Banks, but not car companies

For the record, I'm not in favor of bailing out anybody. However, I don't agree banks don't "produce" anything. In its most basic terms, banks serve as the intermediary between lenders and borrowers and grant credit. Imagine how backward we would be if there weren't institutions that would pay to safeguard our money and provide credit to entrepreneurs to create businesses/jobs/wealth. Therefore, they "produce" a vital social/economic function.

With your logic, if you want to bail out GM such just for the sake of its cars being "a real product produced by people’s labor," should we bial out the almost defunct buggy whips and horse-drawn carriages. They are, after all, "real products produced by people's labor."

The government shouldn't bail out anybody. It doesn't have the money and, even if it did, it wouldn't know where to better allocate it. The USSR "planned" it many times, with disastrous results.

Point taken. And I'm also opposed to bail outs generally. But I find it odd that we're rushing to bail out banks, rather than industry. And that we castigate the automakers for a mess they've made for themselves (which is partly true, of course), but rush to save banks that created the current crisis on the simple premise that they're "too big to fail."

My only point is that if the government is going to get into the business of bailing out companies, I would rather it bail out ones that produce physical products that drive the economy (like automobiles). The automakers went to Washington for a $25 billion loan (which they would've paid back, w/ interest); Citicorp got the government to just take over roughly the same amount of its toxic assets only a few days later.

It does not matter if they bailout the auto industry. Its a band aid on an amputee. The auto industry has been moving to southern states for decades now. The Big 3 has 47 billion in debt, even if the fed gives them the 47 billion, they are still losing market share to Toyota plants located in places like Alabama, Kentucky, Indiana, Texas, West Virginia, and Mississippi. Honda in Ohio and Georgia.

The banking bailout was a waste too. It was funny that congress was SHOCKED that the banks did not continue lending a previous levels after the bailout. All we did was keep the guys who proved they cant run a bank in their job.

I was pumped up on electric cars, but after reading about the problem with lithium supplies for the batteries(there simply isn't enough for more than 1.8 million cars and the world produces 60 million a year), I am not so excited.

here is a link about lithium:
http://www.meridian-int-res.com/Projects/Lithium.htm

Yep, w/o a major restructuring, the Big Three won't last much longer. And I was also angry about the bank bailouts to begin w/. I just wonder why the government has taken it upon itself the job of picking winners & losers in the marketplace (which is what they're doing), and if so, why their preference for the financial sector rather than industry. Although currently, about 20% of graduates from US higher education institutions are business-related majors. I think that's part of the problem, too. The future is made by engineers, not MBAs.

I understand your point as well, but I don't think the United Socialist States of America (USSA) govt should be bailing out failing industries. Not only it messes up with entrepreneurship and innovative ideas, it forces consumers to continue to use bad and expensive products. Imagine if the then "too big to fail" the buggy whip and horse-drawn carriage industries would have been protected from Ford's Model T. Would Ford have been able to compete against those subsidizes industries? What would be our means of transportation today?

Besides, there is zero guarantee that the "Big Three" would only need $25B and that they would be able to pay it back. The amazing part of all of this is that people are throwing numbers totaling hundreds of billions, even trillions of dollars as if they were a few bucks. I think people really don't want to understand the consequences of printing and/or borrowing so much money.

USSA, indeed.

First, I'm not sure why a free market can't coexist w/ some government intervention. It does in Europe. It also has in the US for decades (farm subsidies, anyone?).

Second, if we're going to not intervene in the economy (and I'm OK w/ that as an option), then we should NOT intervene to bail out banks. Period.

But if I had to choose, I'd rather see a bank go under than a car manufacturer. But Congress & the White House disagrees w/ me, apparently.

Europe: higher unemployment, less quality health care, stagnant economy, high taxes. It would even be worse if it had to devote more money in its national defense, but the US spends a huge chunk of dough doing that.

Don't even get me started with farm subsidies. I could easily write a few thousand words why it's a travesty.

In my view, here are some of the problems with government intervention:

-Free markets are a peaceful and voluntary exchange of goods and/or services that provide what people want. It's a continual process of discovering what people demand (which is much more complicated than it sounds).

-Unlike free markets, government interventionists purport that they already "know" what's ailing the economy and "plan" what to do to make it better according to "their" standards, and they have the monopoly of violence to force their plans down our throats. Furthermore, its policies distort markets. The USSR at one time dictated prices for more than 8 million items because those were the ones they thought they ought to be. Look how well that turned out. The Fed sets what the interest rate "ought" to be, and the Treasury pumps trillions of pieces of paper because it decides some sectors of society need a "stimulus."

I could go on and on, but it's mostly government policies that got into this mess in the first place. We're supposed to trust them that "this time" they'll do it right?

Great, now I feel depressed.

Yep, I agree. Part of this mess was caused by the government insisting that more people should buy homes, and pushing banks to make that happen. But I still stand by the argument that if the government is going to pick some companies to subsidize rather than others, it should at least pick companies that make something. Or it could spend money on infrastructure (roads, bridges, schools, etc.). Bailing out banks, which do little more than move money around, is not a top priority, IMHO.

Yes but the thing to do is not to expand the bailout but to stop altogether. I think we should apply the old saying: "When you find yourself in a hole the first thing you do is stop digging." I dont think that the key to getting our country going again is to invest more in failed business plans. I don't think the government should borrow money in order to lend it to banks in the hopes that they lend that borrowed money to someone with bad credit. The ship has already sailed on easy credit. We need to fix the problem, and the only sound way to support more lending is with savings. I have had enough of the government trying to put English on the market.

I heard a recent estimate that the big 3 has an over capacity of 4 million vehicles. Considering GM produces 3.7 million, I would like to know how they are going to survive. (In the 80s GM produced over 7 million cars alone.) Especially when Toyota is increasing capacity next year in US plants by 500,000 and Honda by 350,000, and more in 2010. Do we intend to close the successful plants? How is this supposed to work?

If I may make three points:

(1) Government encouragement of home-owning really has very little to do with the current mess. The policies in question all began (depending on which) between 1933 and 1977. I don't believe that said policies were necessary to cause the housing bubble and resulting mess, but no serious observer can argue that they were both necessary and sufficient. The timing is too wrong.

(2) There are very good reasons to bail out banks. Rather than go into them (others, including the president-elect, have done that far better than I possibly could), I'll just point out why they apply to the automakers:

(a) The Big Three are very big, with over three million jobs connected to them in upstream suppliers and downstream retailers. Those three million jobs, in turn, support millions more in the industries that sell goods and services to auto-sector employees.

(b) The credit system is currently frozen, despite the money the government has pumped in. (Things would be far worse without that bailout, but again, I'll leave explaining that to Larry Summers and Barack Obama.) Result? If the automakers enter Chapter 11, they are unlikely to obtain debtor-in-possession financing. Without such financing, they won't be able to make payroll and will likely be liquidated.

Digression: Most businesses rely on borrowing to make short-term lumpy costs, such as payroll. Take, say, an air-conditioning manufacturing, installation, and service company with 200 employees. It can keep, say, $660,000 sitting around in a bank account every month to meet payroll. Or it can buy $660,000 worth of plant, machinery, worker-training and the like and borrow the money it needs on the 1st of every month. As long as the interest rate on that one-month loan is less than what the company can earn from investing in itself (and if it isn't, why is the company in business at all?) it makes sense to rely on the credit markets. Unexpectedly shut those markets down, however, and all sorts of healthy firms will find themselves going under.

(c) Liquidating the automakers in the middle of a financial crisis (unlike, say, liquidating them in normal times) will throw three million people out of work. It will also have one horrible short-term effect and one terrible long-term one. The short-term effect is the blow to confidence. Maybe people won't run for even higher hills if the Big Three go under, but that is not a risk that I would want to take. The long-term effect is the loss of the firm's organizational capital. Under normal circumstances, the Big Three could go bankrupt and emerge under different management, with a different set of contracts. Under current circumstances, the Big Three are likely to wind up broken up, their plants sold for parts, their design and engineering teams scattered. That loss of organization capital will be hard to replace.

Put (a), (b), and (c) together, and I strongly favor a bailout for the Big Three. Of course, I also want their shareholders wiped out and their management teams replaced.

Add (a), (b), and (c) to the digression, and I want both the financial system temporarily nationalized (which is what the bailout will ultimately amount to) and the auto industry bailed out.

In other words, everybody above is wrong. A financial bailout is a priority because letting the credit system stop completely would be far worse for everyone. "Free markets" are meaningless in an financial panic, unless you want to repeat Secretary Mellon's mistake. ("Liquidate everything!") Bailing out the auto industry is not a "band-aid on an amputee," even if they wind up back in bankruptcy once the financial crisis has passed.

Hope that helped.

How will GM survive? Who knows? Improve product quality, streamline management decisions, lower expenses by cutting part of the ridiculous pension and health care costs, invest more in R&D, etc, etc.

I'm not an expert in the auto industry, but I don't believe it's "too big to fail." The "Big 3" certainly are big, meaning that they use unusually large amounts of productive resources. If they have reasonable potential to put these resources to good use in the future, Chapter 11 bankruptcy will likely uncover this fact and ensure that these firms are not disassembled. But if the only way to keep these firms operating is a government bailout, then taxpayers will be subsidizing the continue employment of gargantuan quantities of productive resources in unproductive pursuits. That's a recipe for economic stagnation.

Debating these issues on a weblog is pointless. I do have to wonder, though, Anonymous, how it is that you have failed to notice that credit markets are not currently functioning, and thus the normal Chapter 11 process is unable to work.

I'm not surprised that you've missed that the opportunity cost of capital is currently close to zero. That's an abtruse point. But it is still an important one. After all, it implies that the opportunity cost of a bailout is also close to zero, while the cost of failure right now is quite massive.

Now, you did earlier write that Europeans enjoy worse health care than Americans, which is contrary to fact. (No, really, it is contrary to every study of health care outcomes ever done, including those that account for obesity and other "lifestyle" differences. It is also contrary to my personal experience in France and Spain, but anecdotal evidence is never reliable.) You've also written that Europe has a "stagnant economy," which is also contrary to fact. Since 2000, GDP per person in the Euro-12 has grown at 1.6% per year, while the U.S. has grown at 1.5%.

Those rather major factual errors do, of course, cast some doubt upon your other statements.

But they aren't relevant, whereas missing both that capital markets aren't working and that the opportunity cost of capital is zero are sort of major things not to notice.

It is reasonable to worry that the Big Three might become continuing drags on the national exchequer even after the economic crisis passes. But that is a worry for the future, and a kind of problem with which many government have dealt quite effectively. Allowing three million jobs to evaporate in an environment of near-panic, however, is not something with which any government has dealt with particularly well. Nor is it something with which the citizenry of any country should have to tolerate, when there are easy means to avoid it.

GM currently has 20% of the US auto market. That's way down from 40 years ago, and it's unrealistic to think that it will rise substantially regardless of what is done.

But if that 20% disappeared overnight, it would be catastrophic to the rest of the economy. Not just from the former GM workers, but the collapse would send shock waves through the rest of the auto industry - parts suppliers could fail, and that in turn could badly hurt Toyota, Honda, and all other foreign auto companies with plants in the USA.

Chapter 11 is the obvious answer - so that GM can reduce costs so that will eventually make a profit at its current market share. But it will only work if GM is able to get credit while it restructures itself. As Noel M. mentioned above, given the current state of credit, GM could easily be forced into Chapter 7 (liquidation).

For GM to be a viable company again, the following actions are needed:

1) Chapter 11
2) Loan guarantees while it restructures
3) Nationalize pension obligations for those already retired or approaching retirement, and for retiree health insurance.
4) Consolidate brands and dealer networks. Close Pontiac, Saturn, GMC at a minimum.
5) Bring current employee compensation in line .with that of American employees of Toyota, Honda, etc. and eliminate inefficient union work rules

@noel: The credit markets are functioning. People are getting loans, if you have decent credit. Its just that you need a 700 FICO score to get a car now, which is just moving back to the standards of 5 years ago. People are still able to get credit cards. New offers are down 17% but they are still going out. Toyota is still offering a 0% rate. Yes, there is a credit crunch compared to when you could get a house with zero down and no proof of income. But is the tightening of standards unreasonable or are those standards likely to change because the fed throws money at the problem? I don't thinks so. It has not worked yet.

The reason GM cant get funded is because they are a bad risk, which is already in debt $47 billion. How do you figure the opportunity costs of investing in GM is zero? Considering their situation, I would say that there are many better places to spend that money, than down the rat hole that is GM. I think GM agrees otherwise they would go to their creditors. And the creditors are relatively motivated to contribute because they would get more back if GM stays in business. How many decades does GM have to loose market share, and how much do they have to go into debt before its not panic?

The government just wants to scare the public to death to force down its collective throat this massive crap sandwich.

Europe: higher unemployment, less quality health care, stagnant economy, high taxes. It would even be worse if it had to devote more money in its national defense, but the US spends a huge chunk of dough doing that.

Uh huh. Well I'm from Ireland where we have lower unemployment, marginally better health-care, booming economy (up until recently) and lower corporate taxes and (very) slightly higher personal taxation.

I live in Sweden, which has identical figures to the US on unemployment, a health care system about a million times better (this is a rough estimate) than the States, a decent economy - could probably be described as stagnant but delivers a far higher quality of living to it's citizens than the US (there are no hobos here, for instance), but has massively higher taxation.

So you can't really tag "Europe" like that because we're made up of different countries with different policies.

You know, I've lived in the States and it's great if you're educated and have a good skill, it's one of the worst countries in the Western world if you're down on your luck. At least here (Sweden) you can have a very good standard of living if you have a skill, and a reasonably good standard of living if you don't, and if you are down on your luck you can still pick yourself up and make something of your life, instead of having your house repossessed and be thrown out on the street when your unemployment runs out.

No "hobos" in Sweden? (how strange to hear such a word from politically correct Europe) Uh-huh.

Let's see how lavishly Sweden (or any other European nation, for that matter) spends on its citizens if/when the US stops subsidizing a big chunk of its defense. By the way, I'll take "being out on my luck" than being taxed to death any day. At least I have a much better chance to improve my situation than anywhere else. Have you compared social mobility statistics between Sweden and the US?

If the US is only "a great place" only for those with education and skills, why is that so many millions around the world try to enter it (legally and/or illegally) and so many stay? Does it compare to attempts to immigrate to Sweden?

You seem to not know much about the multiple welfare programs in the US, which is more patently evident with the multi-billion (trillion?) dollar (I call it) crap sandwich US the government is doing in name of "doing something." Now that's nothing to be proud of.

Now, I have nothing against the Swedes. I heard it has beautiful cities and tall statuesque blondes. I'd love to visit it someday. Live there? No, thanks.

I am always amazed by the utter ignorance on international issues that some Americans are eager to display. For example, the assertion that the US has the best healthcare system in the world, repeated ad nauseam even by some presidential candidates, when all available data say that that is far - really far - from being the case.

Apart from the well-known (and appalling) fact that the US is the only industrialized country that does not provide universal healthcare to its citizens (45+ million people with no coverage), it also ranks close to last among industrialized countries in terms of basic third-world indicators such as infant mortality and life expectancy. For instance, in the OCDE statistics for neonatal and infant mortality for 2003 (and things have only gotten worse since then) that compares 29 countries, the US ranks 25, not far above from Mexico and Turkey. What is even worse, the US had one of the lowest declines in neonatal and infant mortality in the period 1970-2003, that is things are not getting any better. Same thing for life expectancy. US: 78 years, below most European countries and comparable to Cuba and Costa Rica. Sweden: 80.63 years.

Same thing about the myth of social mobility. In international comparisons, the United States occupies a middle ground in occupational mobility but ranks lower in income mobility. And do not get me started with education.

No immigrants want to go to Sweden? Think again. Anybody having a little more curiosity about the world than Sarah Palin knows that most Western European countries are being flooded by would-be immigrants from Africa, the Middle East, Turkey and the former Yugoslavia. Sweden took in many more refugees from Iraq (in absolute numbers) that the US did (and what made them to want to leave Iraq in the first place if I may ask?).

If you actually travel to Europe and not just rely on Rush Limbaugh stereotypes about taxes and what not (I did study and work many years in Switzerland, Germany and France and I pride myself in being fluent in four languages), you would soon realize that average people in these countries, most often than not, enjoy a higher standard of living than their counterparts in the US. The US has a lot to learn from Western Europe; I certainly hope that the next US administration will bring a little more humility and open-mindedness.

@Jorge: I completely agree. Even though I'm a big fan of the US (and think it has some pluses when compared to Europe, particularly in terms of race relations), I find the knee-jerk "USA is #1" assertions hard to take seriously.

While we're at it, the US also ranks well below OECD (and even many "third world" countries) in terms of basic "social educational" indicators, particularly things like engineers per capita or multilingual speakers per capita. I posted about this issue in particular: America's Challenge for the 21st Century

Even though I'm a big fan of the US (and think it has some pluses when compared to Europe, particularly in terms of race relations), I find the knee-jerk "USA is #1" assertions hard to take seriously.

I agree with you, Miguel, that the US does a better job than Europe on race relations. Traditionally, the US has also done a better job on welcoming and integrating immigrants (this may be changing, though). I think both sides of the Atlantic can learn a lot from each other.

I am very optimistic that the US will emerge from this crisis as a stronger, more social, more compassionate and more open to world country. The reign of unbridled capitalism is over. Not a moment too soon if you ask me.

"Utter ignorance." My, my, getting testy, aren't we, Jorge?

Yeah, I already heard that the US ranks way below a bunch of other countries in a bunch of categories, bla, bla, bla. Health care is a favorite one. Have you ever heard of Medicare or Medicaid? What about those many assistance programs providing health care for those above the poverty line? By my part, I'm glad the US doesn't gave universal health care since the one we have now is "wasteful and inefficient." http://www.washingtonpost.com/wp-dyn/content/article/2008/11/29/AR2008112901025.html?hpid=topnews
As you see, the solution isn't just throwing money to the problem.

At least in the US you don't have to wait months for surgery or other types of medical care and die waiting as in "universal healthcare countries." For example, in Sweden, 77 people died while waiting for heart surgery. http://www.nationalcenter.org/NPA555_Sweden_Health_Care.html
Again, how much would Sweden and other European countries would be able to lavish all these goodies on their citizens if a big chunk of its defense wasn't subsidized by the US? They're already having trouble with their aging population.

Now, regarding your international comparison about income mobility, couldn't you have summarized what "median ground in income mobility" and how it arrived to that conclusion instead of throwing me an 18 page study? Written by a sociologist, no less! What, no economists available?

Your funniest quote:

"...you would soon realize that average people in these countries, most often than not, enjoy a higher standard of living than their counterparts in the US..." OK, I dare you on that one. I don't know what "average people" means, but let's compare what the poor in "those countries" have as opposed to the poor in the US.

What amazes me is the frustration of those who always highlight US flaws -- and undoubtedly it has many -- but at the same time have can't comprehend how it achieved its superpower military and economic status, and is a magnet for millions of immigrants around the world. And by people who speak less than 4 languages, no less!

PS There is "unbridled capitalism" in the US? Now that's really funny.

to your original question...think of it this way. Finance is the blood of the economy, whereas the auto industry are the legs or arms. If the body needs a blood transfusion, you do it, you'll even easily find people willing to donate blood. As far as your limbs, you can do without them and nobody will donate one. Blood goes everywhere and is needed by all parts of the body...your limbs, while nice to have, are not vital nor do they affect, say your liver or eyes.