The GM/Ford/Chrysler Bailout

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.


Senate Passed Bailout Bill

You probably saw the news today that the Senate passed their version of the bailout bill. It was expected to pass and did so by a wide margin – 74 to 25. It also appears that many members of the house are changing their mind since they had many constituents call in Monday and Tuesday after the vote and following stock market tumble. Come on people! Do not be so short sighted. A single day in the stock market means nothing. Committing $700 billion to a financial rescue package is going to have serious consequences: increased government power, allowing the financial institutions that behaved so badly to continue, and increasing our deficit – the money has to come from somewhere and you know how much government hates trimming their wasteful programs.

The Bush administration has used fear and little evidence to scare congress and the citizens into an expensive project with no exit plan. Sound familiar?

We need to keep the pressure on the house. They are the only thing standing in the way of this bill turning into law. Let’s take care of our current problems today instead of having our grandchildren pay for them down the road. Let’s keep government power in check. Call your congressperson and give them a piece of your mind!

McCain’s Scare Tactics

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.

House Rejects Bailout – Expect More of the Same

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.

Henry Paulson

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.

I Oppose the Emergency Economic Stabilization Act of 2008

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.

My Congresswoman, Anna Eshoo, on the Bailout

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.