Where does it stop?

Forum adverts like this one are shown to any user who is not logged in. Join us by filling out a tiny 3 field form and you will get your own, free, dakka user account which gives a good range of benefits to you:

No adverts like this in the forums anymore.
Times and dates in your local timezone.
Full tracking of what you have read so you can skip to your first unread post, easily see what has changed since you last logged in, and easily see what is new at a glance.
Email notifications for threads you want to watch closely.
Being a part of the oldest wargaming community on the net.

If you are already a member then feel free to login now.

**Frazzled**

http://www.cnbc.com/id/27662540/

As More Companies Seek Aid, 'Where Do You Stop?'
BAILOUT, TARP, GENERAL MOTORS, GM, FORD, ECONOMY, AIG, AMERICAN EXPRESS, BANK BAILOUT, STOCK MARKET NEWS
CNBC.com | 11 Nov 2008 | 06:17 PM ET
The US government could be entering a bottomless pit of bailouts if it starts propping up failing companies outside the financial sector—including the struggling auto industry, economists say.

With both Ford and General Motors coming treacherously close to severe cash shortage, Congress will convene next week to consider emergency aid for the troubled sector.

Many economists are against the idea, saying an auto maker bailout would open the door to a taxpayer rescue of virtually any major company with cash problems.

"Where do you stop?" says Bill Isaac, former chairman of the Federal Deposit Insurance Corp and now managing director at the LECG global consulting firm in Vienna, Va. "Circuit City's going down. Do we help them? What do you do if Starbucks gets in trouble? Do you help them?"

For Investors:

Think Big-Cap, Long-Term
Stimulus Stock Plays: Obama and China
Cramer's Favorite China Move
Video: ETFs for the New Presidency
Video: Stocks to Watch
In recent days the government also has stepped in to to assist credit-card company American Express and ramped up its aid to insurer American International Group .

That has raised the issue of why the government is willing to provide help to Wall Street financial firms but not assembly-line workers in Michigan.

There are, in fact, increasing calls for a second economic stimulus package to help consumers and small businesses as well as more help for distressed homeowners.

"At some point you have to say this doesn't make any sense anymore," Isaac says. "I don't know whether we draw that line after General Motors and Ford or before General Motors and Ford. But at some point we have to draw the line."

The decision is difficult, Isaac acknowledges, considering the domino effects the collapse of General Motors and Ford would have on the US and world economy. But the two companies may well be better off in bankruptcy, he says, so they can find a more sustainable way to operate than under the current business model.

Isaac discusses bailout issues in video at left.

"I'm really torn," Issac says. "I understand how important General Motors and Ford are, but they do have reorganization statutes to deal with those kinds of problems. It doesn't do any good to keep funneling money into them if they're not going to change the way they do business. At some point the taxpayers get fed up with all this."

Many taxpayers, in fact, are looking for help with their own problems, not those of corporate America.

"This is called 'Congress in action,' " says Allan Meltzer, political economist and monetary policy historian at Carnegie Mellon University. "This is a problem where everybody that wants help is getting it. The people that need help, the government could be doing something useful but they're not paying attention to that."

Addressing the housing crisis is far more important than aiding poorly run businesses that are failing, says Meltzer and other economists.

Though there's a debate over how far the government should go in propping up housing prices, Meltzer says there are common-sense measures that can be taken.

In particular, he wants the government to provide tax credits to anyone buying a home until the end of 2009. That would drive up demand for homes and push prices higher, solving many of the problems vexing the market.

Conversely, focusing too much on propping up banks misses the point, Meltzer says.

"We can help the mortgage market by fixing the housing problem. We can't fix the housing problem by helping the mortgage market," he says. "The government is backward."

Not addressing the housing problem could pose larger problems for the economy than anything that could happen at GM or Ford.

"No matter what the government does, we're going to have a very severe recession," Mark Zandi, chief economist for Moody's Economy.com, said on CNBC. "If government does nothing and doesn't intervene, then we will have the most severe recession since the Great Depression—and I don't think that's necessary."

Watch Zandi's interview at left

But when it comes to the auto makers and firms with only tangential connections to the financial sector, doing something could be worse than doing nothing.

"How are we going to pay for the debt that we have outstanding and is increasing rather rapidly?" Meltzer says. "The answer is we're going to have to consume less and we're going to have to export more. We're taking it out of the living standards of future generations. Somebody has to pay for this. It's not a free lunch."

But Isaac draws a distinction between saving the auto companies and injecting liquidity into large financial institutions, which must prove they can survive beyond the bailout. Few economists take serious issue with the government's distressed-asset program to give banks breathing room, and some even say the government may make money from the Troubled Asset Relief Program, or TARP.

"There's no question we needed to do whatever we needed to do to get the financial system stabilized and functioning again. We've done that," Isaac says. "That job is pretty much behind us, and I think we have really serious policy and political and philosophical questions ahead of us as to who we are going to bail out beyond that."

He would rather see the government focus on changing the accounting rules that he believes led to the financial crisis. Specifically, he targets the mark-to-market regulations that force banks to value assets at levels that in many cases are well below their worth.

At the same time, Meltzer believes potential failures or bankruptcies of GM and Ford would not be as catastrophic for the economy as some think, and JPMorgan Chase said today that GM may have enough capital to fend off bankruptcy anyway.

Foreign automakers would gladly step into any breach, he says.

"Don't you think somebody would pay for the General Motors name and factories? Of course they would," he says. "They might not pay the present price, but it's not worthless."

© 2008 CNBC.com

**sexiest_hero**

I was for the 700 billion bailout, because a credit freeze could wreak the usa. Ihat said I want to see the greedy *&%$#@ who ran thier companies into the ground by jacking up prices on houses way to high.

I think the auto companies should perish, US cars are shoddly made with crappy materials, and are sub par to most forien cars.

If you make a bad product you fail.

**dogma**

GM and Ford are pretty well scragged. Which is fine. As the article points out, foreign automakers will eventually pick up the slack in domestic manufacturing. Shipping cars overseas is too expensive for them not to do it.

**warpcrafter**

All of this bailout nonsense is such a farce. Only 3% of the 'money' in circulation is represented by any actual currency, the rest is 1's and 0's that the central bank pulls out of their ass and uses to push forth their agenda, which is financial slavery.

**Frazzled**

You're right. I don't know how many times we've started off a meeting with "here's to enslaving the world-mu ah ah ah..."

**Kilkrazy**

I am old enough to remember the US government bailing out Chrysler.

if Toyota is in difficulty, who in the world can save General Motors?

There is nothing good to say about any of it.

**Mad Doc Grotsnik**

It all depends how it is handled.

The UK Government basically bought shares in the Companies, which means they get a dividend, which is great. The cash involved is then meant to be used to stimulate lending. And by having shares, the Government has more of a say how it is used. IIRC, the US Government more or less just handed a blank check, and this has been largely squandered by the the US Banks (I MAY BE WRONG BEFORE ANYONE JUMPS DOWN MY THROAT!)

I know it will have bad knock ons, but you have to make the decision sometime. If it's cash flow problems, a short term loan may not be a bad thing. If it's more than that, you have to let them sink.

**sexiest_hero**

But us in the us Hate when the government takes over something, and I do think this high cost easy credit was the primary reason for the issues we face today.

Do you guys think the auto companies should be Restructored after they go bankrupt into smaller companies?

**Kilkrazy**

US citizens have a pretty flexible idea of government intervention.

Fannie Mae and Freddy Mac -- two of the biggest financial institutions in the country -- were basically government guaranteed before they were taken over formally a few weeks ago.

There have been numerous bailouts of big corporations. I mentioned Chrysler. The airlines all had wads of cash in 2001-2002. AIG (?) Insurance was taken over recently. A lot of finance experts now think it was a mistake to let Lehman Bros fail.

The Government can get money three different ways.

1. Tax -- this depresses the economy unless the taxes are spent on productive infrastructure and essential services.
2. Print it -- causes inflation.
3. Borrow from rich people especially foreigners. This works as long the rich think a country is a good place to invest. High inflation and tax makes people not want to lend money to governments.

Of course the problem with borrowing is you have to pay it back, which can only be done by taxation.

**Frazzled**

Don’t forget the F’s were government entities at one time however.

Lehman? Who in the industry is saying that?

**dogma**

warpcrafter wrote:All of this bailout nonsense is such a farce. Only 3% of the 'money' in circulation is represented by any actual currency, the rest is 1's and 0's that the central bank pulls out of their ass and uses to push forth their agenda, which is financial slavery.

Dude, actual currency is just a series of 'ones and zeros.' How do you determine the value of a dollar? I'll tell you right now that is has nothing to do with the actual worth of the paper on which its printed. Currency only works when it is possessed of near zero intrinsic value. That's why gold is no longer effective as a medium of exchange. It now has a use (electronics) and so there is incentive to horde it.

**sebster**

warpcrafter wrote:All of this bailout nonsense is such a farce. Only 3% of the 'money' in circulation is represented by any actual currency, the rest is 1's and 0's that the central bank pulls out of their ass and uses to push forth their agenda, which is financial slavery.

Because a piece of paper is so inherently liberating compared to an electron in a computer.

**Kilkrazy**

Frazzled wrote:Don’t forget the F’s were government entities at one time however.

Lehman? Who in the industry is saying that?

One of the Evening Standard's city editors wrote it a few days ago.

**Frazzled**

Aka no one in the industry then.

**Kilkrazy**

Aka someone who is in close contact with lots of people in the industry.

Let's face it, it was the people in the industry that created this mess, so we shouldn't rely on their opinions.

**Kilkrazy**

Anyway, to give the reasoning behind why it was a mistake, the collapse of Lehman Brothers sent a signal to the market that toxic debts would be allowed to collapse even the largest firms. This is why the banks are so cautious now about lending to each other, and about revaluing and rebuilding their balance sheets, despite the bailout funds.

**Frazzled**

Again Lehman wasn't a bank. An editor in a paper doesn't have a clue.

You act like this is different. I've been through two full business cycles and three industry specific collapses. this is standard. Banks always pull back in the beginning of a downturn. Lehman failed because it marketed bad, highly leveraged transactions-LBOS and other fun things typically pushing 5.0x+ EBITDA. They should have fallen. The industry was starting to work and stabilize when everyone went nuts about a crisis. Let the bad entities collapse and be acquired by the better ones. If needed Government can inject capital (and get warrants) in those healthier entities to allow them to do that.

"Too big to fail" is the mantra of the special interest looking for a bailout. Let them fail. They will restructure and be stronger.

**Kilkrazy**

I have been through three recessions too.

We still have people unemployed in the UK who lost their industrial jobs in the 1980s.

**Frazzled**

Same here. My dad was one. Respectfully, not relevant to the discussion of whether Lehman should have gone under though.

**Kilkrazy**

It's water under the bridge anyway.

Barings was let go. LTCM was bailed out. Lehmans was let go.

**Archaeo**

Bah, let them fail.

**sexiest_hero**

what about credit freezes? Or is that just another scare tactic?

**dogma**

Frazzled wrote:Again Lehman wasn't a bank. An editor in a paper doesn't have a clue.

You act like this is different. I've been through two full business cycles and three industry specific collapses. this is standard. Banks always pull back in the beginning of a downturn. Lehman failed because it marketed bad, highly leveraged transactions-LBOS and other fun things typically pushing 5.0x+ EBITDA. They should have fallen. The industry was starting to work and stabilize when everyone went nuts about a crisis. Let the bad entities collapse and be acquired by the better ones. If needed Government can inject capital (and get warrants) in those healthier entities to allow them to do that.

"Too big to fail" is the mantra of the special interest looking for a bailout. Let them fail. They will restructure and be stronger.

Probably. But in the global economy such restructuring may very well take place in another nation. And some how I doubt you're in the mood to move to China. They don't take kindly to the right to bear arms over there.

**Frazzled**

Keeping Lehman afloat, keeping GM afloat would not help that.

Auto plants are being built in the US, just not by the craptacular company that is GM.

**dogma**

Frazzled wrote:Keeping Lehman afloat, keeping GM afloat would not help that.

Auto plants are being built in the US, just not by the craptacular company that is GM.

Because people in the US still have the money to buy cars. What happens when that is no longer true?

**Frazzled**

Then it won't matter if GW is around or not will it?

Are you still under the mispercetpion the only auto manufacturing in the US is in Detroit?

Buy American. Buy a Honda!

**dietrich**

A commentator on NPR had this comment last night, "Everyone agrees that the government needs to draw a line in the sand (in regards to bailing out additional companies). No one knows where that line should be though."

Banks are freezing credit, which hurts lots of industries. Including the auto industries, because very few people can buy a new Ford F-150 with cash.

GM will argue that 10% of US jobs are related to the auto industry. That might be true, but that doesn't mean 10% of the jobs go away if GM goes away. First, someone would likely buy up the profitable assets (if any) of GM and preserve those jobs. Second, Americans will still buy cars. They'll just be buying Hondas made in Ohio instead of GMs made in Detroit. Third, Americans will need gas and spare parts and washer fluid for the Hondas.

GM failing is bad, and there would be massive layoffs at GM. It's not as bad as GM is painting it though.

The bailout(s) are a mess. Glad to see Congress is doing such a great job with my tax money. There's a reason that Congress has a lower approval rating than soon to be former President Bush.

Let me start the conspiracy theory. Since Dems get lots of money from Unions, the Dems and President Obama will bailout GM and all their greedy executives to keep all those union jobs and buy a bunch of votes. Unless Bush is in office when Congress passes the bill, and then it's that darned Republican giving a reward to all those greedy executives that give the RNC a lot of donations.

The biggest reason for the failure is that most people didn't think it would happen. The good times would just continue. Forever. As a result, they're not prepared for things to go wrong (like people defaulting on loans or their home price to just keep going up).

I heard this on the news yesterday. People realize they're going to lose their big house. They buy a second one that they can afford while their credit is good. Then walk away from the big house, let it foreclose. And the spiral continues.

**dogma**

Frazzled wrote:Then it won't matter if GW is around or not will it?

Are you still under the mispercetpion the only auto manufacturing in the US is in Detroit?

Buy American. Buy a Honda!

No, but I am under the perception that a decrease in domestic manufacturing leads to a decrease in domestic demand. I'm pretty sure GM shouldn't be bailed out, but the idea that it represents a kind of line in the sand is misleading.

Also, there is the issue of what to do about all the employees who would be denied benefits as a result of an auto industry bankruptcy. In the end, it may cost less to float GM than to cope with the widespread mortgage defaults and unemployment claims that would follow in the wake of its demise.

Also, bailing out GM is a political bone which can be thrown to the blue collar crowd in order to sell the inevitable government subsidization of bad mortgages. Salesmanship is going to be a good 75% of the battle against this crisis.

**sebster**

Frazzled wrote:Again Lehman wasn't a bank. An editor in a paper doesn't have a clue.

Lehmans was not a bank, in the sense that a bank is a local branch with those funny rope barriers making you walk in a zig zag, pens on chains and an ATM out the front. But that’s a particularly narrow definition of a bank, and one that excludes a whole lot of entities that people call banks. Lehman Bros was a whole lot of things, and one of its primary activities was as an investment bank. It had a whole arm called ‘Lehman Brothers Bank’.

Now, you might make an argument that people should be clear about exactly what Lehmans was, and that ‘bank’ was too simplistic a definition. But to argue that someone must be misinformed because they referred to Lehmans as a bank is disingenuous.

You act like this is different. I've been through two full business cycles and three industry specific collapses. this is standard. Banks always pull back in the beginning of a downturn. Lehman failed because it marketed bad, highly leveraged transactions-LBOS and other fun things typically pushing 5.0x+ EBITDA. They should have fallen. The industry was starting to work and stabilize when everyone went nuts about a crisis. Let the bad entities collapse and be acquired by the better ones. If needed Government can inject capital (and get warrants) in those healthier entities to allow them to do that.

All of which only works if you maintain the argument that this is a business downturn just like any other business downturn, and that argument only works if you ignore the specifics of this downturn.

A much closer example is the Japanese situation of the 80s and 90s. A ten year recession started with a collapse in the housing sector, leading to banks holding a lot of toxic assets. A lot of policies were tried, but it was only when govt came in and bought up the bank’s bad debts, and lending was freed up and the sector started working again.