Should Detroit receive a bailout?

[iNow]

From an operational/logistic standpoint, they also wasted a bunch of money that could have been focussed on retooling their machines and/or saving jobs.

[Pangloss]

This morning the story is that apparently we're going to bail out Citi Group with another $20 billion, on top of the $25 billion they've already gotten from the bailout fund, and we've also agreed to assume about $306 billion in risk.

 

Without so much as a single executive flying in on a corporate jet for a "hearing".

 

http://www.reuters.com/article/vcCandidateFeed2/idUSTRE4AJ45G20081124

[npts2020]

I wonder what Citigroup's "plan" is?

[iNow]

I wonder what Citigroup's "plan" is?

 

The fundamental difference is that Citigroup has tons of sectors where they make money. They are diversified and pull in cash from multiple avenues of offerings and services. Their difficulty right now is not the result of their own mistakes, but of the market. However, the automakers manufacture cars that have poor fuel standards and which nobody really wants right now, and desperately needs to retool their plants to allow for manufacture of higher efficiency cars with less time and less cost. These are completely different, especially since the possibility of Citi paying back the loan to the government (with interest) is SIGNIFICANTLY greater than the possibility of the automakers paying back the loan to the government (even after they come up with a "plan" to remain viable and not just ask for more in 3 months).

[bascule]

This morning the story is that apparently we're going to bail out Citi Group with another $20 billion, on top of the $25 billion they've already gotten from the bailout fund, and we've also agreed to assume about $306 billion in risk.

 

Without so much as a single executive flying in on a corporate jet for a "hearing".

 

http://www.reuters.com/article/vcCandidateFeed2/idUSTRE4AJ45G20081124

 

In other news two wrongs make a right. Full story at 11.

[john5746]

Their difficulty right now is not the result of their own mistakes, but of the market.

 

I'm not sure you can say that at this point. I would think it should be easier for a money mover to turn the ship around than a manufacturing company, but I am not ready to say they didn't make huge mistakes.

[iNow]

I'm not sure you can say that at this point. I would think it should be easier for a money mover to turn the ship around than a manufacturing company, but I am not ready to say they didn't make huge mistakes.

 

Yeah, that's a very fair point. I may have been too quick with my words in that previous post. My intent was not to support the bailout per se, but to describe some of the key differences between bailing out Citibank and bailing out the automakers. In the process, I may have "over stated" my case. Thanks for the correction.

[padren]

Out of curiosity, how does bailing out Detroit factor into the whole concept of global free markets? I remember some time hearing about some sort of import/export issue with some foreign company over a huge blur between the private/public sectors... is that a factor or do other nations not really care?

 

It does kind of give me pause though, to think our government is probably going to borrow a lot of that bailout money from Japan, and it's going to go directly towards our private industry's attempt to kick their private industry's butt in the auto market.

 

 

I wonder how the head people at Honda, Toyoda, Mitsubishi etc feel about their tax dollars being loaned from their government to our government, to help our private companies to gain enough competitiveness to cut into their market share and profits?

[iNow]

Out of curiosity, how does bailing out Detroit factor into the whole concept of global free markets?

Is this an academic exercise, or can you actually name any single market on the planet that is "free?"

 

 

I wonder how the head people at Honda, Toyoda, Mitsubishi etc feel about their tax dollars being loaned from their government to our government, to help our private companies to gain enough competitiveness to cut into their market share and profits?

Good question. In some sense, I speculate that this has been somewhat good for companies like Honda (although, they too are facing tough conditions as consumers avoid big ticket items like cars). The reason I put this forward is that some people are recognizing how strong they are as a result of their smart decisions, and how much safer it is to invest with them over GM, Ford, and Chrysler.

 

 

http://www.cnbc.com//id/27895948

Japan's Nikkei 225 Average [JP;N225 8094.83 184.04 (+2.33%) ] jumped 4 percent, as a surge in U.S. shares on Washington's decision to rescue Citigroup [C 5.95 2.18 (+57.82%) ] encouraged investors to buy equities, with exporters such as Kyocera bought after the yen remained below last week's high. Another big exporter, Honda Motor, rose 5 percent.

 

They were up 5% today, but their year over year sales are down more than 20% (not bad relative to Ford and GMs YoY being down more than 30 and sometimes closer to 40%). Honda sales are also up 3% month over month. Toyota is in a similar place, but Honda has definitely performed better (Toyota down almost 25% YoY, and only up 1.7% MoM).

 

http://www.cnbc.com/id/27889826/site/14081545

[Pangloss]

The fundamental difference is that Citigroup has tons of sectors where they make money. They are diversified and pull in cash from multiple avenues of offerings and services. Their difficulty right now is not the result of their own mistakes, but of the market. However, the automakers manufacture cars that have poor fuel standards and which nobody really wants right now, and desperately needs to retool their plants to allow for manufacture of higher efficiency cars with less time and less cost. These are completely different, especially since the possibility of Citi paying back the loan to the government (with interest) is SIGNIFICANTLY greater than the possibility of the automakers paying back the loan to the government (even after they come up with a "plan" to remain viable and not just ask for more in 3 months).

 

I tend to agree, and I feel a little better about it having read your reply. In fact as cynical as I've been about this whole process it still feels like the right answer, especially since these answers have NOT been blank checks. Even the weekend Citi bailout had some pretty mind-blowing criteria attached to it, including a $27 billion stake in the company and major changes in executive compensation.

 

On another front I think a lot of credit has to be given to Obama and Bush today, acting in accord and working hard to bring some stability to the situation. The Bush administration is keeping the president-elect in the loop, and the president-elect is supporting the administration thoroughly.

 

Even more effective have been Obama's economic policy team announcements, which are turning out to be very appealing not only to both Dems and Repubs, but also to Wall Street. These are smart people, and it shows.

[Skye]

You know I have this old MAD magazine somewhere. In it they are saying the US government should should get Chrysler to start making a car Americans want, given all the cash that was spent propping them up. And they had a picture of a VW Beetle. More things change eh?

[npts2020]

1)The fundamental difference is that Citigroup has tons of sectors where they make money. 2)They are diversified and pull in cash from multiple avenues of offerings and services. 3)Their difficulty right now is not the result of their own mistakes, but of the market. However, the automakers manufacture cars that have poor fuel standards and which nobody really wants right now, and desperately needs to retool their plants to allow for manufacture of higher efficiency cars with less time and less cost. These are completely different, especially since 4)the possibility of Citi paying back the loan to the government (with interest) is SIGNIFICANTLY greater than the possibility of the automakers paying back the loan to the government (even after they come up with a "plan" to remain viable and not just ask for more in 3 months).

 

1)True but they still make money mostly in one way, loaning money.

2) see 1), Diversification is their only hope, but if the downturn is nearly universal, even that might not help. Are there any new regulations in place about who they can loan the money to or under what terms?

3)We could argue till the cows come home about the causes but where in this are the ideas of market risk and moral hazard?

4)What is a multiple of zero?

 

Now they want to infuse $200 billion into consumer credit markets as well, $600 billion for home credit, $100-150 billion for freddie mac and fannie mae, just for starters. I could ask where all of the money is coming from but I can hear the money machine cranking out dollars. The real question is how will all of it ever get paid back? You can only have so much currency backed by nothing other than Isayso before people begin to wonder if their dollars are actually worth anything. The levels of leveraging and debt are very similar to those preceding the Great Depression but you don't hear much discussion of it. IMO the only further debt (national) worth incurring is investment in things that push technology into the future like, automating the transportation system, greener energy production, better sustainable agricultural techniques, and better education to name a few.

[ParanoiA]

npts2020, what's your problem? Haven't you got the message yet? This economic voodoo meddling is our chosen method. Stop whining about fiat currency, printing money, infusing capital here and there, as if they don't know what they're doing. These are really smart people and they know how to expell bad debt and bad investment without consequences.

 

Next up: protecting the animal kingdom from natural selection. We can still evolve without all of this death and unfair mating practices!! We just need to get in there and take control like we do with all systems.

[iNow]

The levels of leveraging and debt are very similar to those preceding the Great Depression but you don't hear much discussion of it.

While this is probably the worst we've seen since the great depression, the unemployment levels in the early 30s were between 25-30%. Right now, we are still at less than 7% unemployment. Not ideal, but also not the same at all, so such a comparison is hardly warranted at this time.

 

I appreciate the sentiment in your post (and ParanoiA's), but what do you think is going to happen if we don't infuse this money? Have you noticed countries across the planet are doing it, even China? Doesn't that make you pause to consider there may be good reason for doing so? That perhaps when you do a cost/benefit analysis, the costs of injecting funds are lower than the costs of not?

 

It's fine if you're angry and frustrated. At least focus the subject of that emotion into reality.

[ParanoiA]

I have another question...weren't they building cars we wanted three years ago? Weren't we buying the holy hell out of SUV's and knock-off hummers?

 

I haven't been following the market, so I'm probably way off. But it seems disingenuous to act as if all three of them were building cars nobody wants - as if we ALL rejected oil and gas while they "forced" the issue and tried to make us keep petrol in our lives.

 

It seems more like WE changed what we wanted, in a very short period of time when gas hit 4 bucks a gallon, and now we want to act like they should have already had electric cars rolling off the proverbial conveyor belt.

 

I can't help but consider the undeniable truth of markets - that they sell us what we buy. They pander to the public's demand. It's odd that all three would would pander inaccurately.

[iNow]

Ah, indeed. I saw the conversation shifting toward Citi, so was referring more to that action, and not really Detroit. I should have made that more clear in my previous posts.

[Pangloss]

You know I have this old MAD magazine somewhere. In it they are saying the US government should should get Chrysler to start making a car Americans want, given all the cash that was spent propping them up. And they had a picture of a VW Beetle. More things change eh?

 

Ayup.

 

It's an interesting example though because it actually stands as evidence of the potential success of bailouts. Chrysler would have ceased to exist, but instead of employed tens of thousands of workers for another twenty years and made some really bang-up cars in the meantime (and some awful duds as well -- nothing's perfect).

[npts2020]

iNow: I am neither angry nor particularly frustrated. What I am trying to point out is the fallacy of continuing to do business as usual and expecting a positive result. What economists do a very good job of is justifying why things are the way they are. What they do a very poor job of is explaining how things work the way they do. Unfortunately, I don't know much about the bailouts in other countries except that many are doing similar things to what the U.S. is trying to do and on a similar scale. Where is all of the money going? My bet is that it is not going toward any of the things I mentioned near the end of post #87. If it only goes to making more bad real estate loans or to entice people to go into further credit card debt where has it gotten us? BTW I think the automakers are as (un)deserving as the banks and should be treated no differently.

[Phi for All]

I can't help but consider the undeniable truth of markets - that they sell us what we buy. They pander to the public's demand. It's odd that all three would would pander inaccurately.

It *is* unrealistic to expect the automakers to have a whole line of what we want when we want it when we're talking about a completely different power source. Where we can point fingers is that they waited too long to invest in retooling. They were greedy and wanted to squeeze the last bit of profit from the old system, the same way big oil doesn't want to have to start building a bunch of domestic refineries. This is a time of high profit for those who have don't feel they have to invest in the future. This is what bugs me most about bailing them out. They get to have their cake and eat it too.

[Pangloss]

What I am trying to point out is the fallacy of continuing to do business as usual and expecting a positive result.

I don't think bailouts, particularly on this order of magnitude, can be called "business as usual".

[john5746]

Where we can point fingers is that they waited too long to invest in retooling.

 

Seems to me that the Japanese just followed their philosophy of small, incremental change instead of trying to hit an R&D home run. GM and maybe the others swung for the fences with an all electric vehicle and failed.

[ParanoiA]

It *is* unrealistic to expect the automakers to have a whole line of what we want when we want it when we're talking about a completely different power source. Where we can point fingers is that they waited too long to invest in retooling. They were greedy and wanted to squeeze the last bit of profit from the old system, the same way big oil doesn't want to have to start building a bunch of domestic refineries.

 

That doesn't seem fair in the least. Hell, I'm *still* not sure what to retool for. What design are they to hang their hat on? The volt? We're talking billions of dollars here and they're going to have to make a dramatic change and the whole market is teeming with R&D right now. One day this is hot, the next day something else. No one is sure about hydrogen or electric or something else. Then there's the infrastructure to support refueling whatever tech they choose. And there still isn't a car to roll off the conveyor yet.

 

I'm not understanding what exactly they should be retooling for just yet. Would seem better practice to continue R&D until they have a solid, dependable alternative that they can mass produce and sell. Remember, alternative vehicles are quite expensive and most of us cannot afford to subsidize their R&D with early purchases.

 

And the last thing they need to do is jump the gun and retool, lock-in some design that barely cuts the mustard only to be outshined by a competitor that was a bit more patient and rolled out a superior model. If they did jump too soon, we'd all be complaining that they tried to "profit" off of our aversion to oil and "they deserve it" and that's why they're going bankrupt and yadda yadda yadda.

 

GM didn't swing very hard at the EV-1 in the 90s. They tested it out only in California, leased them to a small amount of people, and their ads were bleak and lifeless and were nothing like the fun and sexy ads for their IC models. When their motivation to make fully electric cars evaporated, they pulled the leases and destroyed all the EV-1s, despite lessees who offered to purchase them.

 

But there wasn't the same demand for them that there is now. They aren't oil companies. They don't give a crap what you want them to make. Granted they have a symbiotic relationship with oil, but oil depends on them, they don't depend on oil. They'll make whatever auto matches your energy source if there is demand for it. But oil was cheap, like it's always been, and that infrastructure was there and the people demanded gas guzzlers and they made them. I don't see the problem with GM there. I see a problem with us, the consumers.

 

We want to blame big oil and automakers for OUR demands. Hilarious. It's like watching a teenager make believe that all of their problems are someone else's fault, while you explain to them that it's not, it's their own. We didn't want electric cars Phi. Only a handful of people did, and if I remember correctly, it was government coersion that got the EV going.

 

 

Seems to me that the Japanese just followed their philosophy of small, incremental change instead of trying to hit an R&D home run. GM and maybe the others swung for the fences with an all electric vehicle and failed.

 

Yeah, and that matches the attitude and spirit of those that were touting the energy challenge like going to the moon. Remember that? We just as easily could still be complaining about their lack of foresight and effort in retooling if they had made smaller changes like the Japanese. Instead, they seem to have complimented the grandoise nature of our demand for alternative fuels by going for 100% electric.

 

I will tell you, a hybrid has never been a possibility for me. It's all or nothing. It's all electric, hydrogen, perpetual motion...something, but I've never been satisfied with hybrids, even as a bridge. I'm not alone, and I'll bet GM had me in mind. Same with Tesla motors, Zap autos..etc.

Edited November 26, 2008 by ParanoiA

[Phi for All]

Seems to me that the Japanese just followed their philosophy of small, incremental change instead of trying to hit an R&D home run. GM and maybe the others swung for the fences with an all electric vehicle and failed.

GM didn't swing very hard at the EV-1 in the 90s. They tested it out only in California, leased them to a small amount of people, and their ads were bleak and lifeless and were nothing like the fun and sexy ads for their IC models. When their motivation to make fully electric cars evaporated, they pulled the leases and destroyed all the EV-1s, despite lessees who offered to purchase them.

 

Toyota actually did the smartest thing. They revamped their popular RAV4 model to accommodate an electric motor and a battery. Their retooling costs were minimized and the vehicle was not too costly. The reason the RAV4 EV failed was that GM sold their battery patent to Chevron, who stopped selling them to Toyota and anyone else unless they were making hybrids.

[npts2020]

I don't think bailouts, particularly on this order of magnitude, can be called "business as usual".

 

Other than our money instead of the corporate money being sent down the railway into oblivion, what has changed? I agree 100% with Phi for All that it is a great time for those who profit with no regard for the future.

 

Just was reading this at Boing Boing, called "Bailout Nation", about how expensive the bailouts in the past year or so have been compared to other large government expenditures in the past. The first number is original cost, the second adjusted for inflation.

Louisiana Purchase..........$15 million...............$217 billion

New Deal.......................$32 billion (est)........$500 billion

Marshall Plan..................$12.7 billion.............$115.3 billion

Korean War....................$54 billion................$454 billion

Vietnam War...................$111 billion..............$698 billion

Moon Race.....................$36.4 billion..............$237 billion

NASA's alltime spending....$416.7 billion............$851.2 billion

S & L bailout of the 1980's.$153 billion..............$256 billion

Current Iraq War..............$551 billion..............$597 billion

____________________________________________________

grand total..................................................$3.92 trillion

 

 

 

Current corporate bailout money given..............about $4.6 trillion

 

 

Just for a little perspective on our present situation.

[iNow]

Current corporate bailout money given..............about $4.6 trillion|

Can you elaborate on this? Define your terms and also the time frame, as well as who was giving and who was receiving? I may be missing something simple, but I don't follow where this number came from and what it's representing.