Should Detroit receive a bailout?

[ParanoiA]

Agreed. Fascinating perspective, but only if it checks out. I'm not seeing where 4.6 trillion comes from.

[Pangloss]

It's the old "adjusted for inflation" deal, I presume.

 

And it's all very interesting, but it doesn't constitute "business as usual". In fact it seems to clearly show something quite different -- that we resort to bailouts only when necessary. I won't take issue with you if you want to suggest that THAT's a bad thing, but I don't think that's something you can clearly demonstrate, I think it's just an opinion.

 

Ultimately it's all guesswork, I suppose. I don't know why anybody thinks they know what should be done. And it's always fashionable to question what actually DOES get done. Much harder to actually look at it objectively and try to figure out what the truth is, especially when it comes to something so inherently unprovable as long-term, large-scale macroeconomic trends under various ideo-economic perspectives.

[npts2020]

The $4.6 trillion was from the article, I will research it further for accuracy, but it doesn't seem far off. Also the numbers do not seem so far off that the point of it being an expenditure of historic proportion is invalid. I believe the time frame is since the AIG bailout. The article was written by Barry Ritholtz and there is more discussion of the article here ritholtz.com/blog/2008/11/big-bailouts-bigger-bucks

[iNow]

Thanks. I don't believe you ever shared that link in your previous post.

 

 

Drilling down from the comments in the link, I came to here:

 

 

http://www.bloomberg.com/apps/news?pid=20601109&sid=an3k2rZMNgDw&

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

 

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

 

Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.

 

Collateral is an asset pledged to a lender in the event a loan payment isn’t made.

 

‘That’s Counterproductive’

 

“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”

 

The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.

 

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.

 

Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

 

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”

 

 

Thanks for sharing, npts. It's not so much that I didn't trust the number you shared, it's that I was having a difficult time finding the context of it, and what it was representing. Cheers.

[Pangloss]

Also the numbers do not seem so far off that the point of it being an expenditure of historic proportion is invalid.

 

It does when your $4.6 trillion is spread out over more than two centuries and adjusted for inflation. The Louisiana Purchase was in 1803, for pete's sake.

 

What is the total GDP of this nation, adjusted for inflation, since 1803? That would give us a valid basis for comparison. Otherwise it's just "gee, what a big number".

Edited November 29, 2008 by Pangloss

[pioneer]

The current problem in Detroit is connected to their cost of manufacturing, which is higher than for competing auto makers from other countries like Japan. But is also due to the choices Detroit made over the past several decades and the rising fuel cost of today. A little history is useful.

 

In the mid 1970's, was the first energy crisis, where gas prices rose due to shortages. At that time Detroit was making nice cars that combined luxury and power. But after that shock, the push was for fuel economy. Many other countries like Germany and Japan had a head start. This began to increase the preference for foreign cars, since Detroit was caught with its pants down, unprepared for this new market.

 

This difficult change for Detroit was compounded by changing emission standards which turned the first generation of efficiency cars and all their cars into turtles, that couldn't get out of their own way. They could not just go bigger to compensate since the consumer also wanted good mileage.

 

One of the biggest changes was gas also changed from the 104 octane leaded gas to 87-93 octane unleaded. Cars went from steak to salad, with the EPA adding an elephant. Some of the first generation fuel efficient cars had a good balance of power and economy due to the leaded gas, with the high economy exempt from the elephant. The 1979 VW, which was one of the last leaded models, got 40 mpg highway and could go from 0-60 in 7 seconds. The EPA standards killed the first generation peppy fuel economy with salad and the elephant. You could no longer have both power and efficiency but had to pick one or the other, with people chosen more power.

 

This may have favored Detroit, who had perfected power much better than fuel efficiency. The way Detroit reacted was to recreate new old markets via the big SUV and luxury pick-up trucks. This worked during the boom years until gas prices began to rise over the past several years.

 

But Japan, saw this new big power market and gradually moved in while continuing to invest in fuel efficiency, which is needed in their own country due to high fuel prices. Detroit shot their wad on a short term strategy. The dropping fuel prices may allow them to resume that market strategy but not in the short term, especially with the need for greater energy independence, which means new types of vehicles. The bail out package has this in mind and will help pay for retooling but there will be a time delay.

 

In the short term, they can't compete in the fuel conscious market due to costs unless the mind set of the country returns to the bigger is better where they are already tooled up. This may never happen again, so they need to cut costs, to compete in a market the are not competitive in. Some of their high costs are connected to the labor unions and contracts. One quick option is bankruptcy so they can break the contracts and negotiate a better labor settlement to lower costs. This will make them competitive until the future retooling is complete.

[Pangloss]

The 1979 VW, which was one of the last leaded models, got 40 mpg highway and could go from 0-60 in 7 seconds.

 

Uh, I don't believe that. Got a source? Volkswagen is a make, not a model, and they were not that fast at that time. And I don't believe that MPG figure either. If memory serves their highest performing model that year was the Scirocco, which was something like 11 seconds to 60, and I'm thinking maybe 20 mpg -- half your figure. I ought to know -- I was 14 at the time and intimately familiar with the make, model and performance of every single car on the market. (Yeah I had it bad. Let's put it this way -- I knew how to pronounce "Csaba Csere" before I had my first date.) (lol) But of course my memory may be faulty -- let's see your data.

 

Incidentally, my '07 GM car does 0-60 in 5.3 seconds while getting 31 mpg on the freeway. You're putting way too much emphasis on leaded gas -- there've been a LOT of engineering improvements over the last 3-4 decades. This particularly stands out if you look at performance numbers for the big American muscle cars of the 1960s and 1970s and compare their performance-over-mass against sports cars today. The cars today weigh about the same, the horsepower is the same or less, but the cars are faster to 60 and get better gas mileage along the way. Put another way, there's more than one way to measure efficiency -- do you want to go a long way on a gallon of gas, or do you want to get to high speed really quickly? When you look at it that way cars today are way more efficient than they were 30 years ago.

 

I think they could easily make cars do 50-60mpg if they wanted to, and they would if the customers demanded it (which they're starting to do, although I think it's a bit of an open question at the moment due to the sudden drop in the pump price in recent months).

[jackson33]

Actually there are a good many sources. Google *1979 VW MPG* taking you pick. I chose 'mpgomatic.com'. Seems five 79 VW models went over 40, three of them over 50 MPG, as did some 13 other non-VW models including a couple Ford and Dodge Models. Did note a 1960 Polo reaching 60MPG on another site. None in the 20 MPG for VW, but the National Average in 1960 was 12.4 MPG, reaching 16.9MPG in 1991, where it held until 2004. Think the point made is obvious.

 

2 VW were sold in the US, at a Auto Show in 1949 and by 1955 a million were sold in the US. There claim to fame however was aligned more to clean burning, rather than MPG with gas prices around 20/30 cents per gallon. They had a 16 valve, four cylinder engine allowing almost total pure emission standard, as I understand it. GM, Saturn also has an impressive history, not often mentioned when innovation is lost in an excuse for the Big Three Sales decline.

 

In my opinion, couldn't explain if I knew; The connection between emissions, types of fuel available and other requirements mandated to auto makers, has made it complicated to keep MPG increasing. Even todays higher mileage cars are hybrids, burning no fuel part of the time, or they would still be down around 30MPG. I do think lead based fuels were more efficient for MPG, but very high held very emissions ratings.

 

Well, they do make cars that can travel up to 100 miles a day or more and burn absolutely no fuel, so to speak then its a question of convenience and afford ability to the consumer, who seems to appreciate that weekly or bi-weekly visit to the Gasoline Station.

 

(off topic note) Hope your don't get carried away on Prop 8 topic. By nature it can push the 'political correctness' envelope, but maybe its about time it get moved back to a point conversation can be held...

[Pangloss]

Pioneer was claiming that they got 40mpg while also doing 0-60 in 7.0 seconds. I know there were many cars that got great gas mileage during that time (there were several gasoline crises in the 1970s, you know), but that famous Rabbit diesel model, for example, which generated a LOT of buzz back in the day, did 0-60 in something like twenty seconds.

Edited November 29, 2008 by Pangloss

[npts2020]

Well, GDP in 1803 was a little over $1 billion (~$200/capita from wikipedia X 5.3 million population from 1800 census), so the La. Purchase was about 1.5% of GDP. The other expenditures are over more than one year and a little harder to figure out but I can say with certainty that none come even close to the 30% of current GDP that $4.6 trillion represents. Even if taxpayers only end up losing 10% of that money (an exceptionally optimistic figure imo) these bailouts will have cost us more than nearly any expenditure in our history. Look for those same corporations to be asking for debt forgiveness in a couple of years or sooner to keep them from failing once more. The biggest question is how long can you shovel money into a black hole with no plan for ever getting it back before your currency becomes worthless? IMO this bailout is just a scam to siphon as much money from the federal government as possible before it goes completely broke, the scale of this rip-off should even make the Pentgon blush.

 

p.s. I apologize for not having the link sooner but that isn't where I originally read it either.

[Pangloss]

I can say with certainty that none come even close to the 30% of current GDP that $4.6 trillion represents.

 

I think you're a bit confused (or maybe I am) -- nobody has said anything about spending $4.6 trillion this year. That was the figure you gave for total historic bailout spending over 205 years, which we obviously cannot compare with a one year GDP figure. It's apples and oranges.

 

Here's the problem: If we assume for the sake of argument that GDP has never grown, the total output over 205 years would be 2,870 TRILLION DOLLARS (14 x 205)(cited source). $4.6 trillion is one tenth of one percent of that number. But we can't go by that because GDP has skyrocketed since WW2, which is why I'm asking you for a better figure. Until you produce a figure for total GDP over the last 205 years we can't draw the comparison you're asking us to draw.

 

In short, you haven't demonstrated that bailouts are "business as usual". In fact your Louisiana Purchase updated information (1.5% of GDP) suggests the opposite.

Edited November 30, 2008 by Pangloss

[npts2020]

Pangloss; Well I totally misread the article if the bailout was over 205 years, I had the understanding that the $4.6 trillion was only what the federal government had guaranteed to corporations since the AIG bailout (it does include ~$2.9trillion of FDIC and Federal Reserve liability, however). Keep in mind the $700 billion Emergency Economic Stabilization Act of 2008 is in addition to other obligations already undertaken and is likely to be a low figure if the Fed continues on its current course. It is very difficult to get good numbers for all of this but I don't think anyone can deny that the giveout is of historic proportions.

Currency value (especially where there is nothing backing it) is only worth what a large majority of people think it is worth. Even people who do not have the time and wherewithal that I have to read about and try to put into perspective our national finances, are beginning to realize something major is wrong and they are not being told the truth by their leaders (the ones who know anyway). You have yet to give me a single reason why the current situation will change for the better, other than it always does. While I would tend to agree with you, I believe our time frames are probably very different. I do not think the current bailouts will do anything other than prolong things as they are. They will certainly not address any issues of sustainability or fairness that might exist as part of the problem and are likely to put us right back where we are if left that way. In order to leave this at a readable length I will stop except to say....

I am not trying to show that the bailouts are business as usual, in fact they are very unusual. What they are attempting to achieve is keeping afloat the unsustainable business as usual that got us into this mess to begin with.

[Phi for All]

I am not trying to show that the bailouts are business as usual, in fact they are very unusual. What they are attempting to achieve is keeping afloat the unsustainable business as usual that got us into this mess to begin with.

How do you feel about the phrase, "If a corporation is too big to fail, it's too big to exist"?

[Pangloss]

Currency value (especially where there is nothing backing it) is only worth what a large majority of people think it is worth. Even people who do not have the time and wherewithal that I have to read about and try to put into perspective our national finances, are beginning to realize something major is wrong and they are not being told the truth by their leaders (the ones who know anyway). You have yet to give me a single reason why the current situation will change for the better, other than it always does. While I would tend to agree with you, I believe our time frames are probably very different. I do not think the current bailouts will do anything other than prolong things as they are. They will certainly not address any issues of sustainability or fairness that might exist as part of the problem and are likely to put us right back where we are if left that way. In order to leave this at a readable length I will stop except to say....

 

I am not trying to show that the bailouts are business as usual, in fact they are very unusual. What they are attempting to achieve is keeping afloat the unsustainable business as usual that got us into this mess to begin with.

 

Thanks for clarifying that. I think these concerns are perfectly valid and much more in line with my own concerns over this situation. What's happening is pretty incredible, I completely agree. The potential for catastrophic failure is off the charts, requiring the very highest levels of intelligence, single-mindedness and integrity, and right at the very time when we seem least capable (politically) of any of those three things.

 

But there are two general categories of reasons that suggest that we're on the right course to me:

 

1) Just because the numbers are astronomical does not, in and of itself, mean it's a bad idea. Much of the fear here seems to be based on how large these numbers have been, but if you look at the economy and how rapidly it's grown, and compare it with the scale of the problem that we're facing, you quickly realize that the numbers HAVE to be this large. That's why I kept pestering you for a more accurate basis for comparison, because when expressed as a percentage the numbers actually look about right (which I assume is why they were chosen).

 

Of course, conversely just because a number is astronomical doesn't mean it's LESS frightening. Debt still has to be paid. We SHOULD respect these numbers. There are way too many Maxine Waters types in congress whining about how the poor aren't being helped by the bailout, and not enough Paul Volcker types telling them to shut up and let the adults work.

 

2) What choice do we have?

 

We saddled our horse to the idea of a managed economy -- a compromise between a pure market and socialism. That's our bed. We get to sleep in it. There's no sense complaining about it just because it's suddenly getting scary. In such an economy, just as we know there are problems when you hold the reigns too tight, we now know what happens when you hold them too loosely. Finding that right compromise is what it's all about.

 

So.... let's get to it. In politics it's always a question of "lead, follow, or get out of the way". I recommend "lead".

Edited November 30, 2008 by Pangloss

[Cap'n Refsmmat]

I think they could easily make cars do 50-60mpg if they wanted to, and they would if the customers demanded it (which they're starting to do, although I think it's a bit of an open question at the moment due to the sudden drop in the pump price in recent months).

 

Sure they could. But the emissions (i.e. pollution) would suck. And that's the tradeoff: there are plenty of things you could do to increase fuel economy, but you'd start emitting loads of NOx and such. The hard part is keeping emissions down while increasing efficiency.

 

Of course, I'm sure that with research and work, it could be done. Just don't think that it could happen overnight.

[iNow]

Just because the numbers are astronomical does not, in and of itself, mean it's a bad idea. Much of the fear here seems to be based on how large these numbers have been, but if you look at the economy and how rapidly it's grown, and compare it with the scale of the problem that we're facing, you quickly realize that the numbers HAVE to be this large.

I just wanted to emphasize this important point that Pangloss made. Solutions must always scale with the problems.

 

 

So.... let's get to it. In politics it's always a question of "lead, follow, or get out of the way". I recommend "lead".

Lead? Isn't that something that is no longer allowed in our petroleum fuel and paints?

[Mr Skeptic]

How do you feel about the phrase, "If a corporation is too big to fail, it's too big to exist"?

 

That seems like a good policy. Or maybe they should pay an extra "bailout insurance" since we may need to bail them out

[Phi for All]

That seems like a good policy. Or maybe they should pay an extra "bailout insurance" since we may need to bail them out

I feel the same way, but since I heard it I've wondered if it was just my general, long-held distrust of the mega-corporation concept or not. It makes a lot of sense to keep corporations manageable so it doesn't topple everything if one should be allowed to fail.

 

I've seen how powerful and overwhelming some of these giants have become, especially when they were given the power to own the media that supposedly informs us. I just don't trust them with that kind of power so I was a bit worried that my bias was making the "too big to exist" concept too easy to swallow. These things are rarely fixed with simple maxims, unfortunately.

[ecoli]

How do you feel about the phrase, "If a corporation is too big to fail, it's too big to exist"?

There's no such thing... there is no corporation that is too big to fail, nor should government be in the business of breaking up corporations that are perceived as too big.

 

I don't buy into the whole 'anti-trust' fallacy either. If corporations are big and are able to operate efficiently, then consumers benefit from lower prices (and there's no need for them to be broken up). If a corporation is too big to operate efficiently, it'll collapse under it's own weight and get eaten up by competitors. This is a good market corrective force and should be allowed to happen.

[Phi for All]

There's no such thing... there is no corporation that is too big to fail, nor should government be in the business of breaking up corporations that are perceived as too big.

What about in this case, where if the automakers fail it affects so many millions of jobs that we can't conceivably let them fail?

 

I don't buy into the whole 'anti-trust' fallacy either. If corporations are big and are able to operate efficiently, then consumers benefit from lower prices (and there's no need for them to be broken up).

Except they don't offer lower prices, they offer efficient profits for their shareholders, which is the duty of a corporation. They typically strangle all but a few competitors so they can't be considered a monopoly, then set prices where they want them. They also get suppliers to sign deals that further lock down trade. They manipulate their segment numbers so they only appear to control 30% of a market instead of the 50% or more it really is.

 

I'm a fan of our market system but I think there is a point at which the system can be unfairly manipulated by entities that have undue influence due to their size and control of related markets, especially the media.

[ecoli]

What about in this case, where if the automakers fail it affects so many millions of jobs that we can't conceivably let them fail?

... but we can. The industry will be bought up or it'll leave a market niche open for new players. What we can't afford to do, is prop up bad businesses.

 

Except they don't offer lower prices, they offer efficient profits for their shareholders, which is the duty of a corporation. They typically strangle all but a few competitors so they can't be considered a monopoly, then set prices where they want them. They also get suppliers to sign deals that further lock down trade. They manipulate their segment numbers so they only appear to control 30% of a market instead of the 50% or more it really is.

Well, unless they're committing illegal fraud, this is a non-issue. Efficient profits for shareholders means they have to be offering products that consumers are willing to buy, at prices they can afford.

In this case, than I'm all for monopolies. If Ford was the only car company, but they still offered good products at low prices, then the fact that it's a monopoly wouldn't matter.

 

If it's a monopoly, but it offered products at too high prices, that consumers don't like, then it wouldn't be able to remain a monopoly. More efficient competitors would come in, where or not there are anti-trust laws on the books.

 

I'm a fan of our market system but I think there is a point at which the system can be unfairly manipulated by entities that have undue influence due to their size and control of related markets, especially the media.

I disagree to the extent that if a corporation is illegally manipulating the system (physically threatening competitors, etc) then the relevant people should be punished. However, corporations may be the driving force of markets, but they can't control markets.

 

The media is actually a good case of this. There are only 5 major companies, but all of them are loosing out to the citizen journalism on the internet. They can only influence the markets so far before consumers find alternatives or cut them out altogether.

 

There are really no alternatives to this, which is why the government shouldn't be bailing out businesses which fail to serve the consumer. Big financial institutions are failing, but this is actually beneficial for the smaller deposit banks, which didn't make subprime loans.

However, the fed are now providing capital to these large banks, making it more difficult to smaller banks to compete.

 

Is the government in the business of breaking apart alleged monopolies or breaking them up?

 

This type of economic planning the government doesn't do particularly well... why trust the government to stop corrective market forces?

[Cap'n Refsmmat]

... but we can. The industry will be bought up or it'll leave a market niche open for new players. What we can't afford to do, is prop up bad businesses.

Can we afford the consequences of the failure of these bad businesses?

[npts2020]

How do you feel about the phrase, "If a corporation is too big to fail, it's too big to exist"?

 

Well, I don't think any corporation is too big to fail but there are definite consequences for allowing or not allowing it. IMO our economy cannot be sustained by bombs, hospitals, automobiles, and bad lending practices, making investments in those sectors as they exist tenuous at best. If there is a plan to replace the automobile (besides the automated transit system I like to pontificate about), I am all for helping the industry retool but I see no reason to be giving money to corporations even banks with funny money and shady lending practices are unwilling to lend to. If the gov feels some corporation is "too big to fail" then it should be running that corporation itself to insure it doesn't fail, imo.

 

Pangloss; I agree that scale and context are very difficult to establish for this, especially with as little transparency as there seems to be. This lack of transparency is also what makes me very skeptical about any solution being realized in the short term, I mean how has anything changed other than the risk has been transferred? I have a very difficult time visualizing exactly what is happening to all of the money we are spending and how it is going to help our collective situation one iota.

[Pangloss]

What is it that you think isn't transparent? As far as I know everything is being handled above-board.

 

--------

 

One ironic thing about this is that if you're Honda or BMW or Toyota you really gotta be wondering what you have to do to catch a break. You build auto plants in the US, employ hundreds of thousands of American workers at double the national-average income rate, in enterprises that keep the vast majority of the money in the country of origin, and just when you think you've finally beaten the competition the government steps in and bails them out.

 

And you can't even file a grievance with the WTO because you're a domestic auto maker now.

 

That having been said, so long as the government just does this one thing and eventually steps out of the way, I think it's a good thing. I don't want the government permanently involved in auto-making, but competition is a good thing.

[npts2020]

What is it that you think isn't transparent? As far as I know everything is being handled above-board.

 

 

Try to find out who is getting how much money. You would think you asked for a detailed CIA budget. Various news organizations and NGO's are having to go to court in an attempt to get this information.

--------

 

One ironic thing about this is that if you're Honda or BMW or Toyota you really gotta be wondering what you have to do to catch a break. You build auto plants in the US, employ hundreds of thousands of American workers at double the national-average income rate, in enterprises that keep the vast majority of the money in the country of origin, and just when you think you've finally beaten the competition the government steps in and bails them out.

 

And you can't even file a grievance with the WTO because you're a domestic auto maker now.

 

That having been said, so long as the government just does this one thing and eventually steps out of the way, I think it's a good thing. I don't want the government permanently involved in auto-making, but competition is a good thing.

 

 

I agree that competition is a good thing but unless you want anarchy it must be directed toward a specific goal (besides maximizing profits). The down side is that you will have failures from time to time. If the government didn't shell out a single dollar, there would still be a stock market, banks, insurance companies, and automobile manufacturers even if at a reduced level. There might not be any Ford, AIG, or Citigroup but there would be a major opportunity for other corporations who managed themselves better to step in, people are not going to stop banking, driving cars, or buying insurance. Why should I, who has steadfastly refused to put myself into debt, be giving one penny to corporations who willingly overextended themselves and would rip me off in a heartbeat, given the chance? Nobody, in any discussion I have had about this, can tell me how anything has changed so that we can expect things to improve. The biggest problem is not so much the "loss" of wealth but that the world cannot afford a prolonged period of low economic activity at this point in human history, without dire consequences for many. If the federal government wants to start its own bank and compete with commercial banks, then we would have a bank truly too big to fail and one not beholden to making a profit for shareholders.

 

 

(It's really too bad there isn't an economics forum here)