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The First $250,000,000,000.00
Tom Friedman wrote a piece today criticizing Treasury’s use of the first $250B of the $700B “bailout” funding to buy equity in banks, saying it will stifle creative lending. Friedman is apparently naive.
The reason Treasury put money into large banks was not to “stimulate” the banking system. The reason is so that the banking system can function at all and so large banks can buy smaller banks. The reason Treasury wants large banks to be able to buy smaller ones (really, mid-sized ones) is that they want an insurance policy against the public panicking about the safety of their deposits in some mid-sized or small banks. Public distrust could cause a run on a bank which could then escalate into a run on many banks and then could force Treasury to declare a bank holiday as had to be done during the depression. The reason Treasury wants such an insurance policy is that they know a hell of a lot more about the condition of banks around the country and given that information they think that a public banking panic is sufficiently likely that an expensive insurance policy is warranted.
Now insurance companies and car companies are asking Treasury for similar funding. Let’s hope that Treasury concludes that no more insurance companies need an insurance policy against an insurance panic - beyond the existing AIG policy. If they decide otherwise we will have to conclude that things are a lot worse in the financial arena than people are thinking they are right now.
As for the car companies, let’s hope the government has the guts and wisdom to let them go bankrupt. The car companies need a cleansing of their legacy labor contracts and some of their brain-dead management in order to re-organize into a healthy and much smaller industry. The nature of demand for cars has morphed very largely from a basic need for transportation to a discretionary need for entertainment and luxury. Few people buy a new car any longer because they “need” it . They buy a new car every two or three years - aided by cheap financing that is now being eliminated - because they are bored and want a new toy. During a deep recession such discretionary demand will drop (is dropping) like a rock. And it still has plenty of room to drop a lot further.
There is little difference between G.M., Ford, and Chrysler. They all make adequate products that are almost up to the standards of Japanese and German makers. And they all have terrible dealer networks that are difficult and depressing for consumers to utilize. I won’t go into detail about my heroic but ultimately unsuccessful attempt to buy a Ford recently. I bought a Toyota, no problem. The three companies should be consolidated into one U.S. car company - after they all go bankrupt.
I will say one thing in defense of U.S. car companies. The Koreans have been selling their cars in the U.S. at what I believe are less than full cost prices in order to jump start their manufacturers by helping to cover the overhead without providing a profit. I think that is unfair competition and that a tariff may be warranted in this instance.
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11 responses so far ↓
1 robert essian // Oct 27, 2008 at 2:40 am
Jim, I trust the Fed to get this right because they must.
I’m afraid you will be right about the automotive companies GM, Ford and Chrysler.
Should they go bankrupt expect some civil disobedience because this town is scared. The only way they know to express it is to show their collective displeasure. Hopefully something else can be done.
The next President will have to come out running from the first day he’s elected not when he takes office.
Off this subject: Energy Bulletin had an article called “Dawn of the New energy order” today. Excited the hell out of me…Have a good day
2 Bruce // Oct 27, 2008 at 3:17 am
Hi Jim,
Isn’t creative lending that what has us where we are today? I can’t help but notice that $250b and $250k look somewhat similar. This is in regarding insured funds in banks. This makes me wonder just how figures are derived. It almost sound down and dirty…one hundred little Indians.
Jim, do you recall a few years ago the book (I think) titled Gorilla Investing? It claimed “all you needed to know”, about investing. I think it might work for the Feds and banking.
I feel Tom should be talking about not stifling creative car building.
Where will the several hundred billions go that is left to be spent?
3 Bruce // Oct 27, 2008 at 5:59 am
Ok everyone!
It just occurred to me.
Be happy to know that the market will have somewhere between now and St. Valentine Day to hit it’s bottom.
Why?
Because.
Not because I said so but rather it won’t be able to fall any further!
4 robert essian // Oct 27, 2008 at 6:03 am
Jim, just read an article that claims if a bankruptcy of GM and Ford would create 2 million jobs lost!
I haven’t the expertise to understand what this means in dollars and sense. However, if true maybe it would be cost effective to bail out these companies with loans. Then have as part of an energy policy promoting these companies as part of the solution. It would be good PR and help to pay back the loans.
The legacy costs will have to be negotiated downward as it would be better to have something than nothing and allow these companies to compete with non-union shops that exist in the South.
5 robert essian // Oct 27, 2008 at 6:33 am
PS: Sense (if spelled right) was intended. I find myself shaking my head at all the harm this would cause all these people. Senseless if you ask me…
6 KV // Oct 27, 2008 at 12:11 pm
Jim,
Friedman is not apparently naïve, HE IS!
During build up to Iraq war, he supported it; and, wrote a series of columns about Two Sayd(Spell?), which were total baloney. His reputation was in tattered after the Iraq war. He claimed to rehabilate himself by writing columns in how things went wrong, but never a regret that he was part of the propaganda for the war. He really believed Wolfo’s b s about Iraqis coming out with flowers.
But the pompous wrote about flat earth, about India and China and their economy, conveniently forgetting that together, these two countries had population that was TEN times ours. There was no way these countries could even come to 1/10th of our economy standard while the population was rising unabated. But, it was a comfortable lie for the rest of the world to speculate for unprecedented demands for the resources from the world over. The price these two countries have paid is unbelievable, economically and culturally: how many of us have received calls from an Indian sounding voice claiming he is John or Joanne peddling dish network or some other crap. All these call center employees work in a gated office buildings surrounded by slums. Much of the development came from building toys or writing software for the West; and there was small real growth, except in the MTV type industry. Go to any Indian restaurant and you will fine stupidly dancing people on TV, song after song. And much of Southeast Asia is overpopulated and life is so cheap, that girls are sold before they have even reached puberty (Nicholas Christoff – NYT).
While this was going on, we sent out our plants – everything, machinery, know-how, people - to China and south America so that we can manufacture cheaply. I could go on. Most of these columnists are paid for propaganda and Friedman is the worst.
7 Bruce // Oct 27, 2008 at 11:49 pm
Hi Jim,
You state that major US car compaines are almost up to standards of Japan and German compaines. That is not a good thing.
What I think might be a good thing is mergers rather then failures. The catch is how to get leadership to encourage workers to design, develop and produce. The catch also includes doing so here in the US. Is seems that bean counters have run the show to their gains and not shareholders and not US citizens.
Can someone explain to me why ?
8 robert essian // Oct 28, 2008 at 8:15 pm
Jim, IEA is reporting that all existing world oil fiekds will drop 9.1% (Financial times) year over year. Are these figures right?
Demand is expected to drop 5% next year.
Your logic is better than mine so what does this mean?…Good night
9 robert essian // Oct 29, 2008 at 3:28 am
Jim, thank you for having this sight for free. It is a must stop before work, after work and before I settle in.
The World is changing so fast and I must be prepared, you help me do this…Thanks again
10 KV // Oct 29, 2008 at 8:01 am
Bruce - you wrote:
Hi Jim,
You state that major US car compaines are almost up to standards of Japan and German compaines. That is not a good thing.
What I think might be a good thing is mergers rather then failures. The catch is how to get leadership to encourage workers to design, develop and produce. The catch also includes doing so here in the US. Is (It?) seems that bean counters have run the show to their gains and not shareholders and not US citizens.
Can someone explain to me why ?
What is your question here? What explanation do you need? Looks like you use random sentence genrator to post.
11 wkwillis // Nov 21, 2008 at 2:45 pm
Bankruptcy allows the automakers to escape from their dealership contracts, which are actually more expensive than their union contracts.
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