIG default on their loans because a major default like this would:

• Put more pressure for lenders and investors to provide better oversight of the companies they invest in (at least until they forget about this crisis when the next bubble comes along)
• Limit direct losses and risk to investors and lenders in AIG rather than spreading it out over all taxpayers
• Stop the current trend of big government bail outs of large corporations (e.g. Freddie Mac, Fannie Mae, Bear Stearns), which will only desensitize the public and establish precedence – both which may make it more common in the future.

More importantly, the government sucks at running pretty much anything besides the military (and even they are infamously wasteful). I don’t see how it is the government’s and our responsibility as taxpayers to prop up large corporations – even if their failures will have effects on the broader economy. Recessions are normal market corrections that need to happen. A lot of companies dug themselves really deep holes and now the market needs a serious correction. The government bailing out a few of the big dogs doesn’t change the fundamentals but rather postpones the inevitable and spreads the losses over all taxpayers. I think welfare programs stink, but this is especially disgusting. For all the clamoring that Republicans did in the 90s to reform welfare with the support of President Clinton (which made welfare better than it was), this is far worse. The $285 billion (estimated for Freddie, Fannie, and AIG) is like loaning 10 million American’s with bad credit $28,500 each to keep them out of foreclosure. We’d rightly be pissed out of our freaking minds if that happened and so we should in this case as well.

I also cannot help pointing out how one sided CNN is. There is no mention of the negative consequences of the government taking ownership of AIG and becoming responsible for their debt, only of how it will help stabilize the world markets. That is first class, one sided reporting. I applaud you CNN for your journalistic integrity. Why should U.S. taxpayers be responsible for saving world markets?

There is a lot of turbulence in the markets – and for good reason. A lot of companies are built on a house of cards and the effects of their bad management and people who invest in these badly managed companies should be allowed to ripple through the market. Why should the government and U.S. taxpayers give a rats ass if world stock markets are down for the next 5-10 years. Why should U.S. taxpayers who don’t even invest in the stock market have their money used to artificially prop it up?

The only thing good that happened is that – just prior to the bailout – AIG stole… er, raised… $20 billion in private money before the government took over, so that should offset tax payer risk somewhat.

I haven’t seen Obama’s or McCain’s opinion on the AIG takeover, but I doubt they are going to say it was a bad idea, based on their general agreement with the Fannie and Freddie takeovers. The Senate and House appear to have the same mob mentality that was rampant on wall street with the housing market (must bail out, must bail out, no other options, must bail out). 534 Manchurian candidates (-1 for Ron Paul).

Fortunately, there is another.