Well I may rant and rave, but at least I’m in good company. Thomas Friedman proposes a great idea for fixing the auto industry.
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Posts tagged as:
bailout
I need someone to explain to me why we should be bailing out the perpetually failing U.S. auto industry. I am only mildly informed about the state of the industry, so I’m willing to say I might not get it. But here’s what I do know:
For decades, the domestic auto industry has been in a self-inflicted death spiral. It’s made bad deals with unions, agreed to overly generous pension and health care plans for both employees and retirees, and it’s (perhaps most critically) lagged far behind foreign manufacturers in both innovation and management practices.
While elements of the Wall Street bailout bother me, Wall Street is not a failing industry. It got into some risky practices that it didn’t understand — a lot of them — but I have no doubt that capitalism isn’t failing.
But I can’t figure out how there would be a long-term negative impact if GM, Chrysler and Ford all went belly-up. Or got bought in pieces/parts by foreign manufacturers. Short-term hell? Absolutely. Even if they were purchased, not closed, there’d be a lot of upheaval nationwide — everyone knows someone who works in a business related to the domestic auto industry. My half-informed suspicion is that part of the problem in the industry is simply bloat — not working as efficiently as it should. But, despite our energy idiocy, I don’t think the domestic demand for cars is just going away. So someone will need to make them. We’ll need more from Toyota and Nissan if Ford dies. It will still make sense to build a lot of those cars here, no matter who owns the means of production.
I had an interesting conversation with a friend a couple of years ago. I said, I don’t get agricultural subsidies. It can’t make economic sense to produce corn or cotton or any number of other things here, unless you’re doing it on a massive agribusiness scale. Why should we keep spending tax dollars on subsidizing farmers? He argued that, while the subsidy programs might be larger than needed, part of it was based on a historical sense of national security — that subsidies had gained a real foothold during World War II, to ensure we produced enough cotton for the military’s needs. But we’re exporting about half the cotton we produce today, so the level of the subsidy doesn’t necessarily make sense to me anymore.
So, I would potentially buy it if you said there’s a national security element to ensuring the survival of some of the domestic auto industry. But I don’t see why we should throw money at an industry that hasn’t figured out how to manage itself. Please help me see.
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After the 3yo woke me up three times last night, I didn’t get up and off to the gym at 5 a.m. like I’d planned. So I didn’t have time to write my second econ post. I’ll get to it tonight.
Just a couple quick things for your perusal:
- Compare the a.m. headlines at the New York Times, the Wall Street Journal, CNN, Washington Post, a few other places. Where you get your news right now is definitely going to affect your perception of this crisis. I don’t think we know yet if the doomsayers at NYT are right, or if the others are, but it’s something to keep in mind if you’re trying to keep a level head.
- The Washington Mutual failure, while bad, was not unexpected. WaMu has been trying to figure out how to save itself for months now, and if you’ve been reading the financial news, it’s been all over it all summer. So, while bad, it’s not necessarily a symptom of the bailout negotiations stalling — the way it might have read if you’re just now tuning in to all this mess. My two-second editorial — WaMu had way too much in bad mortgage loans, but executive hubris may have hastened its downfall.
- And finally — lots of news media right now are blaming congressional Republicans, notably in the House, for sinking the bailout yesterday. Conversely, you might also blame the Democrats — I think it’s got enough votes to pass, but it’s not bipartisan yet. My take: the Ds are right to insist that something this earthshattering be bipartisan, and the Rs are right to ensure we’re not just bailing out Wall Street, but instead that we’ve considered American mortgage-payers. We’ll see….
- Finally, check out this interesting article on the Swedish banking implosion in 1992. Interesting.
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Update: I don’t think either one of these two items are very good signs.
UPDATE 2: Want something a little more financially written, but very hopeful? Read this great column in the WSJ. Hat tip to Rex for the link.
Some questions and answers that have run through my head, and that I’ve discussed with friends, in recent days. I’m not an economist or a banker. I’m just a political and news geek. So don’t take my advice here when you’re acting on your own financial accounts. Talk to a pro!
Q. Do I need a bomb shelter or something? CNN makes it sound like the sky is falling.
A. Not about the economic crisis. However, North Korea announced this morning that it’s restarting its nuke program, a little news tidbit that got buried under the avalanche of the day’s econ crisis. Make of that what you will. I’ve got a Bobcat showing up here tomorrow. [Not really! I mean, not really about the Bobcat. North Korea is restarting its nuke program for real, though.]
Q. I have a fixed-rate mortgage. Am I going to lose my house?
A. Again, turn off the TV and step away from the set. If you pay your bills on time and have a fixed-rate mortgage, you don’t have a lot to worry about right now. It would be a good time to accelerate any debt payments that aren’t fixed-rate, however. Actually, almost anytime would be a good time to do that.
Q. Then why do we need a bailout? Shouldn’t people and institutions who got in over their heads lose their money? I mean, not to be rude. But isn’t that how capitalism works?
A. Here’s where it gets more complex. It may actually be in everyone’s interest to have some kind of “bailout.” [I'll join with my boss Rex in saying that "bailout" is an unfortunate term for the package that's been presented to Congress.]
Here’s one reason we may need a bailout [there are others]: If enough companies and people have made bad investments, banks lose confidence. I know you have to fill out reams of paperwork to get a loan, but still, every loan is based on confidence. The bank compiles lots of information about you to inform its confidence that you’ll repay. When formerly top-notch companies like AIG and Lehman Brothers can’t pay their debts, banks tend to lose confidence. Suddenly, what they thought were solid bets aren’t.
So if a “bailout” injects more money into the banking system, and shows the system that the government has confidence in the economy, it makes it easier for bankers to take a chance on companies, and on you and me. And that’s good.
Q. What should I be thinking about this bailout?
A. I’m not sure myself. The amount is really, really big. The federal government budget proposed for 2009 is $3.1 trillion. This bailout amount is 0.23 percent 23 percent of the federal budget. [Update: Thanks to CeeElCee for fixing my math. I did that 3 times last night and it never sounded right, but I gave up. Note to self: You are no longer a night owl. Stop trying to think after 8 p.m.] Doesn’t sound like a lot that way, I guess. Think about it this way, instead. So far this year, the U.S. has spent about $12 billion a month in Iraq, a total of $108 billion or so. We’ve spent around $600 billion there total. At $700 billion, the bailout is another Iraq war in terms of cost.
That in and of itself to me says we ought to ask a lot more questions before saying OK to the Paulson plan. I think Congress is moving in a good direction by trying to put some more specifics on the package, including more required oversight of the Treasury’s actions. [The original bailout proposal Paulson sent to Congress not only let Treasury act pretty autonomously, but it also said that no court or legislature could reverse its actions. Yikes! Checks and balances, people!]
Q. Can I still buy a house?
A. If you have good credit and are employed by someone other than yourself, sure. [As much as it astounds me, a lot of banks weren't requiring a whole lot of paperwork from the self-employed on mortgages the past few years. In fact, when I bought the house before this one, I was in the middle of changing jobs. My mortgage broker said, Hey, can I put you down as self-employed? Then you'll just need to tell me how much you expect to make next year. Having already purchased two homes in the past, I was flabbergasted. I'd had to sign away all but my firstborn to get those two loans. So, if I didn't have a job, I could just call myself self-employed and project an income? Apparently so. That's one of the things they're clamping down on now in the mortgage market.] If you’re self-employed, you might actually have to do more paperwork now. But for now, those with good credit are still in OK shape. If you don’t have a house to sell, in fact, I think now is a great time to buy. Get a fixed-rate, 15-year mortgage and enjoy your good deal.
Q. What about my retirement money?
A. This is probably what a lot of Americans are worried about right now. My thought: If you aren’t retiring for 15 or more years, and you’ve been happy with how your retirement plan is doing until now, don’t take this time to worry about it or worse, to tinker with it. With a caveat: If you have lots of money in one or two stocks, fix that now. Diversify! Different kinds of stocks, different kinds of mutual funds, a few bonds….exposure to international and emerging markets as well as the U.S…..you get the picture.
Q. What about my short-term emergency fund? It’s in a money market account.
A. It’s fine now — the Treasury said this week that it would guarantee money market accounts for the next year. Traditionally, money market accounts are investments, and like any other investment, you risk losing your money. But until the past couple weeks, you didn’t lose money that you invested in a money market account. You might not grow your money as fast as inflation, but the principal you invested was safe. A few money market funds recently “broke the buck” — meaning, they lost money on the funds invested — including a large one from Lehman Brothers. One of the Treasury’s recent protective actions was to say, we’ll back money market accounts, up to a point. Hopefully that’s going to stop some bleeding — people had been yanking investments out of their money market accounts — which just leads to more panic.
Q. Well anyway, shouldn’t I just pull some money out of the bank? For safekeeping?
A. Umm, no. As long as you have less than $100,000 in your account, the FDIC protects it, no matter what happens to your bank. If you have anywhere approaching $100,000 in your account, you need to be talking to a money manager about better using your assets anyway.
Q. So what caused all this again?
A. Is it too flip to say, Our national addiction to credit? There are a lot of causes to the current scenario, but here are a few:
- Americans have a lot of personal debt. It’s not too crazy to posit that the economic recovery after 9/11 was largely fueled by credit in one form or another — credit cards, home equity, etc. Unlike the federal government [apparently], individuals eventually do have to pay the piper.
- Related, home lending has been very relaxed and in some quarters, even sloppy, in the last 6 or 7 years. In the face of the late-90s deregulation, and in what I think started as a well-meaning effort to make owning a home more affordable, and to increase the flexibility of the credit markets, banks started offering products like interest-only loans, and offering them to people they never would have lent to in the past. Shockingly, many of these people turned out to be bad credit risks. I do blame the banks some for this — I think an incredible number of loans were made to people who didn’t have the financial knowledge to understand how they were getting in over their heads. Banks could have done more to educate their customers and to protect themselves from risk.
- Banks, investment banks and insurance companies used the light regulatory environment of the past 10 years to create some instruments that they should have known were incredibly risky. For instance, credit default swaps [when companies buy and sell contracts saying that they'll pay if a debtor defaults] function like insurance — but unlike insurance, credit default swaps aren’t regulated. A lot of companies were selling these without holding enough assets to cover their promises. How big a problem are these? Well, in March, the credit default swap market was twice the size of the stock market.
- And, of course, we’ve had a historic bubble in housing markets nationwide. A lot of this credit house of cards was piled on top of the housing market bubble. When the bubble burst, the cards fell too. [Ha, I love mixing those metaphors. So wrong.]
Q. All this sounds fairly bad, but not catastrophic. Why do we need a bailout again?
A. I don’t think we need a bailout, personally. But we need an injection of confidence into the economy, and that will likely include some more money from the government.
Q. If we don’t do anything, what could happen?
A. Well, if banks continue to be skittish about lending, business can’t get the credit it needs to do business. Many retailers depend on regular short-term loans to buy their inventory, for instance. No loan, no inventory. No inventory, no sales. No sales, no employees and no paying of the bills. If the credit squeeze starts to affect large numbers of businesses, and if it starts to push unemployment up even more — while inflation goes up, even — well that’s a bad path to be on. I think we’re really in a bad spot at the moment, with inflation on food and energy pretty high. The typical Fed response to inflation [inflation=uncontrolled growth, forcing prices up] is to raise interest rates, making it harder to borrow — slowing the economy down. Right now, we don’t want to make it harder to borrow, when banks are scared to lend money anyway. Somehow, we need an external actor to push the economy in the right direction. Some form of government intervention may take care of that.
Q. How hard was it to type those last two sentences?
A. Very, very hard. I like to think of myself as a “progressive libertarian.” I think Congress functions best when it’s gridlocked–and can’t get a whole heck of a lot done. If it is going to do something, I want it to be minimal. With the proviso that there are a lot of things that only government can do effectively. [Thus the progressive part of me.]
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