Saturday, November 15, 2008

Bailouts

Over the last couple of months there has been quite a bit of talk about various bailouts everywhere I go. Suddenly everyone is an arm chair economist, and I figured it was my turn. Sarcastic Weasel posted an excellent look at the events leading up to the problems. The basic core statement is that any set of stocks or investment not based on some form of production or direct service is really an investment in nothing. And you should really expect to get nothing in return for investing in these things.

So I am really looking primarily at two different bailouts. First is the bailout of the financial institutions. I understand that the government is putting its money into these banks in order to continue to keep the flow of credit intact, but we have seen that this is not what has happened. There is still some credit to be had but most institutions have overreacted and cut credit below levels previous to the current problems. I do have to say, I happy that the government is not buying up toxic assets as this would likely cause some additional problems. I listened on NPR the other day of an individual that had created a company that was creating a market around these toxic assets. This type of company would have made said individual rich, but if folks could invest in this, they would and again you would be investing in nothing.

Instead we see our government buying into stocks in these companies to bolster the assets they have to work with. This is a sound strategy if the company is being run correctly. At least if these companies can recover then the government would gain money back plus more. Hopefully we could pay down the enormous levels of debt that we have with other nations. Some level of debt is healthy, but we are far from healthy. Not all banks and financial institutions made really dumb mistakes, maybe we should invest in these institutions and let them grow as they obviously understand some of what was going on. And then they should honor FDIC commitments for people with the failed banks and then they can reinvest in intelligent companies.

The newest bailout idea for the automotive industry failed, but that is not the last time we will hear about it. The automotive companies are carrying their own form of toxic asset in pensions and health care for employees and retirees. What we need to do is rewrite the rules of retirement. I respect that these companies were creating a package of benefits that would help employees and gain employees given that it was so attractive of an offer. But I don't respect the fact that besides creating package that is not sustainable and they have hidden how poorly these retirement accounts were doing and deferred costs till later dates like last year. These companies are unhealthy and no amount of injection of government funds will make these companies intelligent enough to survive. Why were they not saving money in the good times? Did they even have good times? Right now, not many consumers are spending that type of money and it will be a while before they do.

So what do we do about it? There are millions of jobs at stake. Money spent on these companies will be wasted money, a gain in debt, with no way out. Instead, if you want to spend money, I would create a series of incentives for new industries to to move into the area. You have an area of the country with good access to both coasts, plenty of space and loads of people. What really is lacking is the diversity of jobs to create a stable area. Really you need to create some form of safety net for the folks that's jobs will be lost when these companies fold, instead of helping a company that has no idea how to stay in business and its set of executives.

Executives and socialized health care are big enough topics that are both pertinent hear, but I have avoided for the time being...

2 comments:

Ted W. said...

I've read that the Auto industry has a direct or indirect impact on 1 in 10 jobs in the US. I think given the timeframes, there's little likelihood we can bring in replacement industries. Unfortunately, I think we ultimately have to prop up the auto companies. However doing so should carry more benefit than handing Detroit a blank check. We need to gain some degree of control over the management and replace a braindead corporate culture with one that isn't. I agree that these companies are unhealthy -- but it's not because of pension plans -- it's because they've been run terribly.

Reverend0 said...

I just happened to pick on pension. Their income versus expenditure is way off base. I picked one expense, whereas they are not smart about the vehicles they are selling and that has hurt their marketshare dominance that they once had.

As for helping them... ug.