Now that we taxpayers own GM and Chrysler, car buying won't be the same. The next time you buy a car, should you favor your car companies, as opposed to Ford, Toyota, Honda, etc.? After all, if GM and Chrysler sell more cars rather than less, they will need fewer of your tax dollars in bailout money from the U.S. Treasury. And the Treasury's holdings of GM and Chrysler stock will increase in value, which could ultimately ease your tax burdens if the government sells these shareholdings at a profit. Why not make some money while you spend some?
Perhaps you'll see the Secretary of the Treasury or the Vice President on prime time TV, pitching GM or Chrysler products. (Biden's got the smile for the job.) The Social Security Administration could include brightly colored sales brochures along with your annual benefits statement.
The Fed might offer zero percent financing for GM and Chrysler vehicles, but only until the end of the month. The IRS could give rebates for purchases made during this weekend's bargain blowout.
If the GM or Chrysler product you buy turns out to be a lemon, you'll be able to write your Representative or Senator about warranty work that isn't satisfactory. And you can complain to the Treasury, or better yet the White House, if there aren't enough cupholders or the paint peals after a few years.
Bad boys who fear the FBI will learn to look for unmarked GM or Chyrsler sedans, instead of Ford Crown Vics. The EPA Adminstrator's official car will be a Chevy Volt.
If things turn out well enough for GM and Chrysler, maybe Ford will want to sell some stock to the U.S. government. Toyota and Honda, too. After all, business is business.
Showing posts with label Chrysler bankruptcy. Show all posts
Showing posts with label Chrysler bankruptcy. Show all posts
Monday, June 1, 2009
Sunday, May 31, 2009
GM, Chrysler, Lies and Statistics
One of the truest thing ever said is that there are lies, damn lies, and then statistics. One shouldn't confuse statistics with underlying truths. It is easy to become obsessed by statistics, and lose sight of underlying truths.
The Gross Domestic Product (GDP) is a measure of economic activity. In essence it consists of adding up all expenditures for consumption, investment (without accounting for depreciation), government, and exports, and then subtracting imports. GDP, therefore, can be said to measure total national spending. If the government focuses on boosting GDP, then increasing any of these types of spending serves the policy. And when times are good, it may not seem to matter if $1,000,000 is spent investing in a chain of franchised hair salons, a small software company, or a machine tool shop.
However, not all economic activity is the same. That becomes clearer when times are tough. As the unemployment rate rises and the nation looks for ways to create jobs, the need for more hairstylists to give $100 haircuts is a lot lower than the need for skilled computer programmers to create ingenious new software or for skilled workers to operate the precision machine tools used to produce high quality equipment. Economic strength comes from having strong core industries that produce essential or important products. One can't build lasting wealth by processing documents for refinancing mortgages or underwriting asset securitizations. There have been many economically healthy times without refi transactions or a securitization market. But true economic strength is difficult to attain without robust industries that make tangible and valuable products.
That's why the government's bailouts of GM and Chrysler from bankruptcy make sense. Manufacturing motor vehicles not only employs a lot of people, it also uses a lot of technology. Modern cars and trucks require advanced materials; sheet steel isn't enough. They also contain a lot of computing power--dozens of tiny computers are built into today's cars and trucks to do everything from regulating the mixture of fuel and air going into the engine's cylinders to triggering the air bags to operating the GPS system. The days when a 17-year old kid could work on a car with a couple of screwdrivers and a set of socket wrenches are long gone. Thus, the auto industry supports a variety of sectors of the economy.
It also helps to preserve critical manufacturing skill sets. Only a small number of nations have skilled workers who can operate precision machine tools, the foundation of any advanced manufacturing industry. The machine tool industry makes the machines that make the cars, airplanes, and goods that we consume. If you've ever wondered how the HVAC system in your house was made, it was made by machines that were built by the machine tool industry. Without machine tools, we'd be back in the 18th century, relying on fireplaces and open windows. Machine tools also built the machines that built the tractors, harvesters and other equipment used by farmers. Food would be much more expensive and less abundant without machine tools.
The government will no doubt do some dumb and silly things with GM and Chrysler. There are fears that bureaucrats may end up deciding how many cars will be blue and how many will be red. Or how many models and options will be available. Surely, on a day-to-day, granular level, some of the taxpayers' money will be wasted. When that happens, the press will have a field day playing gotcha journalism, which will curb any bureaucratic inclinations toward micromanagement.
Government subsidies have been crucial in the nation's development. The settlement of the vast farmlands of the Midwest and West was facilitated by the Homestead Act and the government's subsidies to the railroads, which could cheaply ship goods to farmers and bring their harvests to the populous East. The Postal System's mail delivery contracts were crucial to the infant commercial airline industry in the 1920s and 1930s. The Interstate Highway system speeded up all economic activity. The Internet began as a Defense Department experiment, and has evolved into the biggest information revolution in history.
The auto industry historically led the way out of recessions. This time, things will be different. GM and Chrysler have shut down a number of plants and largely halted production for the next few months. They and their suppliers have laid of hundreds of thousands, and many more layoffs are likely by the end of the summer. Production, we hope, will then resume. But without the tens of billions dollars in government bailouts, GM and Chrysler would very likely be headed toward liquidation. In that case, which American industry would lead the way out of recession? There aren't many good candidates.
The government bailouts of GM and Chrysler aren't a sure bet. The taxpayers could be taken to the cleaners. But what's the alternative? A trip to the cleaners anyway for heightened recession, increased unemployment compensation and Medicaid costs, and ripple effect bankruptcies of suppliers and the unemployed. In some communities, the tertiary impact might even lead to municipal bankruptcies and unheated classrooms. Trillions of dollars of federal bailout money has been expended to stabilize the banks. Bank stocks are doing better, and refi activity is up. But you can't build a strong economy just by refinancing mortgages, even if the increased spending from refi increases GDP on a statistical level. We took that approach recently, in the early 2000s, and things didn't turn out so well.
The financial system cannot become truly healthy, and the economy cannot truly recover, until the real economy revives. That's why the GM and Chrysler bailouts, as distasteful and risky as they may be, are sound government policy.
The Gross Domestic Product (GDP) is a measure of economic activity. In essence it consists of adding up all expenditures for consumption, investment (without accounting for depreciation), government, and exports, and then subtracting imports. GDP, therefore, can be said to measure total national spending. If the government focuses on boosting GDP, then increasing any of these types of spending serves the policy. And when times are good, it may not seem to matter if $1,000,000 is spent investing in a chain of franchised hair salons, a small software company, or a machine tool shop.
However, not all economic activity is the same. That becomes clearer when times are tough. As the unemployment rate rises and the nation looks for ways to create jobs, the need for more hairstylists to give $100 haircuts is a lot lower than the need for skilled computer programmers to create ingenious new software or for skilled workers to operate the precision machine tools used to produce high quality equipment. Economic strength comes from having strong core industries that produce essential or important products. One can't build lasting wealth by processing documents for refinancing mortgages or underwriting asset securitizations. There have been many economically healthy times without refi transactions or a securitization market. But true economic strength is difficult to attain without robust industries that make tangible and valuable products.
That's why the government's bailouts of GM and Chrysler from bankruptcy make sense. Manufacturing motor vehicles not only employs a lot of people, it also uses a lot of technology. Modern cars and trucks require advanced materials; sheet steel isn't enough. They also contain a lot of computing power--dozens of tiny computers are built into today's cars and trucks to do everything from regulating the mixture of fuel and air going into the engine's cylinders to triggering the air bags to operating the GPS system. The days when a 17-year old kid could work on a car with a couple of screwdrivers and a set of socket wrenches are long gone. Thus, the auto industry supports a variety of sectors of the economy.
It also helps to preserve critical manufacturing skill sets. Only a small number of nations have skilled workers who can operate precision machine tools, the foundation of any advanced manufacturing industry. The machine tool industry makes the machines that make the cars, airplanes, and goods that we consume. If you've ever wondered how the HVAC system in your house was made, it was made by machines that were built by the machine tool industry. Without machine tools, we'd be back in the 18th century, relying on fireplaces and open windows. Machine tools also built the machines that built the tractors, harvesters and other equipment used by farmers. Food would be much more expensive and less abundant without machine tools.
The government will no doubt do some dumb and silly things with GM and Chrysler. There are fears that bureaucrats may end up deciding how many cars will be blue and how many will be red. Or how many models and options will be available. Surely, on a day-to-day, granular level, some of the taxpayers' money will be wasted. When that happens, the press will have a field day playing gotcha journalism, which will curb any bureaucratic inclinations toward micromanagement.
Government subsidies have been crucial in the nation's development. The settlement of the vast farmlands of the Midwest and West was facilitated by the Homestead Act and the government's subsidies to the railroads, which could cheaply ship goods to farmers and bring their harvests to the populous East. The Postal System's mail delivery contracts were crucial to the infant commercial airline industry in the 1920s and 1930s. The Interstate Highway system speeded up all economic activity. The Internet began as a Defense Department experiment, and has evolved into the biggest information revolution in history.
The auto industry historically led the way out of recessions. This time, things will be different. GM and Chrysler have shut down a number of plants and largely halted production for the next few months. They and their suppliers have laid of hundreds of thousands, and many more layoffs are likely by the end of the summer. Production, we hope, will then resume. But without the tens of billions dollars in government bailouts, GM and Chrysler would very likely be headed toward liquidation. In that case, which American industry would lead the way out of recession? There aren't many good candidates.
The government bailouts of GM and Chrysler aren't a sure bet. The taxpayers could be taken to the cleaners. But what's the alternative? A trip to the cleaners anyway for heightened recession, increased unemployment compensation and Medicaid costs, and ripple effect bankruptcies of suppliers and the unemployed. In some communities, the tertiary impact might even lead to municipal bankruptcies and unheated classrooms. Trillions of dollars of federal bailout money has been expended to stabilize the banks. Bank stocks are doing better, and refi activity is up. But you can't build a strong economy just by refinancing mortgages, even if the increased spending from refi increases GDP on a statistical level. We took that approach recently, in the early 2000s, and things didn't turn out so well.
The financial system cannot become truly healthy, and the economy cannot truly recover, until the real economy revives. That's why the GM and Chrysler bailouts, as distasteful and risky as they may be, are sound government policy.
Sunday, May 3, 2009
The Chrysler Bankruptcy: Creditors Hit the Wall
Secured creditors, the most favored class in finance, were probably glad to have this weekend to catch their breath after the Chrysler bankruptcy filing. They went eyeball to eyeball with the Obama administration in the Chrysler bailout negotiations, and didn't get what they wanted. Apparently, a large portion of Chrysler's secured debt was held by hedge funds and speculators of similar ilk that bought their holdings for pennies on the dollar and were hoping to extract more pennies from the government as part of a non-bankruptcy bailout. Faced again with the specter of Wall Street profiteering at the expense of middle class taxpayers, the Obama administration bargained hard for concessions. The secured debt holders played a classic game of Wall Street brinksmanship, and the company went over the brink into bankruptcy court.
The secured debt holders probably guessed that after the Lehman bankruptcy, where the Bush administration tried to impose discipline on creditors and wound up bailing out AIG's creditors dollar for dollar, the government would flinch whenever debt holders stood firm. But they may have failed to look objectively at political reality. The American taxpayer is fed up with bailouts for the wealthy, and the Obama administration may recognize that there is a limit to the government's borrowing and printing of money. Even though the U.S. government can run a marathon of a deficit, sooner or later it will hit the wall. And it did with the Chrysler situation.
The creditors are now stuck slugging it out in bankruptcy court, where they would have been if the government hadn't been around for them to try to game. Faced with having to rest on their legal rights, they may succeed to asserting their liens on Chrysler's assets. But so what? Who will buy those assets? There is only one ready buyer who will pay anything approaching a semi-passable price, and that's Fiat supported by the U.S. government. Those are the same players that the creditors just failed to game. With the auto market shrinking dramatically, Chrysler's factories and manufacturing equipment are basically surplus capacity. Few investors will buy production equipment that makes products with no market. The secured creditors won't realize much more than scrap value if they try to auction off Chrysler's hard assets piecemeal. The only significant value in this bankrupt's estate lies in selling some portion of Chrysler as a going concern, with the tradenames that for decades have meant something to Americans. So the secured creditors will probably find themselves again staring at the U.S. government and Fiat as the only buyers willing to pay anything substantial for Chrysler's assets. Do they think they'll see much improvement in the price offered?
By taking creditors off the pedestal that the Bush administration put them on with the AIG bailout, the Obama administration has done well for taxpayers. The GM bailout remains on the negotiating table, and the lines in the sand are now clearer. A resolution with GM's creditors may now be easier. Even more importantly, creditors of large financial institutions must now be furrowing their brows over the possibility that the U.S. government might not pay them out dollar for dollar. Perhaps they're even beginning to perspire. That's not a bad thing. It took a lot of creditor participation to make the big banks too big to fail. If creditors realize that too big to fail doesn't mean too big for creditors to take a loss, then some degree of rationality might return to the money markets. Markets where certain players cannot lose are destined for dysfunction, and that's where we are with today's credit markets. Perhaps creditors will in the future be less eager to participate in the over-leveraging of already large banks.
"Irony" is used way too much in today's public discussion. But one irony of the Chrysler situation is that a foreign auto company may end up being the biggest winner. That shouldn't provoke too much concern. All auto companies today with any chance of success are multi-national. Toyota is famously global, sometimes shipping a few thousand vehicles a year to dusty third world countries that most sales executives in Detroit never heard of. One reason why Toyota compact pickup trucks perform so well is that they have been tested in every imaginable environment. Ford and GM have a chance of survival in part because they have worldwide operations. Chrysler was too heavily concentrated in North America, and was highly vulnerable when the North American credit bubble popped. Linking the surviving parts of Chrysler with Fiat strengthens both companies. Many people employed at Chrysler and its parts suppliers won't be returning to the plants, because their jobs are gone forever. However, some will if the Chrysler bankruptcy reorganization is successful, and many dealerships could survive as Chrysler/Fiat dealerships. Perhaps 100,000 or more jobs could be saved.
Government assistance in the economy has a long history in America. The Erie Canal, the homesteading of the West, the national railroad system, the air transportation system, the interstate highway system, and the enormous tax and finance subsidies for residential real estate are just some of the most obvious examples. Government safety nets like unemployment compensation, health insurance for many of the needy, and worker retraining programs play important roles in softening the harshness of capitalism. Manufacturing is part of the core of any strong economy, and some government assistance to preserve manufacturing jobs is likely to be money well-spent. We can't build an economy processing paper for home loan refinancings and mortgage securitizations. We need to make things--things people want to buy. Let's hope for a successful reorganization of Chrysler in bankruptcy court.
The secured debt holders probably guessed that after the Lehman bankruptcy, where the Bush administration tried to impose discipline on creditors and wound up bailing out AIG's creditors dollar for dollar, the government would flinch whenever debt holders stood firm. But they may have failed to look objectively at political reality. The American taxpayer is fed up with bailouts for the wealthy, and the Obama administration may recognize that there is a limit to the government's borrowing and printing of money. Even though the U.S. government can run a marathon of a deficit, sooner or later it will hit the wall. And it did with the Chrysler situation.
The creditors are now stuck slugging it out in bankruptcy court, where they would have been if the government hadn't been around for them to try to game. Faced with having to rest on their legal rights, they may succeed to asserting their liens on Chrysler's assets. But so what? Who will buy those assets? There is only one ready buyer who will pay anything approaching a semi-passable price, and that's Fiat supported by the U.S. government. Those are the same players that the creditors just failed to game. With the auto market shrinking dramatically, Chrysler's factories and manufacturing equipment are basically surplus capacity. Few investors will buy production equipment that makes products with no market. The secured creditors won't realize much more than scrap value if they try to auction off Chrysler's hard assets piecemeal. The only significant value in this bankrupt's estate lies in selling some portion of Chrysler as a going concern, with the tradenames that for decades have meant something to Americans. So the secured creditors will probably find themselves again staring at the U.S. government and Fiat as the only buyers willing to pay anything substantial for Chrysler's assets. Do they think they'll see much improvement in the price offered?
By taking creditors off the pedestal that the Bush administration put them on with the AIG bailout, the Obama administration has done well for taxpayers. The GM bailout remains on the negotiating table, and the lines in the sand are now clearer. A resolution with GM's creditors may now be easier. Even more importantly, creditors of large financial institutions must now be furrowing their brows over the possibility that the U.S. government might not pay them out dollar for dollar. Perhaps they're even beginning to perspire. That's not a bad thing. It took a lot of creditor participation to make the big banks too big to fail. If creditors realize that too big to fail doesn't mean too big for creditors to take a loss, then some degree of rationality might return to the money markets. Markets where certain players cannot lose are destined for dysfunction, and that's where we are with today's credit markets. Perhaps creditors will in the future be less eager to participate in the over-leveraging of already large banks.
"Irony" is used way too much in today's public discussion. But one irony of the Chrysler situation is that a foreign auto company may end up being the biggest winner. That shouldn't provoke too much concern. All auto companies today with any chance of success are multi-national. Toyota is famously global, sometimes shipping a few thousand vehicles a year to dusty third world countries that most sales executives in Detroit never heard of. One reason why Toyota compact pickup trucks perform so well is that they have been tested in every imaginable environment. Ford and GM have a chance of survival in part because they have worldwide operations. Chrysler was too heavily concentrated in North America, and was highly vulnerable when the North American credit bubble popped. Linking the surviving parts of Chrysler with Fiat strengthens both companies. Many people employed at Chrysler and its parts suppliers won't be returning to the plants, because their jobs are gone forever. However, some will if the Chrysler bankruptcy reorganization is successful, and many dealerships could survive as Chrysler/Fiat dealerships. Perhaps 100,000 or more jobs could be saved.
Government assistance in the economy has a long history in America. The Erie Canal, the homesteading of the West, the national railroad system, the air transportation system, the interstate highway system, and the enormous tax and finance subsidies for residential real estate are just some of the most obvious examples. Government safety nets like unemployment compensation, health insurance for many of the needy, and worker retraining programs play important roles in softening the harshness of capitalism. Manufacturing is part of the core of any strong economy, and some government assistance to preserve manufacturing jobs is likely to be money well-spent. We can't build an economy processing paper for home loan refinancings and mortgage securitizations. We need to make things--things people want to buy. Let's hope for a successful reorganization of Chrysler in bankruptcy court.
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