Outside Erie

19 Responses to “Comment of the Week — A Rescue Plan for Detroit”

1. MGR
   November 21st, 2008 at 11:15 am

   So the plan would be to subsidize a structurally deficient business model by buttressing sales with tax breaks for a few years? Well it will get billed as a “stimulus” package instead of a “bailout” so it gets good press, it will fix nothing and business will go on as usual until the marginal gains get incinerated by the cash burn rate at the big 3. It is certainly not better than many other plans that have been suggested, but it sounds like the American Way.

2. john morris
   November 21st, 2008 at 2:19 pm

   Hello!!!

   Has anyone learned anything from the housing bubble largely created by a series of government programs like Fannie, Freddie and above all the housing mortgage deduction which worked together to create a special, sacred asset class. No need to save or invest in actual goods producing industries– your house will go up by 100,00 or more in value every year.

   Americans may finally be making smart judgements about saving more, spending less and perhaps owning fewer cars and driving less. This is a good thing since it might free up capital for new industries, better producers and an economy less dependent on overleveraged domestic consumers. But in steps the government to try to make sure that doesn’t happen.

3. TonyF
   November 21st, 2008 at 2:39 pm

   Good news: Fannie and Freddie are suspending foreclosures during the holidays!

   I saved and invested. In not too much more time, it will all be gone. Thanks to our government and Freddie and Fannie, the banking industry collapsed because of undue pressure to lend money to those who can’t pay it back. The government thinks we should all have affordable housing. I won’t have an affordable retirement but that’s OK. The collapse was anticipated but Barney and the boys weren’t smart enough to head it off.

4. john morris
   November 21st, 2008 at 3:23 pm

   Here is a link to the famous essay by the economist, Frederic Bastiat called What is seen and what is unseen.

   He states that a good economist is not only aware of the imediately seen jobs and industry seeking a favor or handout but on the total economic picture. In it he tells the story of the broken window.

   “On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.

   On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.

   Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window. ”

   In the real world– and we all live in one in spite of the government’s attempts to trick us out with easy credit and fiat currency–money cannot be created from thin air, which means that dollars spent saving the big three will be subtracted from other potential savings or spending.

   Of course the other point he makes is that one will never see or know what would have been created by the money spent on the broken window. This is always the major problem at work. Industries or employers that employ many people right now always have a political advantage over the industries and potential companies of the future because people can see them now and feel the actual pain of losing them. Thankfully, someone had the foresight to see the potential jobs in the car industry exceeded the losses in the much larger buggy whip business. That would not happen today.

   http://www.econlib.org/library/Bastiat/basEss1.html

5. Phil G
   November 21st, 2008 at 3:37 pm

   I appreciate the constructive nature of Shane’s comment, but throwing more money at the problem has not worked in the past. (We gave them money for improved efficiency cars. What did they do with that money?) There will be a hit and a rebuilding period.
   I am particularly sympathetic to the people 10 years removed from the work force, who thought they were going to have a pension and health insurance. What do they do? However, I don’t have the answer.

6. john morris
   November 21st, 2008 at 3:57 pm

   The answer is that there is no answer– No Answer. Everything else you here is ignorance or an outright lie. Money cannot be created out of thin air. Losses are losses; bad investments are bad investments and underfunded pensions and unsuportable promises are just that.

   Let’s not imagine that the big three have the only underfunded pension plans out there— conservative estimates put the figure at 200 billion. We seem to have built our economy around this idea that the government has the power of god and an unlimited checkbook to heal any pain. Everyone is looking back with the confidence that the US government is there to back them but all there is folks is a bunch of liers and a printing press.

   Don’t look down but it kind of looks like Citi Bank is insolvent .Weimar here we come.

7. MGR
   November 21st, 2008 at 4:41 pm

   As explained previously, my main approach to the auto industry would be to recreate the automobile as a long term capital asset rather than a very expensive high volume rapid depreciation investment for financing sources and consumers alike. One aspect of accomplishing this would be serious value added features - retractible traction studs for snow, auto sensors that will override manual control to avoid collisions, true auto-pilot options, etc. Lower hanging fruit would include a better version of the windshield wiper - do you mean to tell me the best we can do is a rubber squegee on a mechanical arm that works poorly?? How about 200K mile tires that do not require rotation.or cameras to see around congested corners. Maybe a car that you stand inside rather than sit, how about a built-in treadmill, a big city commuter’s dream. As fast as we like to call things dinosaurs, people seem reluctant to call a spade a spade when it comes to cars but they are all out of date.

   Maybe my approach is off when actually people want more disposable cheap cars. If that is true, we should create two classes of cars with vastly different safety specs and power and not allow certain models on interstates. If this is true, though, I think we need the ‘cheap’ vehicles to roll off the lot closer to 5-7K, not 20K because on a 3 year plan, it won’t work otherwise.

   My theory that cars today are outdated should prove true when the Japanese car companies start having major problems or severe downsizing in a few years because the short term financing that props up the high volume model is not coming back.

8. Shane
   November 21st, 2008 at 5:13 pm

   Peter, thank you again for the recognition.

   I do feel the need here to elaborate on my previous comment in light of the new comments and scrutiny.

   Let me first say that in no way do I support any excuse for increasing the scope and scale of the Federal government, nor do I condone the ever increasing role they are taking in private industry.

   That said, knowing that based on recent trends, some of my tax money WILL be ending up in the coffers of these companies , would much rather structure it in a way that at the very least has a greater chance of eliciting some positive outcomes that are broader than just keeping the ailing auto companies in cash for the next few months.

   I was not for the Financial Services bailout, and am less of a fan of how the money is being doled out and utilized. The fed is acting like Ed McMahon and his prize patrol of old deciding when and where to show up with balloons and a giant novelty check, then they walk away only to let foolish people run amok with their windfall in irresponsible ways.

   I am tired of the thinking of the last 20-30 years that the government can and should be the saviors of certain industries / individuals at the sake of those who worked hard and found a modicum of success (has anyone else re-read Ayn Rand’s Atlas Shrugged recently…..in rings more true today than when it was written in 1957).

9. john morris
   November 21st, 2008 at 5:36 pm

   Interesting subject since one of Erie’s biggest employers builds equipment for the railroad industry. Would this 25 billion or more have found it’s way into this industry, perhaps in the form of a plant to build passenger train equipment? That’s the trick. We will never know.

   Shame on us for working in businesses that made the right decisions. Looks like the right plan now is to get out before the looters take it all down.

   No Dagny, I don’t think there’s a single mind left on Taggart Transcontinental.

10. Shane
    November 21st, 2008 at 6:13 pm

    who is John Galt?

11. john morris
    November 21st, 2008 at 10:10 pm

    I don’t want to give away the books amazing plot but I think it would be wise for everyone to read it.

    A few thoughts about Ayn Rand. She was strongly criticised for always thinking in terms of basic principles cause she always thought about what would happen to a person or a nation or a world if it operated by one principle or another. Most people thought that was just silly “extremist” thinking and said America could continue to operate by mixing and matching free market and collectivist policies according to whatever seemed to “work” at the moment.

    It should be remembered that Rand correctly predicted the eventual fall of the Soviet Union and all other communist states. She also took the position that America could not survive as “half slave” and “half free” and that it’s mixed economy would either be made free or collapse. She was actually good friends with the Austrian economist Ludwig Von Mises and she was well grounded in her thinking.

    So anyway what happened. The Soviet Union collapsed and America is close to it. The basic principles at work are the same. Once one violates the princple of free people deciding which companies survive or which loans are made, you set up a race to the bottom. A big factor in our situation is the “too big to fail concept”. We really are never going to know just how many mergers and business deals were based or supported by the idea that a company just by growing large enough, would gain the implied backing of the government in an emergency. We know the banks have that in terms of deposit insurance but I think a lot of times it looked as if most very large companies seemed to have credit ratings a bit higher than their fundamentals would support just because they were that big.

    Has the result been the elimination of all problems– or just the accumulation of larger and larger risks until they now threaten the actual solvency of the government itself? We are likely heading towards an inflationary death spiral as we try to print our way out of this.

12. Phil G
    November 21st, 2008 at 11:03 pm

    John’s response to my comment is understandable. Frustration is appropriate, but something will happen. The problem will be significant. The response may be good, bad, or neutral. Bad is a pretty safe bet. If people do not have healthcare or money, they will do something. Maybe that means there will be riots in Detroit, Washington DC, or Florida. Can you imagine spending the better part of your life as a worker at GM, thinking you’re going to receive a portion of your salary every month, then the bankrupcy takes that all away.

    To reinforce my position, I think the long-term economy will be better off if we don’t bail out the big 3.

13. john morris
    November 22nd, 2008 at 10:30 am

    I don’t have enough time to post an extended reply right now but part of the problem is that we likely don’t agree on the actual financial state of the country right now. I see a huge hazard in this bailout cause we are broke and in a hole far deeper than Japan was when it’s bubble popped. They were a country with a very high savings rate. We don’t have anything close to the money to cover the growing line of people in need of government cash. The faster people get the message of our situation the more prudent our decisions will be. I mentioned the Weimar Republic for a reason.

    For the record, I don’t believe there is nothing in the auto industry’s pension and benefit accounts, just that there are huge shortfalls.Most of these folks also people would also have their Social Security payments etc… If there is any help given it should be just to cover these benefits. I want to make one thing very clear however— millions of people in smaller businesses and self employed are having similar problems with their 401k plans and savings. It’s not right at all to protect a special class of people.

14. KS
    November 22nd, 2008 at 12:18 pm

    To comment on the “Broken Window” scenario. I couldn’t agree more. It is one thing to fix the broken window. It is another thing entirely to pay someone to “perhaps” fix the window. It is yet another thing to pay someone to “perhaps” fix the window, and then not protect it from getting broken again.

    I would have much less concern about a bailout if I had any faith in the ability of the leaders of the big three to turn their organizations around. We would simply be paying to repair a house that is on a broken foundation. If we want to be delusional and call it an investment in the future of the industry, then someone should start talking about Return on Investment. If a bailout is for prevention purposes and is just going to bring us back to sea level… then I think I’ll pass.

    How can organizations that run poorly think that they can do so without harsh consequence? How do we as a country think we can avoid the natural cause and effect? How can we count on our government, given the current deficit and mounting debt, to ensure the proper actions are taken with this money? Try getting a clear and transparent answer to where the $750 billion is going and you will certainly see my point. I am no economist, but common sense tells me that sooner or later the chips will fall. In my opinion it is a matter of who will absorb the blow, us or our children.

    This weekend, as the news channels aired the story of the big three executives flying into DC in separate corporate jets to ask for money, one of the companies were quoted as saying “To make a big to-do” about the jets is avoiding the larger problem. That is my problem. That shows the culture of these organizations. They don’t get it. And if that type of waste is not a blink on their radar, you can imagine the waste in the rest of their business processes, pension programs, administration costs, etc. It is a catastrophe that so many people will suffer if these corporations fail, but how on earth can we justify giving them billions of dollars KNOWING that it will not make the industry better? I don’t have all the answers, but at some point common sense simply has to prevail. Maybe it is not that simple, or perhaps we have made it more complex than it really is.

15. Dale
    November 22nd, 2008 at 4:07 pm

    It has been noted in the media that both Ford and GM have given some thought the past couple days of disposing of at least some of their corporate jets. Whatever do you suppose gave them that idea????

16. George Vietze
    November 22nd, 2008 at 6:40 pm

    Simple put, the government cannot legislate prosperity. In the long run fundementals will prevail, throwing money after a bad business model makes no sense and anyone with any business and common sense knows that to be a fact. We are already headed down a quasi-socialistic path similar to what Europe tries to accomplish. The government has seen fit to “quarantee” Wall Street firms, banking institutions and now manufacturing facilities, we as a country have fallen down the slippery slope that the government is the answer to solving the financial and credit crisis. The real solution is more likely in the area of “cultural change” but that usually only comes after a “bottom” has taken place and reality mandates a major cultural shift to more solid business fundamentals. This will happen but it will take time. One practical solution is to recognize the “game being played” and position yourself, if possible, to paying off all debt, try to maintain liquid assets in as safe a place as possible and invest in hard assets at todays liquidation prices, when the inevitable monitization of this country huge debt takes place, you may be in a position to sell those assets at “inflationery prices” and with a conservative lifestyle in a place like Erie, Pa. that may be an option. If you could be in a position to pay off the debt on the accumulated hard assets, more than likely the banking institutions will require “tough” underighting requirements and you could be in a position to “seller finance” your assets at market interest rates and be on the “right side” of compound interest, the lender side.
    In investment circles the “ninth wonder of the world is compound interest. Instead of complaining about the “goverment’s new game” position yourself to benefit. After all, what is the alternative?

17. John morris
    November 22nd, 2008 at 8:09 pm

    I just want to make one thing clear— Monetize the debt means inflation or quite likely hyperinflation. This is not a joke or a pretty thing for anyone who remains in the country. How did the civilized nation of Germany get into the situation in which it was cheaper for people to burn marks to heat their homes than buy coal? Well, it started with a lot of needs, war debts etc… and few people willing to face the music of paying for them.

    ‘Immediately after the war the German government, under the leadership of the Socialist Party, embarked upon heavy expenditures for health, education, and welfare. The demands on the treasury were extremely heavy anyway because of demobilization expenses, the demands of the Armistice, the disorders of the revolution, and the staggering deficits of the nationalized industries, especially the railroads, postal services, telephone, and telegraph. Public administration by the new men raised to power by the revolution, nevertheless, was extravagant, as the resources made available by the creation of new money were apparently unlimited. A number of measures for the nationalization of certain industries (e.g., the coal, electrical, and potash industries) were introduced, but failed to become law. The eight-hour day was enacted, and labor unions were given many legal immunities and privileges. In fact, a system of labor councils was set up which authorized the workers in each enterprise to elect representatives who shared in the management of the company! While government expenditures rose by leaps and bounds, the revenue suffered a gradual decline until, in October 1923, only 0.8 percent of government expenses were covered by tax revenues. For the period from 1914 to 1923 scarcely fifteen percent of the expenses were covered by means of taxes. In the final phase of the inflation the German government experienced a complete atrophy of the fiscal system.”

    http://mises.org/story/2347

    This is what we need to wake up to. There is a well of tangible goods and when it’s been spent or promised away in debts filling it back up with IOU’s won’t fix anything.

18. George Vietze
    November 23rd, 2008 at 12:25 pm

    John Morris, thank you forl the link in your comment. This supports the economic theory of the effect of monetizing debt not supported by value causes hyperinflation. Hopefully the United States does not follow the same path as Germany but as you pointed out recent policies lead in that direction. What is the effect of countries like China and others that have purchased a substantial amount of our debt?

    When responding to some of the economic and other challenges facing both our country, the Erie area, and us individually there is no one solution that fits every circumstance, each of us are at differennt stages of our lives and a long term solution to some of us is a lot different for others depending upon their age and objectives. A great deal of money recently from major funds and investors have been put into short term and long term treasury instruments. Short term treasuries are accepting almost NO YIELD just to have a place where one can feel SAFE and MAYBE get the principal returned. The TEN YEAR TREASURY BILLS ARE ACCEPTING A YIELD OF JUST OVER 3%. This is the first time in 50 years that 10 year treasury bills have yielded so low an amount. The economist say when speaking about the equity (stock) market, “Don’t worry, it will come back!”. Well smart money used to buy that theory until just recently when 10 years of value has dissappeared, that may be all right if you are 20-40 but if you are
    50-70 what if that happens again in 10 years? Everyone has their own ideas about this new shift in economic values, myself being 71, I’ve shifted to hard assets, mostly land and of all the areas in the country I chose the Erie area because of its diversified base, low price compared to potential of increase because the area has already taken its biggest hit economically in the past decades and current demographics signal upward movement. The risk is mostly political and cultural changing of attitude, but compared to California which borders economic devistation and other areas with similar problems the price value ratio greatly favors this area, at least in my opinion.
    When I see value like the bank that just purchased the Koehler property for less than $8,000 when the recorded past debt was in excess of $800,000, someone is missing the boat. Buying land is not for everyone because it take special expertise and land is not liquid like other investments, you can’t just call you BROKER and sell in 24 hrs. and real estate taxes and carrying costs are a factor, but cash is a depreciating asset in this economy, you can’t trust the stock market IMHO, treasury bills don’t pay much but I guess the government backs those investments??? I don’t have all the answers but am just trying to point out that some of the answers may be right in our own back yard!!!

19. john morris
    November 24th, 2008 at 11:02 am

    I hope today’s Citi Bank bailout news helps to put things in perspective. The government is going on the hook for close to 300 billion and put up 20 billion. The default rates being seen in the universe of loans banks rated as prime is staggering making it more and more likely that most U.S. Banks are insolvent. MR. Mortgage and MLimplode.com are likely the best one stop source of info on the subject. Banks are still trying to call the problem a sub prime crisis because acknowledging it’s true dimensions is just to scary.

    “Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill and government officials to restart the asset-purchase program in recent weeks.

    “The problem is that other banks would want to get in line” for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. “Is there enough money to do that?”

    Well they’ll print it.

    http://ml-implode.com/staticnews/2008-11-24_USAgreestoRescueStrugglingCitigroup.html