Arguments for the auto-bailout, and fiscal stimulus
2008/12/17 in credit crisis
Confidence. Confidence is key to recovering from this economic nose-dive.
In previous articles, I argued that the fiscal stimulus package was a waste of money, and that the auto bail-outs were a distraction of our focus which should be on the banking system (rather than on one manufacturing industry). I argued that each was likely to fail in the long run, and was likely to cost US taxpayers billions, with little to show for their hard-earned contributions.
But, upon reflection, I now realize that there are sizable secondary benefits that could be gained from going forward not just with one, but with both packages…and that is of consumer & business confidence, which I believe are key if the US is to pull itself out of recession (and away from depression) in 2009.
What consumers need badly is a jolt of confidence that “everything is going to be alright”. Big numbers, and bold action taken by the US government (even if it makes little economic sense) can do that by boosting intangibles such as “confidence” of consumers in a fragile economy.
What the auto industry failure would do to consumer and business confidence across the country is a massive unknown, but it cant be good. Just the headlines “GM bankrupt” would cause shivers up and down the business community that could have “confidence” repercussions across a broad swath of American industry.
I previously argued that the worst mistake the US government did was to try and sell the crisis to the American consumers in order to “save” them with the TARP. That process of selling the crisis was the inflection point upon which the American consumers woke up to the new reality, and in response collectively shut their pocketbooks, thus sending consumer-facing businesses into financial distress (the Auto industry included).
In order to make up for that previous mistake, perhaps its prudent for the government to make another “mistake” and actually pass the Auto bailout, and to announce a massive fiscal stimulus package. I say “mistake” because I still believe that the economics clearly illustrate that neither one should work. The auto industry will not reform itself if it gets propped up, and the fiscal stimulus can’t possibly be large enough to actually pull the US out of recession. But, that misses the point.
The point is that the US consumers (which account for over 2/3 GDP) are in dire need of some good news, and after scaring the consumers out of the market back in September, the government now has a responsibility to coax the consumers back in to the market in the new year.
Better to deal with the long-term problems at a later date (of an inefficient, uncompetitive auto business, and a bloated government debt to pay for the coming fiscal stimulus), than to deal with the short-term consequences of an economic collapse at an earlier date.
Perhaps a jolt of confidence is exactly what the US consumer needs!?!? (verdict still out…please comment below)…
Further Reading:
Gary Baumgarten said on 2008/12/19
We’ll be talking about the auto bailout at 5 PM New York time today on News Talk Online on Paltalk.com.
Please go to http://www.garybaumgarten.com and click on the Join The Show link to participate.
Thanks,
Gary
Gerald Spencer said on 2009/02/06
Is there anything of value left after the auto industry executives and the auto unions have bled their companies to death (bankruptcy)? What is their balance sheet net worth after you remove the value of all intangible assets such as goodwill? The banks probably have mortgage lien on the title to most of the remaining assets anyway. If they are allowed to the public feed trough this time, they will surely return on a regular basis. Should we continue Auto Industry bad behavior and outright theft of company money with taxpayer funds? Who is going to buy a vehicle from a bankrupt auto manufacturer when the bankruptcy court will allow the manufacturer out of their warranty contracts with the vehicle purchaser? It is too late for Chapter 11 reorganization. Any Taxpayer funds given to the US Auto Industry will only encourage the continuation of the arrogant, stupid, and selfish bad business policies of both the US Auto Industry executives and the UAW members. Do not let these same highly paid incompetent executives and the overpaid union workers continue their featherbed deals, job banks, perks, private jet airplanes, stupid business decisions, and etc. with taxpayer money. These are the same people that took so much money from the US Auto Industry that they bled the US Auto Industry to death. Let them go bankrupt so other parties can buy their assembly plants and re-start these plants as non-union automobile manufacturing operations. Maybe we have to let the Big 3 Executives disappear with the large amounts of money that they took from the US Auto Industry, but do not let them have any Taxpayer Funding to continue their bad business practices and personal thievery. The big 3 automakers are already in debt up to their ears. Let them all disappear, especially as a lesson to all of the other financial geniuses that caused these problems. If these financial geniuses that caused these problems disappear then the UAW feather beds that they created will also disappear with them. Are these Taxpayer Billions for the Auto Industry going to fund the golden parachutes and bonuses of the auto industry executives that caused the crisis? Should taxpayer money pay off the bank loans that occurred when these financial geniuses borrowed money to pay stock dividends, in order to artificially drive up the stock prices, which personally enriched themselves through their stock option plans? How can we get rid of these financial geniuses and the UAW feather beds that caused these problems without costing the taxpayer some of his/her hard earned tax money? The US Auto industry is going bankrupt, and this bailout just postpones the dates of the formal bankruptcies. Are there any more Lee Iacocca type people in that industry that could revive these sick Auto Manufacturing companies from their impending deaths? They do not need any more Enron Type Financial Genius Master Criminals?
The only thing that will save the US Economy is the re-building of our gold reserves in order to preserve the buying power of the dollar. The only way to do this is to produce export more (dollar value of) things than we import. The only way that we can accomplish exporting is to re-industrialize and make these products with US materials & Labor. In the last few decades we have purposefully destroyed the industrial base that won WWII and gave us today’s bountiful way of life. Paying people to pave roads, build infrastructure, plant trees, dig holes then refill the same holes, rake leaves, write poems, paint pictures, environmental cleanup, etc. will not be useful or contribute anything to correcting the US economic problem.
As long as the US government continues to just crank up the presses and print more dollars, T-Bills, Government Bonds, etc. to pay for these pork barrel projects, negative balance of trade, government payrolls, bailouts, entitlements, operations, social schemes, wars, new infrastructure, wealth re-distribution, mental health, and etc. We will see the buying power of our dollars diminish until a loaf of bread costs a week’s wages.
How can we ever re-start our industries (re-industrialize) to generate a positive balance of trade that will restore our economy? Most of the men who knew how to operate the US basic industry and factories were fired 30 years ago and are now long dead. There are no books that completely tell everything about how to do most of the things that we knew how to do years ago when we created the industries that won WWII and then gave us our bountiful way of life. We need science-oriented citizens to create products and services that we can exchange for foreign currency. Foreign owned US dollars and foreign gold.
The dollar buying power or value is partly about psychology when it is backed by the “full faith and credit of the US government” rather than gold. This is the same as my definition of “Junk Bonds”.
Since the US government stopped redeeming freshly printed US dollars for gold, foreign governments and foreign individuals continue to use these freshly printed dollars (and other freshly printed US securities that they earned in exchange for their products that they exported to the USA) to purchase title to real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions and everything else of value that is located in the USA. We paid these foreigners with our freshly printed dollars to manufacture or supply the things that we imported and consumed (rather than US citizens working to make these products ourselves in this country). Some government sources estimate that the title to 25% of our property and businesses are now foreign owned (http://www.economyincrisis.org/content/ownership). What will be the buying power of the dollar when we have nothing left to redeem the dollars earned by foreigner manufacturers?????????
There is (probably) a limit to the amount of paper dollars that the foreign country manufacturing people and the foreign country raw material supplying people will continue to accept in payment. This limit will become apparent as soon as foreigners own title to everything of value in the USA and nothing is left that the foreign dollar holders want to buy with their freshly printed paper dollars. This is selling of our children’s legacy to foreign owners, and the US government calls it “Investing in America”. This is sort-of like selling our body parts to keep from working!!!!!
The USA population will probably become employees, indentured servants, or maybe slaves of the foreign countries and foreign individuals that will own everything of value in the USA in the near future. The foreigners know that the US dollars that they earn will buy less and less each day that they do not spend them. They also know that these securities are not redeemable for anything except the “full faith and credit of the USA” (aka junk bonds). Our children and grandchildren might also have to change to the religion of the business owner if they want a job.