Keep in mind while reading this that my knowledge of economics is entirely from AP Economics a few years ago, and what I read on Wikipedia and in the news. On the one hand, letting certain companies like AIG and GM would certainly, unequivocally, cause a massive short-term job loss. This would have a detrimental effect on spending all throughout the rest of the economy. On the other hand, why should I, as a taxpayer, subsidize failure and mismanaged businesses? Having just said that, what about all the thousands of people who work for a company like GM, who had nothing to do with the upper-level decisions that have brought the company to where it is. I certainly don’t bear them any ill-will.
The reason I am conflicted is because I think that to let very large companies fail would cost more than helping them through tough times, but I think failing business need to go down if market forces so dictate, even if it is in a spectacular ball of flame. However, I freely admit that I don’t have a good definition of a “very large” company, or even where I would draw the line. I certainly wouldn’t support bailing out a local small-farmer, but I don’t know exactly where the cross-over point in the middle is.
There have been several so-called “experts” calling this the greatest economic crisis of our generation, comparable to the build-up to the Great Depression. My understanding of why the Great Depression got worse in 1932 is because of two reasons. 1) The Smoot-Hawley Tariff, and 2) Hoover steadfastly refused to offer monetary assistance to struggling companies. If the cost of standing on the sidelines while big companies go bankrupt is a return to massive unemployment and deflation, I suppose I’d pick the lesser of two evils (i.e. yet another bailout).
Care to offer your perspective and help me find a stance of my own?
Human greed is a given. Going bankrupt and losing your business is a check to keep top executive’s salarys reasonable. The government just removed that check. So party on CEO’s we will pay for it.
The problems causing GM to face this immediate crisis are not entirely of their own making. People are unable to get a loan to finance a car purchase, due to the credit market. Sales are plummeting largely because of that.
AIG on the other hand, where a bailout is already underway, is directly culpable for the financial crisis itself through it’s sale of credit protection credit default swaps.
It is probably not a good idea for a policy maker to actually define such things too clearly, as a certain ambiguity is useful and perhaps required to reduce system gaming.
It is widely advised in the case of a bailout taht the punishment as it were be a clean out of management and wiping out the shareholders, so that they learn a lesson about oversight. On the former, of course, that is not easy as kicking everyone out is disruptive. CxO level has to go, but gradually, then others as needed. Rather like a buyout, the private acquirer, even when convinced the old management isn’t up to snuff, doesn’t fire all Sr. management in one fell swoop. It’s done in stages. Of course in political situations the Populist Left (and Right to be frank), being generally ignorant of such things, calls for blood and wants instant gratification, although such would be against best interests.
My understanding is that Hoover did in fact launch assistance but also tried to balance the budget, by increased taxes, which sabotaged his own efforts.
As for a choice between bailouts, one might ask if the firm has a generally good record, but has just been hit in the head by the crisis. Or is the firm in constant trouble, and likely never really going to reform itself.
In the instance of AIG versus GM, it would seem to me, from an investment perspective that AIG is and was a well run firm, but it had one little unit that it should have never let run - the London credit insurance unit - that blew up the firm. It may be AIG will have to be broken up to save it, but it has generally an excellent history, and probably can be sold back to private investors at a pretty price once the panic goes.
On the other hand, the American car industry has been sick, ailing and apparently utterly unable to reform itself since the 1970s. It seems to manage to be on the wrong side of virtually every possible market development. Yet foreign car firms manufacturing in the US of A seem to be able to do a fine job, so merely cost does not seem to be a proper answer. Rather, it seems the management cultures of the big American auto manufacturers is simply riddled with deeply seated incompetence and parochialism. (Not that the US is alone, the Italians have a similar issue, and frankly so did the UK, whose manufacturers merited their death)
Finding a way to break up and unwind GM, rather than just bailing out the current ‘regime’ would seem advisable then. Perhaps a bailout and break up. I would suspect ‘smashing’ GM would allow a scrappier better successor to emerge, free of the legacy of entrenched incompetence and parochialism.
Care to offer your perspective and help me find a stance of my own?
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The flaw in the bailouts is we are rewarding the guys who crashed the system. If you were hiring a guy to run the economic system and Paulson and his cohorts dropped of their resumes, you would shit can them. They took huge industries and destroyed them. I would go a new direction. I would investigate them for fraud.
There are plenty of economists who screamed in the night at the dangers we were facing due to the banking thefts. They would be leading my financial bailout. No one from AIG,Goldman or any other company that was complicit would get near it. They can not be trusted.
The domestic auto industry certainly wasn’t on the wrong side of the market for the hugely popular truck and SUV boom of the 90s and early 00s. If anything the foreign makers were unable to come up with a product to compete significantly with the Silverado, F-150 and Tahoe.
I’m not sure why you say that ‘cost does not seem to be a proper answer’. Legacy cost of retiree health care is one of the biggest disadvantages for the domestic auto industry. One that GM recently dealth with during the most recent UAW contract, turning over responsibility for it to a UAW managed fund. Unfortunately they won’t reap the benefits from this until 2010. Plus they recently also recently eliminated health care benefits for white collar workers over 65.
So you’re advice, essentially, is to bailout the company that caused the crisis, but not the industry devistatingly effected by the crisis employing of millions of people.
No indeed, they bet everything on one category of highly inefficient [for general usage] vehicle class that required, for there to be a good market, an ongoing credit boom & low petrol pricing.
Unlike most global manufacturers that spread their bets, and resisted pilling too much into that one category, and kept up investment and innovation in lower cost higher efficiency models.
Sounds familiar eh? Why, its the bloody 1970s-1980s, part II. Same bad bets, same bad management ignoring innovation and making bets on model categories that can only be sustainable in a boom / low petrol priced market.
Because European and Japanese car makers do not have stunningly lower cost bases for workers.
Rationalisations that should have been undertaken 20 years ago.
AIG did not “cause the crisis” - they’re an insurer, not a lender. You might rationally blame Bear Stearns or the I-Banks in New York, but AIG? They did not cause unregulated mortgage lenders to loosen credit standards dangerously, nor did they create & market securities off of sub prime pools. They got blown up by one unit writing insurance on credit securities, the vast majority of the AIG insurance empire is world class insurance and risk mitigation that has fuck all to do with the credit bubble.
Well, the irrational hatred and fear of the financial intermediaries will likely trump proper analysis.
Paulson changed direction. He said he was going to buy assets from the banks. Instead he has favored cash infusions. So he is giving tons of tax money to the people who mismanaged and stole. He lied.
He is talking on TV now and the market dropped over 100 points during his feel good talk.
From my point of view they made huge profits by providing vehicles that people were very eager to buy. In selling vehicles with a large profit margin they were able to (temporarily) sustain their soaring legacy costs for the hundreds of thousands of retiree’s with health insurance.
The gas price increase and increased government regulation of fuel economy certainly hurt them, but they were adjusting to the new market through a new labor contract and development of electric vehicles. Government help would have been unnecessary if not for the credit crisis.
Health care costs were significantly lower 20 years ago.
cite? I don’t believe this is true, specifically due to legacy costs already mentioned.
Taking the equity positions is pretty much the advice he was given, the mortgage buy up process never made much sense. Perfectly fine centre-left economist like Krugman so advised him, you should be thankful there is a change.
It rather looks like once they sat down and tried to gear up, the figured out that the solution proposed was not going to work, and so decided to take the option as advised by a goodly number of economists, of injecting capital to support the balance sheet. Hardly “lying” - rather likely to get a better deal than the mortgage auction thing.
They made decent margins in a bet on an unsustainable strategy. Prior experience should have taught that the market factors that made their behemoths saleable (although the reality of heavy discounting made their margins stupid relative to other mfgs) would not hold. The 1970s and 1980s should have taught that.
They, in essence, doubled down on a long run losing bet.
That is a management failure, through and through. Worse it is and was an entirely predictable management failure.
So, if not for the very low pricing on credit - that was made possible by the very practises you are blaming their failure on - securitisation, low pricing risk - they can not survive.
Well, it is a bit circular eh?
Never mind that there is unanimity that in the medium run petrol prices have to rise given rising global demand and flat supply (or supply increases at relatively rapid escalation in cost of extraction).
One should think a major car mfg with a history of getting clobbered might perhaps want to diversify, innovate… in short not get caught with its pants down in terms of management strategy in just about the same identical squeeze that hammered it one full management generation ago.
And?
Even flat projection forward on cost, one should expect that their actuaries would have been able to forecast rising pressure given the aging of their work force.
In any case, hardly matters in the end, if GM can only sustain itself on super cheap credit for consumers, at unsustainable rates, and with petrol and input prices at historical lows, then it’s fucked no matter how much money is put into it. Better to break it up.
I recall there being a desire to get an equity position for helping out the banks by buying up the bad debt, not just spending the money on the equity position. The point of the bailout was to encourage more lending by removing bad assets. Buying up equity positions hasn’t done that very much, and some of the banks are planning to use the money for purchases of other banks, which really won’t help.
I don’t think the AIG bailout had anything to do with preventing job loss at AIG, most of whose divisions are in good shape anyway. It was to prevent them not defaulting on their insurance obligations, which would make the global picture for banks even worse.
GM is a bit more about job loss, but not just GM, but also for the dealers and supplier companies. Also, do we really want to increase marketshare for foreign companies that much?
I do think there is a case for demanding that the management teams that got them into this mess leave without golden parachutes, though.
Ah, buying mortgage securities gets you fuck all for equity position in a bank. Encouraging lending is via reinforcing the balance sheet. It is far simpler to do so directly, via an equity or near equity position, buying hard to value securities in a reverse auction, with the cash going into the bank as revenue.
In EITHER instance, money is fungible, and unless one exercises management rights, one has little say on the lending decisions.
Until banks are stabilised there will be little lending.
Horribly run companies selling a shit-turd product for years. I don’t understand why they didn’t tank 20 years ago other than that people don’t worry about this stuff until it’s inconvenient for them.
I’d like to see a full, socialized government takeover of them rather than a bailout. Let my tax dollars make it so that I can buy an ugly, utilitarian, government-issued “CAR” that gets 70 mpg on hybrid diesel/electric and only costs me $5K out of pocket!
Is there any reason to believe that the auto companies will be better run once they are given a bailout? If these companies failed there would still be plenty of auto options. The banking industry was a little less certainn as to what the effect would be.
Without asking Congress or the American people, Paulson just decided to spend the money in a totally different way than was promised when the money was given.
"The government has abandoned the original centerpiece of its $700 billion rescue effort for the financial system and will not use the money to purchase troubled bank assets.
Treasury Secretary Henry Paulson said Wednesday that the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. He also announced that the administration was looking at a major expansion of the program into the markets that provide support for credit card debt, auto loans and student loans."
This is getting totally absurd. No more money on this stupid bailout!
Again, the auto companies are not looking for a bailout solely because they were poorly run. GM is very profitable outside north america. It’s because the domestic market for their industry has evaporated due to their credit crisis. Although it’s also starting to effect foreign markets as well. The foreign auto companies are in a similar situation, but most have a better liquidity position.
I don’t think the main concern is access to auto options, it’s the loss of jobs and health insurance for millions of people.