Re: The ending

CoinSpin wrote:
Briarroot wrote:
CoinSpin wrote:

There's a whole huge debate about this situation, and living in Michigan at the moment, I'm right in the middle of it... Things like "why was the banking industry, who doesn't actually produce anything and got themselves into this massive mess through their own stupid and downright criminal negligence with respect to the mortgage fiasco, just get handed 700 billion dollars to fix their own problems.


Banks produce *wealth* not goods. The banking system takes a fixed amount of capital, and by lending it and earning interest as well as full repayment, generates more capital. It's a mistake to say that banks produce nothing. What you should have said is that banks take something and magically transform it into more something!

That being said, I don't think the Federal government should bail out the banks and investment firms any more than it should bail out goods manufacturers. Let the markets fix the markets; let the markets punish the foolish and incompetent and reward the wise and able. Sure, the transition will be painful for us all, but postponing the inevitable will make the eventual collapse even *more* painful. That's precisely how we arrived at our current situation. The Federal government is already massively in debt, a circumstance which devalues the dollar and threatens our future. Running up more debts making feeble attempts to fix a system which _is_not_broken_ is the hight of folly. That's correct: the system is not broken. It's acting exactly as it should. When bad loans are made, the lenders should suffer defaults. If those lenders were able to spread the risks of those bad loans around to other lenders, then they too should suffer the consequences of their bad decisions. That's what's happening and it should be allowed to continue. A depression, should one come, is not the worst thing that could happen. The world still produce enough food to feed itself, and enough energy to provide for itself, and enough goods to satisfy the needs. Out of chaos, order will be produced, and the system will be all the stronger for it. Propping up failed banks and investment firms is the wrong strategy.

Well said... But there is an inherent problem with letting the market fix the market... Greed.


Okay, but please, let's not mistake "self-interest" for greed.


The housing crisis is a prime example of this... Since the Great Depression, housing prices have stayed very flat, rising at the same basic rate of inflation as everything else, wages included. But then some people decided they could make a fortune by prospecting on real estate, and suddenly the price of housing was climbing at excessive levels, far outpacing inflation and average salary increases.


That's not quite what happened.

In order to keep inflation in check, the Fed kept interest rates at an artificially low level for far too long (thank you Alan Greenspan!) after the mini-recession of 2002, a circumstance which caused capital to search for other markets. The flow of capital cannot be regulated and unintended consequences always seem to be the result of government interference in areas where it has little expertise, money markets being a fine example. Since interest rates were so low, traditional investments looked unattractive and real estate, which as you pointed out had an excellent long-term record of growth, became a much sought-after alternative. When demand rises prices also rise and when demand rises precipitously in a limited market like real estate (property cannot simply be cranked out as if from an assembly line) thus producing what amounts to a feeding frenzy. It was then that investors began to look for more and varied ways to expand their opportunities and the sub-prime loan business appeared to be an easy method.

Sub-prime mortgages have been around for decades. They were useful in certain instances (for example: getting government agencies to stop threatening legal action for the alleged "racial preferences" of mortgage lenders) but the boom in sub-prime mortgages that we experienced in the last six years was the result of capital seeking maximum return while government kept its foot on the interest rate brake. That's not an example of greed, it's simply self-interest. Sure, there *was* a certain amount of greed present in the mad rush to sell sub-primes and slough off the risk through credit-default swaps, but that kind of thing is present in every human endeavor. Don't try to tell me that the typical buyer of a sub-prime mortgage wasn't interested in buying a house that he could not have afforded otherwise - because he was - and that's not greed either, it's simple self-interest.


The quick (and ethereal) rise in real estate values drove banks and other institutions into bizarre lending practices, because the average consumer could suddenly no longer qualify for an average house. The lending schemes (and individuals taking advantage of the situation) finally escalated to the point where the bubble burst, and people found that their houses were devalued (actually just moving back to where they *should* have been), and they owed more than the house was worth... All because everyone sat back and let "the market fix the market" when it was obvious something had to give along the way - the trend couldn't sustain itself.


That's not quite how it happened.

Let's not forget that no consumer was ever forced to sign a mortgage contract under duress, and that every consumer should have known that a "variable-rate mortgage" was just that - variable - and that low interest rates have nowhere to go but up. In other words, not all the blame for this mess lies with the lenders, the buyers have also been foolish. People simply enjoy living beyond their means; the practice is quite common. How many people do you know who spend more than 20% of their income on a car, something with no real value at all? An automobile will be scrap in a few years, unlike a house which up until this time was a solid source of equity.


A free market is a fine theory, but in reality it needs some policing to prevent greed from causing an implosion, with a few profiting and the rest of us suffering the devastating impacts. A little regulation just on housing valuation would have completely prevented every bit of the banking crisis we are seeing today, if it had been implemented when prices started artificially inflating.


I agree with that to the extent that I also agree that laws governing individual conduct are also necessary. Saying that investment markets require regulation is no different than saying that individual behavior requires regulation. Freedom entails responsibility and in any society there will be some who abuse their freedom and act irresponsibly. That's not a knock against free societies, it's a recognition of human nature. Murder is also one result of freedom, but I don't think you'll find that very many people want to give up their freedom because of the existence of murderers in their midst. In sum, we should treat banks and investment firms the same way we wish to be treated as individuals; recognizing that because of their size, they have far more potential to do harm than any individual (i.e. steal or lose billions) but also that they have far more potential to do good (i.e. create wealth).


But US auto makers, who were just as hard hit by the economic downturn as anyone else (and often harder hit), can't get a measly 14 billion without massive conditions and a mountain of stipulations." Common comments up here. And they have a point, I mean they just *gave* the banks the money, and the bank bigwigs just kept right on throwing huge chunks away on junkets and ridiculous crap, not even a month after the bailout. Yet Detroit has been asking for a *loan* not a handout, and they get read the riot act. In a political environment where the big push for the presidential race was "we need to make new jobs and stop outsourcing" it would seem like the government would want to help keep actual US companies in business, rather than letting the US companies die and all of the foreign automotive companies have the industry.


The problems with Detroit's Big 3 are: 1) they already owe more than they're assets are worth (GM reportedly owes $48 billion right now); 2) their labor costs are far in excess of their competitors; 3) they have a bloated and hugely expensive retirement system which supports more retirees than they currently have workers; and 4) they don't produce vehicles which the public perceives to be worth what they cost to build. To sell their products GM, Chrysler and Ford are often forced to offer them for below cost. Lending Detroit more money won't solve any of these problems.

Very accurate... Which is why I'd like to see them actually get into bankruptcy proceedings, to be able to renegotiate many of those issues and alleviate some of the hemorrhaging. Just the union contract renegotiation would make huge strides, and keep in mind that most of that retirement/pension fiasco was union-driven as well. Foreign car makers don't have to deal with most of this crap, and even those plants in the US can skirt many of the labor issues without penalty - oh, but if a US company doesn't roll over for the unions, they get pummeled. Goes to show how easy it is to blind a government to issues in their own back yard, when you throw enough lobbyists and money at the individuals running the show.


The Democratic Party has relied on the labor vote for more than half a century and they can't be seen to be indifferent on this question even though the UAW is more than a little culpable in Detroit's current troubles. So it's entirely understandable that the Democrats in Congress are beating the Doom Drum and loudly proclaiming that if the Big 3 fail, a new Great Depression will engulf us all. It's almost a job requirement for them! <g>

I don't know if a depression is actually in the offing but even if it is, I don't think bankruptcy in Detroit will matter much; after all, bankruptcy doesn't mean they have to shut down, just that their debt payments will be put on hold and their labor contracts subject to judicial review. The USA survived the bankruptcy of the steel industry, the railroads, the airlines and dozens of other important sectors over the last 30 years, we can also survive if Detroit goes bust. Sure, the transition will be painful for auto workers but if America still needs to buy new cars then there will still be work for them - though perhaps at plants with different signs over their doors and at a much lower wage rate. But if America doesn't keep buying new cars, that is if we really *do* enter a prolonged depression, then it won't matter how much money the government lends to Detroit, they'll be finished anyway.


Me, I'd rather see the companies go into bankruptcy proceedings. They have been trying to streamline for years, but have had one massive blockade: unions. Part of the reason the US companies can't remain competitive has to do with the ridiculous labor costs per car, that have been constantly driven higher and higher by the unions. In many cases, the US companies have more automation and fewer workers on each assembly line than comparable foreign manufacturers, and yet US cars have a much higher percentage of labor costs. Let the bankruptcy proceedings get far enough, and they have a legal "do-over" where they can throw out any previous labor agreements and start from scratch. It's amusing to see how the labor unions are currently "willing to talk" and "willing to make concessions" when bankruptcy is looming on the horizon, but up until now it's been "pay us what we ask or we strike" and a constant squeeze on those same car companies they now are stumbling all over themselves to help. Way to man the buckets after you already busted holes in the floor of the boat.


Another problem: the CAFE regulations which force the Big 3 to produce a sufficient number of small fuel-efficient cars to offset the large luxury cars, SUVs and trucks which are their real bread and butter. The Big 3 can sell large expensive vehicles at a profit but their small cars can't compete with offerings from Japanese and European producers, who of necessity, have been making excellent small gas-misers for decades. The law forces them to put enough of these things on dealers' lots to bring up their average fuel mileage - but they don't sell except at a huge discount. Their losses on these small cars outweigh their profits on large cars and thus they sink further and further into debt. If they really want to save Detroit, Congress should repeal the CAFE laws, or at least give the Big 3 a waiver. That would be unfair to the competition, but then so is offering them a loan.

Hadn't even considered that issue... Very good point. But ironically, the SUV and luxury market is no longer the bread and butter, in fact that whole market became a pariah when gas prices hit record highs...
Now that the prices are down to 3 year lows, no telling what will happen.


The precipitous rise in the price of oil, from $30 a barrel to near $150 in just 15 months was a real kick in the testicles for Detroit. The billions that they lost this year because of the sudden shift in consumer buying habits, on top of the billions they already owed, have led them to the brink. IMO, they should be allowed to topple. Even though oil prices have dropped lately (pick-up trucks and SUV sales rose and hybrid sales were down in November compared to October), long-term prospects indicate that they won't stay that way and Detroit simply can't build small fuel-efficient cars at a price or quality level that matches their competition.


Honestly, I think if they were to get a loan, the big stipulation I would like to see on it is that they produce more efficient vehicles... Not the ridiculous "hybrid" vehicles they are rolling out now, that actually cost more in production (and long term carbon footprint) than traditional vehicles, with very little gain - pretty sad when they hybrid version of some of these vehicles gets lower fuel economy than their traditional counterparts, eh? Make the Big 3 actually produce *real* green vehicles, and tailor them towards the new president's big energy and conservation push. Seems like a perfect opportunity for a meshing of goals there, don't you think?


As part of the new CAFE bill, Congress already loaned Detroit $25 billion earlier this year to assist them in retooling for the smaller vehicles necessary to meet its regulations. I think Detroit's problems are systemic and not amenable to short-term fixes. Chrysler is probably already dead. Daimler-Benz spent billions to buy Chrysler and lost more billions with them each year they owned them; now Cerberus, the private equity firm that bought the company from Daimler is looking *very* uncomfortable. Ford is in better shape though I don't think its prospects look all that good down the line; and if GM wants to survive it's going to have to take *drastic* steps, steps it should have begun taking 15 years ago when Toyota, Honda and Nissan began building auto plants in the US. Detroit simply can't stand pat. They have to do something and bankruptcy court appears to be the only thing they haven't tried.



--
"Man will always be Man. We tried so hard to create a society that was equal, where there'd be nothing to envy your neighbor. But there's always something to envy: a smile; a friendship; something you don't have and want to appropriate. In this world, even a Soviet one, there will always be rich and poor; rich in gifts - poor in gifts, rich in love - poor in love." - Comrade Commissar Danilov in "Enemy at the Gates"
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