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Deika Morrison

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Friday, December 5, 2008

Befuddled by the Big 3 dilemma

Studies show people are unlikely to buy cars from a bankrupt company. And at the end of the day, there is no guarantee that bankruptcy will protect jobs. So, I don't think bankruptcy is an option and personally, I cannot understand the way the auto companies are being treated. Here's why:
  • The US economy is in recession. Record unemployment. 533,000 jobs lost in November alone. Close to 2 million jobs lost since the beginning of this year. To make matters worse, these numbers do not include those who have given up looking. I don't want to sound alarmist, but this is very very serious - for economic AND social reasons.
  • The Congress and the President (43) has a chance to save, yes save, millions of jobs by providing assistance to the auto industry. This money is to save jobs.
  • Did I say the US is in a recession? So, if the auto industry collapses, these employed people who become unemployed have few options for employment. There is much supply of labor, and little demand. A recession is a very inopportune time to take a hard line of "let them fail" - the broader ramifications for all Americans will be too severe
  • Now, lets look at some of these ramifications. Unemployed people do not have the resources to consume or pay debts in the way that they could when they were employed. Some may not pay debts at all. So who suffers other than the unemployed people? As it turns out, all the companies and their employees that rely on that consumption are affected. Therefore, greater potential for further unemployment and poor company performance. If these companies that produces consumables are publicly traded, then investors will batter the stock price. Battered stocks depress markets, and therefore affecting investment portfolios. Investment portfolios are managed by companies in the financial sector. Who else is affected? All the companies to whom debts are owed are affected. Those companies are also members of the financial sector.
  • Ah, the financial sector. Remember the financial sector? Well, let's revisit that sector for a bit. The sector got itself into a crisis. Note, the auto-makers did not cause the financial sector crisis. And then, the financial sector needed a bailout which they got of $700B. All of this has not been used, but the President won't touch those funds to help the auto sector because its saved for the financial sector. Now, did I mention that despite the bailout, there have been record job cuts in the financial sector? But of course, because saving jobs - unlike the objective of the auto manufacturers - was not the objective. The objective was to stabilize the system, provide confidence in the sector and strengthen institutions. And then, it was HOPED, yes HOPED, that ordinary people would feel the benefits of that by banks doing what they exist to do - provide loans etc. But that never happened, and subsequent interventions and speeches by Secretary Paulson have tried to provide greater consumer benefit. But alas, banks that are not owned by the State cannot be forced to do what they does not believe is in their interest. Private institutions have a responsibility to shareholders, and logically, they sat on the funds they have received. So now, the irony of this situation is that if unemployed people don't pay debts, banks will need more government funds. Unemployed people consume significantly less, so those companies that produce consumables bring in less revenues and have a harder time paying debts, so banks will need more government funds. And then if the auto industry fails, there will be no new business from millions of consumers who need credit to buy cars, so banks will need more government funds. So now, the banks' current and future prospects look pretty dim. So, you'd think they'd encourage the government to give $34B to the auto industry. The auto industry is asking for a loan.
  • Now, here's the best part. The financial sector started this crisis. And had it not been for the crisis, the auto industry would not be at the precipice at this point in time. Yet, its having a much harder time getting approval (even with all the strings and concessions) for a smaller amount of funds for direct consumer and economic benefit when the financial sector received multiples more (much of which is unaccounted for). So, when the sector gets in trouble again what will happen? Well, the financial sector will get more money of course. And it will argue that there was no problem with the auto industry at the time of the approval of the $700B, so therefore this need is unforeseen and therefore the sector needs money in addition to the $700B. Yet, because the sector has been hit badly the sector will have to engage in more layoffs (did that the first time). And then because the companies in the financial sector are private, the Government will beg them to lend to ordinary people etc., and they will refuse.
  • And through it all, millions of people would have lost their jobs as a result of the collapse of the auto industry, and maybe millions more in the financial sector and other industries as a result. More companies are unlikely to survive, and those who do survive and do not perform satisfactorily and are publicly traded will get a battering from investors. The stock market may be depressed further, taking with it confidence. And the bailout costs will just rise way above $34B now being refused to the auto industry now. More cost, less jobs. Does this make sense to anyone?

No doubt the auto sector needs reform. No doubt the political protection has hurt them and has not forced them to become competitive. No doubt that taxpayers money should never be wasted.

But, the cost of this unemployment will be far greater than $34B. And there seems to be sufficient foundation to base the new manufacturing for the new America. If these auto companies do not make green cars, they can be retooled to make green machinery ( wind turbines etc). Allowing skilled workers to lose their skills and allowing machinery to become rusted is not the answer to this problem.

The auto industry needs a transition plan. And it needs transition funds to tide it over. Otherwise, the cost of starting over - for it and the rest of the country - is just far too great to contemplate.


kapo said...

Deika, I agree with you that the situation is desperate, but many believe that disaster is not as imminent as GM is saying. In any case, a kabuki drama is under way where a bailout will result, but there has to be a lot of screaming and heavy drumbeats before. There is a massive level of opposition to a bailout by the public and the republicans want to take advantage of that. Ultimately though, they cannot afford to be labelled as the party which can be fingered as having destroyed millions of jobs. It is just politics

kapo said...

The Republicans are doing a partial deal by allowing for the shifting of funds designated for the development of efficient cars to be used in the auto sector bailout. That way they can allow for Obama to take the heat from the real bailout when he takes over in January. It is all just about politics.

Deika Morrison said...

Really? It was reported that Nancy Pelosi (D) allowed the funds to be tapped as long as they would be replenished at a future date - I don't know the details.

With so many lives on the line, I really don't think of these issues as "politics". I would hope that those elected took it a little more seriously than that themselves.

kapo said...

In my old age I have come to realise that the currency of politicians is power. In a democracy that comes through votes. Following Occams Razor, when a politician in a democracy makes a decision, you can usually tie it back to just how it will affect their standing with their voters. Businesspeople have ruined America by their single minded focus on shareholder returns for the next quarter, which gives them access to fat bonuses, their currency. Jamaica is poor not because the people are dumb or ignorant, but because the people are rewarded for acting disfunctionally. Some guy will stab you because his currency, prestige among his friends and the security they offer, makes it a better option for him to rub a gaol sentence than turn the other cheek. The republicans would dearly love to see a depression which would get them back in office next time around, but they cannot afford to be fingered as the culprits. On that basis, I expect a last minute deal some time around the end of the month which allows everoyne involved to look really heroic. America is the most powerful country on earth because the system, however flawed, works. You will know when it stops working, as Canada will start beefing up its border controls.

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Reasoning The Reasons by Deika Morrison is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.