Dec 12 2008

There's just something wrong with this statement

Published by under Economy,Thoughts

Majority Leader Harry Reid, D-Nev., called the bill’s collapse “a loss for the country,” adding: “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”

(“Auto industry bailout plan dies in the Senate,” MSNBC, http://www.msnbc.msn.com/id/28166218, December 12, 2008 )

Am I wrong to wonder why Harry Reid — a Democrat and one of the more liberal ones at that — is dreading having to look at Wall Street today? Ok…I understand what he really means — he knows that Wall Street will take a dive today (500, 600, 700 points?) because of the failure of the Senate to pass the Auto Industry bailout bill. But what about the people on Main Street? I would think that as a Senator (well, as a legislator in general) he should be more concerned about having to look people out on Main Street in the eye rather than worry about how far Wall Street is going to plunge.

I for one am not particularly in favor of the auto bailout — the “Big 3” got themselves into this mess and now they want a handout to get out. I understand that if GM and Chrysler collapse (or, more likely, go into Chapter 11 bankruptcy) then the impact on the economy will be severe and, who knows, may well set us up for another Depression similar to the one of the 1930s. But I also realize we cannot continue to prop up these companies if they won’t make drastic reforms to become more competitive in the global marketplace.

I see the role of the government in this situation as providing a “soft cushion” to an otherwise hard landing. The government should help facilitate either the merger GM and Chrysler with another company or they should provide some assistance in an effort that will result in these two automakers (and possibly Ford as well) becoming smaller, more agile and producing higher quality vehicles at lower cost. This assistance should be done with the idea that, in the long run, this will help Main Street America and that is good for Wall Street.

If the Big 3 want to survive this mess they’re going to have to do some major restructuring internally. We’re not talking about a surgical cut here or there but rather some amputations and they will need to start with executive management and go all the way down. On the flip side, the UAW needs to also make concessions. Their choice is simple — stick to the negotiated contract terms and not yield at all or make concessions that will help the companies weather this storm. I realize that Republicans tend to claim that UAW members make $73 per hour but there’s more to this story than just a number. Well, yes that is the bottom number, however, a good breakdown of that number shows that there’s more to it than that:

  • $40 per hour is cash (wages/overtime/vacation pay)
  • $15 per hour is health insurance/pension related
  • $15 per hour is retiree benefits and represents fixed costs

So in reality the UAW workers are making $55 per hour (compared to the average $45 per hour of the non-unionized workers at the Japanese auto plants) (Leonhardt, David, “$73 an hour: adding it up“, The New York Times, December 9, 2008 ). The UAW fought hard to get the wages and benefits that it has in this current contract. What the UAW now needs to realize is that they must make concessions soon if they want to see Ford, GM, and Chrysler survive this economic crisis (in one form or another) — otherwise they might all be left holding the paper of their contract while standing outside of the shuttered plants.

Both sides must come to an agreement on deep, long-lasting and substantive changes if they are to survive. But Harry Reid should be more concerned about seeing the impact on Main Street rather than on Wall Street by the failure of the Senate to help provide soft landing to these companies.

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Nov 21 2008

Scary Times

I’ve stopped paying attention to the stock market these days. Oh, I keep tabs on it frequently but I’ve removed the Windows Vista gadget I used to have in the sidebar that showed me how the market is doing in a “realtime” basis. It’s too depressing. I’ve already done all that I can at this point to shore up my own finances. Back when this plunge was first starting I moved my 401k investments out of stocks and into bonds and money market funds. I’ve moved my wife’s IRA to bonds. Where I can’t do that I’ve left the accounts alone with the hope that when the market rebounds…which it will…I will at least recover my investment (albeit I may be an old man by then) or make good on it in a big way.

What disturbs me is the lack of leadership at the top — both from the White House and from Congress — in addressing this issue. After asking for $700 billion dollars to buy these toxic mortgage backed securities that helped drive this mess, Treasury Secretary Paulson has now decided that doing so is too complicated and would not provide the needed effect of calming the markets and providing some sense of confidence. Instead, he’s investing that money in the banks themselves. Unfortunately, the banks apparently are intent on either sitting on that money (like the American consumer is doing with whatever cash reserves they have) or using it for acquisitions and mergers. That, of course, hasn’t helped at all nor has it resulted in the much needed relaxation in the credit markets. The idea that this money would help cause a “trickle down” effect that would settle the upset American economic market seems to have failed. I, personally, would posit that the Reaganomic idea of “trickle down” has now been clearly shown to be the “Voodoo Economics” that President George H. W. Bush once claimed. Perhaps Secretary Paulson should use the other half of the $700 billion dollars that he’s got in a “trickle up” idea — instead of giving the rest of the bailout money to banks and other financial institutions give every household in the country $100,000 and let them spend it to help jump start the economy. Since “trickle down” doesn’t work…perhaps “trickle up” will.

I read Paul Krugman’s latest op-ed piece in the New York Times and it doesn’t really give me all that much hope. Yet he’s right…we’ve got a complete drift in economic policy due to an administration that is apparently unsure of what to do (or unwilling to do what it needs to do) and a Congress that is biding it’s time…for what I don’t know. What I do know is that the lack of action by the administration (or their claims that they are not sure of what action to take next) as well as the statements made by Congressmembers such as Senator Carl Levin yesterday are going to really drive the American consumer into a bunker mentality that perception will become reality. Consider this statement made by Senator Levin yesterday

We cannot allow the issue of which source of already appropriated funds will be used for the essential purpose of preventing the economy from sliding into a depression, which is a real possibility if one or more of the domestic auto companies goes under, given the impact of the auto industry on millions of jobs, on suppliers that are in most or our states and on all of our communities which have Big 3 auto dealers.

Levin, Carl, “Statement of Senator Carl Levin on Bipartisan Agreement to Support Auto Industry,” November 20, 2008, found at http://levin.senate.gov/newsroom/release.cfm?id=305179

I’m certainly not claiming that Senator Levin is stating that we are already sliding into a depression but such statements can cause real fear in American consumers and they will respond accordingly — by pulling back even further on whatever spending they are already doing and that will, in turn, contribute to the slide into a depression.

What’s happening now is a mess created by this administration with it’s lack of real economic policy, by a Congress that is, and has been for years, truly partisan, and by a Fed Policy Board Chairman that argued too much for allowing the markets to regulate themselves. But, let’s be honest, it’s also caused by an American consumer that bought on credit as far as they could go and by a system that threw all the basics of lending out the window in the pursuit of short term riches. We have forgotten the very basic concepts of economics — you don’t get something for nothing. And now, many more of us may well lose everything.

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