Monday, December 1, 2008
"Where's My Bailout?"
Only kidding, I don't need a bailout. I'm not defaulting on my mortgage nor my credit card debt, since I don't have any, and I'm down to the last 7 payments on my automobile loan. I'm not trying to make out that I am some kind of a "Financial Saint". Believe me, I've made my share of financial mistakes . My point is that every time I made a bad decision I paid the price. It's because I paid the price that I learned from my financial mistakes.
The most popular phrase these days seems to be "I need You to save me from myself". None of the folks who have been bailed out or are asking for bailouts were put into their situation by someone else. They all did it to themselves, by making one bad decision after another . The List of bailout wannabes is getting longer by the second. The bailed out include the GSE's Fannie and Freddie, AIG and the Greedy Wall Street Bankers. The wannabes include the Big Three, and several states, including Michigan, California, New York, New Jersey and the City of Detroit are in the que with their hand out. The city of Detroit is asking for $10 billion to hold them over, and that is approximately $11,000 for each resident of Detroit. That's not a bailout. That's a buyout, and the buyer in this deal is getting hosed .
As we warned in our newsletter a while back "There are always takers for government handouts, and when the government lets it be known they are in the bailout business the line is never ending." . Now that they are smack in the middle of the bailout business, who should and shouldn't get bailed out?
My advice: It's time for some tough love. The businesses that are in trouble should hire a turn around specialist. Yeah, I know, it's much easier to ask for a government handout, but that won't solve your problems. These companies need to rethink their business model, not take on more debt. If you are not generating a profit in your business, borrowing money to fund your health care and pension cost doesn't change the fact that you are not making money in your core business. You certainly shouldn't take out a 25 billion dollar loan to start another money- losing division to build expensive little environmentally friendly cars that people won't buy, in enough numbers, to be profitable. It's not a good idea even if Nancy Pelosi thinks it is. You need to look at your cost structure, and if you find your labor cost is 50% more than your industry average, you might want to cut back in that area just a wee bit. A wee bit as in get rid of the 50% premium so you can be profitable. It may not be an easy thing to do, but when you're fighting to survive, it's the only thing to do.
The government needs to decide if the survival of the Big Three is really important. If it is, they need to get rid of the CAFE standards, which are merely government dictates as to what types of autos Detroit needs to build. You can think of it as a kind of "central planning lite". The Free Market will tell GM, Ford and Chrysler what will be profitable to produce without any help from Big Brother. The UAW needs to wake up and smell the coffee. Wage increases can only come from productivity gains, and Union work rules that hamper productivity is why they are now, hat in hand, begging for a bailout.
My advice for state and local government: It's the spending, stupid. State government spending is not merely out of control, the patients are running the asylum .Vallejo, California filed for bankruptcy. It seems they couldn't afford to continue to pay their fire fighters and police officers. With more than 200 of them making between $100,000 -$199,000 in salary per year, and 28 of them making between $200,000-$299,000 per year, is it any wonder? This does not include their pension or health care benefits. These "public servants" are making 2-6 times the median wage in Vallejo. Another California town is going bankrupt because the golf course they bought isn't making money and they are going to default on their nearly $7.5 million dollar bond issue. The golf course they bought, are you kidding me? Golf course = Essential Service? California, New York and New Jersey are three of the highest tax states in the nation, so once again it's not the revenue, it's the spending, stupid. It's time to cut back on spending.
These bailouts cost real money. Money that the government doesn't have. The only way they can spend it is to borrow it from you and me, and then raise our taxes to pay for the loans. Should you and I pay more taxes so that the Federal government can enable the companies, states, and cities that are profligate in their spending on salaries, pensions, and golf courses to continue about business as usual?