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Why I'm less offended by a potential "Big 3" bailout than I am by the bailout of Wall Street

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November 13, 2008 – Comments (10) | RELATED TICKERS: GM , F

There's no shortage of hilarious cartoons out there about the current mess that the "Big 3" automakers have gotten themselves into.  The promise of comedy is the carrot at the end of the stick to get you to read my thoughts on the potential bailout of the auto industry first.  Deep down I know that bailouts of terribly run companies (and take it from someone who works in the industry and has been squawking about it for some time, that is exactly what the Big 3 automakers have been) are wrong. 

Having said this, for some reason I am much less offended by the government providing low interest loans to GM and Ford (Chrysler should be left for dead and picked apart by the vultures) than I am by the free handouts that Paulson has been giving to his friends on Wall Street.  I'm sure that part of it has to do with the fact that I work in the industry, so through a trickledown-effect anything that infuses billions of dollars into it is ultimately good for me.

But there's more to it than that.  Many of the companies in the financial sector, like investment banks, hedge funds, and those lying ratings agencies, are worthless and add no real value to the economy.  They just move money around and create profits by using leverage, smoke, and mirrors.  Real economies are not service based.  Even though they are inept at doing so, at least GM and Ford make stuff.   

While I take everything that he writes with a HUGE grain of salt and don't look as him as a psychic savior like many who blog do, Peter Schiff often has some good points and he certainly says them in an entertaining manner.  I am currently reading his latest book "The Little Book of Bull Moves in Bear Markets." In it he sums up what has happened to our economy beautifully:

"A service-based economy has largely supplanted one based on manufacturing that was now at a competitive disadvantage to producers in Asia and elsewhere who were less burdened by regulation, high taxes, and mandated worker benefits.  America had become a nation of consumers, and producers were disappearing. 

Reflecting that reality the balance of trade was running huge deficits, with imports exceeding exports by some $800 billion annually."

This one's a gem, too:

"As strange as it may sound in our postindustrial, credit-fueled, savings-depleted, shop-til-you-drop society, consumer spending in and of itself does not constitute an economy.  Rather than being part of the solution, consumer spending is a major contributor to our current malaise."

The problem with America is that we were turning into a place where no one created anything.  All we did was use an unsustainable credit bubble which created rapidly rising asset prices to make everyone feel rich and then shovel this imaginary money around by performing services for each other while farming out the real value-adding productive work to foreign countries.  As annoying as the resulting inflation was, I actually saw the falling dollar as a good thing because at least it was encouraging companies to produce goods in the United States once again.  The annoying temporary spike in the U.S. dollar will only serve to erode our manufacturing base even more.

So while I don't want to see any more ineptitude or bad behavior rewarded, and I certainly don't want to see the government go any further into debt, I have a lot easier time justifying bailing out manufacturers than I do financial institutions.

Now for the funny stuff. 

I love the note above the gas tank on this one that says to fill with "Premium tax $ only" HA

Deej

No position in GM or Ford

10 Comments – Post Your Own

#1) On November 13, 2008 at 3:21 PM, DemonDoug (76.96) wrote:

I am equally offended by all of it, if we would just let the whole thing go through some pain we could restart it all and get moving.  I keep imagining what if greenspan hadn't cut interest rates and allowed all these crazy mortgages to happen in the early 2000's, and if our tax structure had been more fair, we would not be in this mess at all.

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#2) On November 13, 2008 at 3:46 PM, Gemini846 (65.61) wrote:

Just another example of how socialist entitlement programs (union labor) has been detrimental to our nation. I know there is more too it than that, but these guys need to get that health care off of thier books ASAP.

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#3) On November 13, 2008 at 3:54 PM, LordZ wrote:

A loan that cant be paid back is what ?????????????

A gift....

No gifts, no mercy, no quarter, these idiots have had over 20 years ~ now its time to let  true markets and competition take its course, the longer we delay, the more likely the patient will die....

Let them go into bankruptcy, let them stop the insanity, and let something better emerge.... Smaller more entrepreneurial companies ~ making things people will want.

Just because the name says GM and or Ford doesnt make them American ~ they are so far from American..... 

Let them fail...... Let them FAIL...

its sort of like trying to kill the other 8 healthy people to take their blood and organs to stick them into these cancer ridden dead corpses....

 

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#4) On November 13, 2008 at 4:02 PM, socialconscious wrote:

My main and perhaps only reason to attempt to bail out the big three is that we would be responsible for pensions through the PBGC(Government agency which guarantees failed corp pensions). I adressed this in my blog. PBGC in theory derives money from taking over pension and insurance premiums without tax money. In reality it is 14 billion underfunded using this method  A GM bankrupcy alone would mean funding a $100+ billion and growing pension plan. My blog below and all IMHO.     

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=108886&t=01001154058673654380 

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#5) On November 13, 2008 at 4:21 PM, barich1 (52.56) wrote:

If there were 3 other American car makers ready to fill in the gaps if the big 3 failed then I would be all for the "let them fail" argument... but there is not.  If they fail then there will only be foreign cars and the trade deficit gets larger, umpteen jobs are lost, we as a whole are weaker than if we have the 3 poorly run companies.  The morale of the country would be further eroded.  Imagine if you were unemployed in the mid West, scratching for a job, then you heard that the big 3 just laid off their work force.  Or if you were investor already on the verge of cashing out.

  "Just because the name says GM of Ford doesnt make them American, they are so far from American..."  Well, that is a good point, but they are a lot more American than Honda.  I haven't owned an American vehicle in a decade, no thanks to my Ford Ranger.  I do my own car work.  Do you know how frustrating it is to grab the right size wrench plus the one larger and one smaller size only to find that none of them fit?  The peice of junk literally had both metric and standard bolts.  Things like the alternator were made elsewhere and were put together with metric.   That was the end for me.

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#6) On November 13, 2008 at 6:38 PM, Tastylunch (29.35) wrote:

I'm alos less offended by it as well since the Big 3 actually make something of productive value. Maybe they do a bad job of it, but ata least it's something tangible that give solid middle class jobs. The banks converesely create fictional intangible products that rob the taxpayer's wealth.

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#7) On November 13, 2008 at 10:38 PM, DemonDoug (76.96) wrote:

since the Big 3 actually make something of productive value.

You haven't driven an american car in your lifetime have you....

a bad car is not something I would call "of productive value."  It's just as bad as leeching wealth by wall streeters.

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#8) On November 14, 2008 at 9:51 AM, TMFDeej (99.27) wrote:

Doug, I have bashed American automakers repeatedly over the years, but their products aren't nearly as bad as they used to be.  American light vehicles are a lot more valuable to society than these companies that push money around without creating any real value.

The domestic manufacturers' main problem is their legacy costs.  While I personally prefer Japanese and German vehicles to American ones, GM and Ford would sell enough vehicles to be viable companies if they didn't have to provide healthcare to half of the country, pay huge pension benefits, and huge salaries to their workers.  They are behind the trends, but they would still be productive.

Deej

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#9) On November 14, 2008 at 12:35 PM, LordZ wrote:

The little three

well actually little 2

as chrysler is privately held by an evil billionaire private equity fund of baby killing, grandmom purse snatching, step on a fallen persons neck SOns of " CENSORED "

ANd they arent really even US>>>>>>>> oh sure they originated here, but ironically so called foreign auto makers actually provide more and better jobs to us.

Meanwhile they ship jobs elsewhere and only cater to a small group of thug like unrealistic shrinking union jobbies...

ANy one hear of a JOBBY NOONER ?????????

WEll GM has been on a JOBBY nooner for over 20 years...

Its time they faced the music and either made it on their own or  fall.

BUt to let them drag the other 80% who arent benefited by their arrogance and imcompetence is criminal

if not stupid....

 

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#10) On November 16, 2008 at 3:18 PM, karraskijm (< 20) wrote:

No bailout!!! Look, if the US automakers produced cars that the world needed, they would not have swollen inventories. They have been in decline for decades.  Chapter 11 is the logical next step.  Look, people can't have it both ways.  Unions and executives cannot demand higher compensation and then at the same time not take any blame for the current situation and expect help.  This must end!!!

 

Chapter 11 would provide the car companies the crucial ability to address key problems: (1) reduce extra capacity with plant closures; (2) reduce the dealer network, which is a costly exercise to perform without Chapter 11 and one that drives down prices and profits due to a system that injects too much supply into the market; (3) re-negotiate labor contracts (no more pensions, 401ks only); (4) remove current management and their high pay structure; (5) focus on R&D; (5) replace the marketing and engineering departments that have produced cars that consumers don’t want; and (6) government re-capitalization would be available only after the companies have trimmed the fat.

 Will there be layoffs? Yes, this is unavoidable, bailout or not.  A bailout would only delay the inevitable.  Look, I've heard politicians claim, "Chapter 11 would be disastrous.  Even if (the automakers) were able to restructure, (the automakers) likely couldn't get financing."  Well, this is where I say hold on.  If a company enters Chapter 11 and they have a good plan, then and only then, can the government step in to provide assistance in the forms of loans or equity stake in these companies.  Report this comment

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