Monday, March 30, 2009

When You Shake Hands With the Devil ... Better Count Your Fingers

It took Ford's CEO Alan Mulally two trips to Washington to figure out that the bailout money the government was dangling in front of him was really a pact with the Devil, fraught with peril, but figure it out he did and so he and Ford survive to live another day. GM and Chrysler however weren't as lucky. They couldn't or wouldn't see the handwriting on the wall, and thus have sealed their own fate.

Chrysler's CEO Robert Nardelli is now forced to negotiate a do or die deal with Fiat, as his partner the devil holds a gun to his head and whispers in his ear "cut a deal in 30 days or you my friend are toast". Rick Wagoner, GM's CEO, has been shown the door, and GM has been given 60 days of operating capital to conclude it's restructuring. All we can say is good luck... you are going to need it!

Is it possible that GM will be able to do in 60 days what it hasn't been able to do in the last 20 years? No! It can't, and won't. If GM wants to survive as a company and not as the host organism for the parasitic UAW, it should make the long over do announcement that it will be seeking bankruptcy protection under Chapter 11 in order to reorganize its business. If it doesn't, it may exist for a brief period of time as a scaled down post office type operation, making tiny eco- friendly cars that won't take you very far, while providing jobs with above market compensation and benefits for a small number of politically connected autoworkers. But its days will be numbered, and when the operating losses become too great, and they will, for the UAW's Democratic allies to continue to provide the necessary political cover they too will cease to exist.

How is it that GM got things so wrong? They seemed to be under the false impression that because the Democratic party was beholden to the UAW's campaign contributions afforded by it's dues paying members, that somehow it was safe to sleep with the enemy. I hope they know now what they should have known then; it is never safe to sleep with your enemy! They failed to realize that they were never going to get a fair shake in the political arena. Without the protection of the bankruptcy laws and the threat of a court imposed settlement, the company will continue to be stuck between a rock and a hard place in it's negotiations with a recalcitrant union that won't budge and bondholders who don't want to be sacrificed to placate the UAW.

There is a lesson here in dealing with a government that disdains the rule of law and thirsts for ever more power and it is a simple one: When you shake hands with the devil, you better count your fingers!

Monday, March 9, 2009

So This is Saving the Economy?

What is it going to take to discredit the "Economic Fine Tuning Crowd" so that they will take a break from their massive intervention in the not so free markets in order that a recovery might actually get underway? How is it that there are still people who believe in the ability of the government to "Fix" the economy?

If there is anything that we have learned in the past year, it has got to be that the government interventions to save the economy have done anything but save the economy. Saturday, March 14 will mark the one year anniversary of the Shot gun Wedding arranged by the Fed of JP Morgan and Bear Sterns. Bear, the blushing bride, was forced to walk down the aisle with Morgan in order to save the banking system, and sacrificed to save the families reputation, so to speak. That Friday, the DJIA closed at 12,145, the S&P 500 at 1,315 and the NASDAQ at 2263. A year after the start of "Rescue Mania", all three of the major market indexes are at about half of their year-ago values. This is what the government considers a rescue plan?

Perhaps if we examined the other recipients who have benefited from government bailouts, we'd find that they are in much better shape. This might then account for the lingering belief in the ability of the government to rescue troubled companies. Roll call: AIG? CITI? Bank of America? Fannie & Freddie? GM? Chrysler? Nope! The story is pretty much the same. Rather than being the elixir of life, government bailouts seem to be a curse, turning seriously ill companies into zombie-like firms that move aimlessly about consuming increasing amounts of taxpayer dollars, but never recovering from their zombie-like state.

After working their magic rescuing corporations, it seems they are now getting serious about bailing out/rescuing the homeowner with an effort to pass a cram-down law that will legalize theft. Someone borrowed money from a bank to buy a home and will legally not be obligated to pay it back. What else would you call this? The idea that things will improve in the mortgage markets because the government has created significant additional risk to bank capital flies in the face of economic logic. Why don't they just pass a law making it legal to rob banks?

When the result of the rescues are this bad, I think that a legitimate argument can be made, like the one we made in September, that doing nothing would have produced a better outcome. Had we done nothing, could the markets be considerably worse off? One thing we know for sure is that had we done nothing, we would not now be on the hook for the trillions in debt the bailout/rescue/recovery plan will cost us.

The Government rescue plans aren't rescuing! Republican led bailouts didn't work, and the Democrat led bailouts aren't working either. I think what is needed is a "bailout intervention" led by the taxpayer. Maybe that would snap them out of their denial and force them to abandon this reckless behavior.

Part of the problem is that politicians don't want to admit that they don't know what they are doing. With great confidence, they tirelessly repeat a version of what their staffer who spoke to another staffer who heard an economist supporting their plan said, with the version enhanced just a little bit each time it was repeated. The truth is the economist who they claim is supporting their view point is no where near as sure of the outcome as is the politician who doesn't know a thing about economics claims to be. After listening to Pols this last month we all know that government infrastructure spending has a 1.54 multiplier effect. That's good, right? Well it seems that only the politicians are sure of this, and the economists think that this might be the case, but really aren't all that certain. Can you imagine the malpractice suits if the government was held to the same standards that your doctor is?

Actions have consequences, and the consequences of compounding one mistake with another aren't good. Here is my suggestion: the Congress should take an early and extended Spring Break this year. They should go back to their districts or to the beach and just hang out for a while, but before they go they should do us all a favor and ditch the mark to market accounting rules that are choking the banks. This would give the banks and the rest of us in the private sector a little breathing room and some time to get the economy going again.