Thursday, November 13, 2008

BAILING OUT A LIFESTYLE?

I need to admit from the get-go that my understanding of economics is best exemplified by the look on my accountant's face sometime between his uttering "You did what?" and dropping his head into his hands.

Oh, I can understand a balance sheet, bring a film in under budget and discern that a financial report from a Canadian producer has got more holes in it than a WWI battlefield -- but some of the other things related to our financial system defy my version of logic.

I really need somebody to explain the current "Bailouts" being instituted by various governments to supposedly prevent our economy from collapsing. Because the more I read about the situation and listen to the talking heads, the more confused I get.


I kinda (though not totally) comprehended the bank bailouts. Apparently banks are just run by people not quite as smart as the guys on Wall street who thought up all kinds of fancy debt instruments and easy credit schemes the poor dumb or simply gullible bankers couldn't see were ultimately worthless even if they really would've made them a shitload of money if they'd worked. And since it was my money the bank had put at risk, I figured the government stepping in might prevent their problems becoming bigger problems of my own.

And here's a tip for all those of you who have a ton of Amway products filling up the garage -- try talking to some bank executives. They might just bite.

Although you should be forewarned that they don't bite whenever I walk in with a sure-fire money-spinner. I might have more actual assets and a better grasp on honesty than most of the guys they've apparently been shoring up, but somehow I'm not the kind of people who can apparently be trusted to build an economy.

Okay, fine. But can somebody then explain why I'm now supposed to bail out the automakers?

If you haven't been paying attention -- the Big Three automakers – Ford, General Motors and Chrysler - are about to (according to them) slip into bankruptcy. An estimated three to five million jobs tied to the auto sector will disappear and hundreds of thousands of retired auto workers will lose their pensions and health benefits.

Dire "End of Days" stuff to be sure and a situation we'd all like to prevent. But I'm not clear on how giving Ford, GM and Chrysler our money solves these problems.

Speaking personally. I haven't owned a North American car since I was 18. I've always been able to find a foreign built model that was better made, more enjoyable to drive and/or cheaper. Christ, I even bought a Jaguar when they were considered a mechanic's personal retirement plan and came out financially ahead of friends who purchased Fords and Chevys.

For the longest time, the B3 have known their foreign competition is head and shoulders above them in quality, customer service and innovation. They haven't addressed those issues and as a result have lost more and more market share. Maybe it's the same question I've been asking about the Canadian Film business for a while -- Why is it essential for me to keep rewarding failure and mismanagement?

Because I want to keep my neighbors working? Well, that would be fine if that's how the B3 operated. But it's not. My province of Ontario handed them around $500 Million a little while ago and all they've done since then was shed jobs -- while hiring more people to build their cars in Mexico, South America and China (where you can get away with paying slave wages).

So even when using semi-slaves these guys can't make a buck? Maybe they've got a problem no amount of my money or anybody else's will solve.

Last week, I was listening to a radio talk show on the issue when a call came in from a guy who worked at the nearby Ford plant in Oakville. He related the oft-heard conspiracy theory about the guy who invented a carburetor that could get 75 miles to the gallon and was silenced by the evil corporations. Only he knew the guy personally, named him and identified him as a loyal Ford employee who was a shift foreman.

In his version of the story, the foreman "who still lives just down the street from me" took his invention upstairs to the execs at Ford, who tested it and found it to be far superior to anything they were using. So they bought the idea.

Only, against all expectations of the guys who built the cars that Ford would soon start installing the invention buddy down the line had invented, the miracle carburetor never materialized. However, according to this radio caller, Ford didn't resort to the urban legend of "disappearing" the inventor. They just turn up at his house on a regular basis to remove the ones he keeps putting on his own car and threatening to sue him for patent or copyright infringement.

So -- Ford owns an invention that could immediately skyrocket their share price and out-distance the competition by miles but it would be better if I just lend them some money instead?

Okay, so maybe we're dealing with a autoworker with a gift for fiction and a line mate he wants to make trouble for. I guess the call's in the archives at Talk640 in Toronto if anybody from the government about to write Ford a cheque on my behalf wanted to check.

But here's something in B&W from a (hopefully) more reliable source, The National Post. Their Saturday headline concerned the difficult times facing our automakers. But if you turned the page of one of the inside sections, you were met with a great big picture of GM's new Camaro, anticipated to come off the line in six months as the most sought after car in the world. According to the Post, more than 600,000 people have already expressed interest in owning one.

So does GM really need a handout, or do they just need to find a way to get that car into their dealerships quicker? Speaking locally, I'd make the Woodbridge outlet and its surrounding population of testosterone fueled young Italian males a high priority.

I also got wondering about a company that sits just a few blocks my Newmarket home, Magna International. Magna makes auto parts and they're also crying for help. But anybody with even a passing acquaintance to the company knows that Magna has lost a fortune over the last decade in the horse racing business, particularly by buying up money-pit racetracks.

They also own a golf course on the border of my city that caters to a very exclusive clientele. Former president Bill Clinton is a regular player and Tiger Woods has been known to drop by to shoot a few holes with hand-picked members of the corporate and political elite.

So shouldn't Magna unload those racetracks or that golf course for the money it needs to stay afloat before they come knocking on my door?

How come it isn't the far-more-wealthy-than-the-average-taxpayer guys, the ones who've enjoyed the perks of playing a round at Magna or sharing a libation at their sports arena private box, who are bailing these guys out?


Do they maybe not have the money, influence or intelligence to do that either? Have we got our own pitiably incapable and self-centered ruling class similar to the Russian oligarchs they make so much fun of?

I mean, why isn't the oil industry, currently swimming in cash, stepping in to support the auto industry which supplies the very gas guzzlers that helped drive up oil profits in the first place? Do they maybe know the handwriting is already on the wall for the North American car makers?

As the B3 crumble, I clean out the garage and find a newspaper from last summer announcing the new Honda Canada headquarters currently being built down the road to, as the local paper says "house its growing sales, marketing and customer service operation teams". Meanwhile, many Financial sites this week featured another announcement from Honda -- that they're building yet another brand new manufacturing plant.

Apparently, people are still buying cars. Just fewer crappy ones. So a lot of those endangered auto workers of ours will likely find new jobs. So why do we have to help out their incompetent bosses?

I always thought the whole point of Capitalism was that the strong survived and those who could innovate and increase value prospered. In the same way that there is no crying in baseball, there aren't supposed to be any "do-overs" in business.

I thought the concept that an idling class takes priority over one that creates something died during the French Revolution. Or did the last few years of prosperity and entitlement bring all that back?

Elsewhere on the web, Billionaire Mark Cuban has launched a site called Bailout Sleuth which is already unearthing indications that some of the places where the bailout money is going are already being hidden from us.

Given the banks and brokerages that are insisting the execs who fumbled this whole situation are still due their million dollar bonuses and just about everybody else with a proven record of incompetence lining up for a handout, I'm wondering if there isn't something else at work here.

Where are the perp walks? Where are the fire sales of the luxury assets of companies who screwed things up for the rest of us?

None of that's happening.

Basically, it's starting to look like what we're funding is a continuation of the charmed lifestyles of the Courtiers who caused all this trouble. The peasants who used to work for Magna and Ford, Chrysler and GM will be without jobs, pensions and health care. While the fops and elites who were supposed to be steering the ship are comfortably on the other side of the iron gates again, still playing golf and betting on the ponies.


Anybody ever notice how much the Magna headquarters resembles Versailles? Am I the only one hearing tumbrels in the distance?

4 comments:

Bytowner said...

Note to Ford's bosses: start installing that carburetor on every car you make. Retrofit the ones that are on the roads already. License the patent out to the competition.

Do that stuff ASAP.

Then we'll be quiet about the bailout.

Most of the time.

Mark said...

Jim,

I was in Washington DC in the spring and I was very surprised to notice that hardly anyone in the Capital of the United States was driving an American car. It was a lot of Toyota, Mazdas and Hondas. I thought if no one in the capital of the nationalistic, patriotic United States of America was driving those shit boxes, who else would? It was a clear sign of something wrong.

Did you happen to catch 'Who Killed the Electric Car'? Those bozos would have made a killing when the Oil prices went through the roof.

And the right wing wants to run government like a business... God help us.

Clint Johnson said...

The automakers? Nobody should be bailing them out. They have mismanaged themselves into this situation. Sure, with financial doom hanging over everyone and a credit crunch- fewer people are buying big ticket items right now. It also doesn't help that the public is still saddled with a misconception of quality based on how things were two decades ago. Cars from the big three are now consistently in the top ratings for build quality and dependability. High enough that Nissan has decided to drop their own line of pickups and simply re-badge the Dodge Ram.

Their problem has been too many models and marques.

General Motors is made up of Buick, Cadillac, Chevrolet, GM Daewoo, GMC, Holden, Hummer, Opel, Pontiac, Saab, Saturn, Vauxhall and Wuling... and now they want to buy another of the big three so they can add Chrysler, Dodge and Jeep to that list? Instead, they should sell off GM Daewoo, Holden, Open, Saab, Vauxhall and Wuling for operating capital while they cherry pick the few good models from Buick, GMC, Hummer, Pontiac and Saturn before sending them off to join Oldsmobile in the marque graveyard.

Chrysler still has a few billion in cash so it can weather the storm.. or just break itself up since the Dodge and Jeep brand are worth more on their own.

Ford can sell off Volvo and their stake in Mazda and Aston Martin while they send Mercury off with Edsel.

The first one to go bankrupt will have its assets bought up by one of the remaining two companies and they will the stronger for it.

The government should just let us keep our money. Maybe that way I could someday afford to buy another new car... that 2009 Camaro has been on my wishlist for a couple years now.

As for the mythical carburetor that can get “75 miles to the gallon”? The big three have spent billions over the last three decades trying to get their CAFE (Corporate Average Fuel Economy) up to the mandated standards. Cars have to average 27.5 mpg and trucks have to average 20.7 mpg. For every 0.1 mpg that they miss the target by, they have to pay the government $5.50 for every single vehicle they sell. That would work out to about $36,000,000 for every tenth of a mile per gallon their average missed the mark by. Try to bury a way to get that average up? They would line up to blow anyone who walked in the door with a way for them to sell a few hundred thousand cars that got 75 mpg. Hell, they would sell them at a loss just so they could sell a few more of the less efficient cars that have the nice fat profit margins.

I do think that the oil companies know that if they tried to get closer financial ties with the car companies they would immediately be attacked by the politicians for trying to create a cartel to pull one over on the hard done by voting public. They would spend the next few decades in court and spend hundreds of millions to defend themselves.

Now to the economy as a whole.

It isn't so much that you are having trouble understanding the economics behind the bailouts, it is more that the politicians have no understanding of the economics and are just acting in their own interests.

For years, the politicians in the US (democrats primarily but the republicans aren't blameless) have used regulations to force the financial institutes in a direction that is economically infeasible but politically expedient. Through the Community Development Act and the directives of Fannie Mae and Freddie Mac, they forced the banks to make more and more loans to people who could not pay them back. This was with the stated goal of giving as many poor people a home as possible, which helped get democrats elected. It also inflated the cost of housing. If you give home buyers easier access to money, then home sellers will be able to raise the prices. More people got homes and home manufacturing was booming... what could possibly go wrong?

The people stopped making payments that they couldn't afford and the housing market snapped back to what it should have been for the last ten years. Okay, it over compensated somewhat and dropped below what it should be- but still a lot closer to reality.

It would have been hard on a few banks and a few million home owners would once again have been home renters. It could have been the lead story in the business section for a few months and then faded away.

But two groups saw an opportunity.

The first group were politicians who saw a chance to scare the hell out of the public so that they could use it for campaigning and legislation (campaigning by proxie).

The democrats, who had been the primary instigators of the mortgage failure through their market directives, blamed it on the free market and by guilt of association, the republicans. They held press conferences to make sure that the public was suitable scared with pronouncements of imminent doom unless they were allowed to step in and save the day. The republicans thought they could play to their strong suits of being the fiscally responsible party and so went along with the democratic parties doomsday prophecy.

The democrats played the game best and they crossed the finish line first. Since they made so much noise about “fixing” the economy, they now have to do something. They are trapped by their own rhetoric and so dusted off the New Deal and slapped a “And Improved!” label on it. Just like the original New Deal, the New And Improved Deal will take a recession and turn it into a depression.

The second group was the media. Nothing gets ratings like the end of the world so they played this up as high and as fast as they could. It certainly helped that the politicians were giving them a hundred sound bites a day. They made things sound so dire that people started making decisions based on the financial world collapsing and it became a self fulfilling prophecy.

The bank bailout is going to make things worse. The banks that were mismanaged into bankruptcy have already started to take the bailout money and purchase the banks that were managed well enough to stay solvent. So the politicians are making sure that those that screwed up are taking over the jobs of those who didn't screw up... sweeeeet.

What would have made more sense would be to give the money to the banks that WEREN'T going bankrupt. Just stipulate that the money could only be used to purchase a failing bank and fire everyone that sat at the executive table.

That gets us back to the automakers, they saw all that bailout money falling from Capital hill and they just figured they had better grab a bucket while the grabbing was good.

dining room tables said...

A very good topic. I was so impressed in the article. I love the picture that you post. I always wanted to try that but I can't afford it.