And no, I’m not even talking about the Lions.  Their 0-16 season looks heroic compared to the pan-handling, rent-seeking, name-calling, self-pitying and grovelling coming from Detroit pundits, auto execs, union bosses and politicians.  Some of the most ludicrous things are flying about day after day in defense of a massive money grab (aka: redistribution, theft) by the big three.  Rather than realizing their tough situation, rolling up their sleeves and setting about the difficult task of righting their respective ships, they’ve chosen to blame others who are more successful, to whine, to grovel, and to plead before no-nothing pompous politicians. Have some dignity Detroit!  At least Rod Marinelli didn’t beg for money from Washington.

Karen De Coster writes about some of the crazier things coming out of Detroit of late:

“The Union is squaring off against the South again. This time it’s Detroit’s union — the UAW — partnering with the auto manufacturers, politicians, and media supporters of the domestic auto industry to wage warfare against the entire South.

“The problem here centers on certain southern states — Mississippi, Louisiana, Georgia and, in particular, Alabama — where certain bone-headed senators seem to have forgotten that the Civil War ended, with the appropriate outcome, almost 150 years ago.

What’s more, these Alabama representatives argued that they and other southern states had plenty of automotive manufacturing capacity to take up the slack and keep the country’s economy going if Detroit was to go belly up. Specifically, Alabama’s Republican senator Richard Shelby called Detroit a ‘dinosaur’ and said bankruptcy was a better solution to the problems facing U.S. carmakers. The state’s other senator, Jeff Sessions, also a Republican, said Detroit’s collapse would “not be the end of the world. We have a very large and vibrant automobile sector in Alabama.”

That’s Detroit News columnist John McCormick, who labeled Southern politicians opposing the bailout “good old southern boys.”

Detroiters continue to embarrass themselves by placing the auto industry collapse into an us-versus-them framework. In the midst of all the whining and begging for a bailout, the South has been declared the new enemy, along with the foreign-car manufacturers who are producing cars — in Southern plants — that consumers want to buy. The army of politicians and opinion columnists in Michigan who lay the groundwork for resuscitating this fading industry don’t bother to acknowledge that it is in the best interests of any public company to maximize quality for its customers and efficiency of production and profits for its shareholders.”

And…

“Getting back to John McCormick’s limp line of reasoning, he ends his column by implying that Michiganders should boycott Alabama — especially the retirees and warm-weather family vacationers. As always, the little guys are told to give up their way of life to preserve the high-paying jobs of corporate and union executives — along with the jobs of people who make cars no one wants to buy. But what’s in it for them? National pride?”

I can’t handle this shameful display of prideless whimpering and excuse-making for ineptitude any longer, I’m gonna go watch the Lions game on my DVR as a reprieve.

From An Obersvation or Two:

Counters think there might be enough votes to pass it. Still a question of what strings will be attached. The  the Free Press reports that one string may be the congressionally-forced dismissal of GM’s CEO. It wants the companies to drop lawsuits against states that made arbitrary and punitive legislation against them. It also reports that ”[t]he bill is to include numerous conditions on the auto industry, including appointing an overseer to monitor the automakers’ progress on restructuring plans.” Nothing is detailed over what power that overseer may have.

The WSJ says that the overseers should be bankruptcy-lite. The board should have powers to force restructuring. It wants change in the dealership networks, labor contracts, even find a foreign buyer for Chrysler. This is a middle-road response.

Unfortunately, it elsewhere reports that the “car czar” might also be a Washington appointee that ensures that the companies make cars that Washington likes.

Finally, here’s a section in GM’s most recent SEC 10-Q

Looking into the first two quarters of 2009, even with our planned actions, our estimated liquidity will fall significantly short of the minimum required to operate our business unless economic and automotive industry conditions significantly improve, we receive substantial proceeds from asset sales, we take more aggressive working capital initiatives, we gain access to capital markets and other private sources of funding, we receive government funding under one or more current or future programs, or some combination of the foregoing. We are actively pursuing all of these possible sources of funding, but there can be no assurance that they will supply funds in amounts and timing sufficient to meet our liquidity requirements in the first two quarters of 2009 and perhaps in later periods.

So, according to this, there are five different ways that the company can be solvent again. The bail-out is only one of them. I wonder why there has not been any report on the companies efforts in the other four categories. In particular, I’d love to hear from bankers about why they have no provided loans to the company.

The latest from An Observation or Two:

Today’s theme is unfairness.

“Why is our industry getting all the skepticism, while banks and insurance companies are getting all the money? ” writes the UAW president.

“Citigroup got $20 billion on a Sunday afternoon, but CEO Vikram Pandit was not forced to submit a business plan or drive to Washington from Manhattan to be grilled by the Senate Banking Committee,” writes Daniel Howes.

It’s a dangerous point to make for bail-out supporters. The unfairness argument can mean one of two things. Either the auto-makers should get a bail-out, or that no one should. And since there are all sorts of other fairness issues with giving select companies bail-outs,* it seems the best response is that it was unfair to give finance a bail-out and it would be unfair to give the autos a bail-out.

But the congressional response would be something like this: Fix finance, fix the economy. Auto industry is not finance, so to hell with it.

Elsewhere, the Detroit Free Press makes makes an appeal to Congress, “You don’t want an economic disaster on your hands.”  It makes other passionate appeals, but all of them economic.

The downside risk argument has been used in a number of occasions, and I have yet to see it in an context that considers the dynamic interplay of the economy (how does this fit with ongoing job losses and job gains?) and even the percent of total economy.  So here’s the context: even using the absolute largest figure for the extent of possible job losses to the economy based on the Detroit 3 dissolving into the ether, the downside risk is only 2 percent of the total jobs in the economy.** That’s including the multiplier effect, so do not come back and ask, “Well, what about all of the spin-off jobs?”)

Today, the newspapers are writing about the legislators that are skeptical of the auto bail-out. I hope it isn’t a coded statement that means more logrolling*** is necessary to pass the loans.

*for example, why don’t we give the other U.S. automakers low-interest loans? Shouldn’t we then give all industries something similar to be fair? And is it fair to pledge the full faith and credit of the U.S. government (i.e.–they’re going to come after everyone if the loans go bad) for selective and discretionary financing?

**Simple calculation. Take the 3 million from the CAR study and divide it by the employment figures of the Bureau of Labor Statistics

*** “Logrolling is the trading of favors or quid pro quo, such as vote trading by legislative members to obtain passage of actions of interest to each legislative member.” http://en.wikipedia.org/wiki/Logrolling

SFE bloggers break-down facts and fallacies offered in major media outlets…

SFE blog Number Six discusses an article which claims the government saved Boeing and needs to do the same for the auto industry.  Excerpt:

The most interesting flaw in the article, though, is in his analysis of Boeing’s history:

“Why does the United States have one of the most robust aircraft-manufacturing industries in the world? The answer is not that pure free markets have, through the workings of a natural law, granted us such a bounty. Yes, Boeing has been disciplined and strengthened by global-market competition, particularly with Airbus, but large-scale federal spending on defense contracts has crucially strengthened Boeing’s position as a locus of human capital, design experience, and innovation. In 2006, the federal government spent more than sixty billion dollars on aircraft manufacturers. Boeing received $20.8 billion, according to Government Executive magazine. (Lockheed-Martin received $27.3 billion, and Northrup-Grumman $16.7 billion.)”

This sounds plausible, but is almost entirely wrong.  To support his claim Cole would need to show not how much Boeing sold to the government in 2006, but that government was a crucial help in the development of Boeing’s commercial sector when it counted.  This is not generally true. In the 1930s FDR held a grudge against Boeing because they denied him the right to address their workers in his 1932 campaign.  Congress held anti-business hearings.  Boeing was one of their targets, and to appease them Boeing offered the resignation of their President, Phil Johnson (government’s leverage came from its control of airmail contracts).  Then World War II approached and it didn’t matter who liked or didn’t like Boeing; government needed the best planes in the highest quantities possible.  The Air Force pushed Boeing to bring back Johnson, which it did.

The huge military buildup certainly boosted Boeing’s bottom line.  It did not, however, make inevitable what came next- in fact, it raised great obstacles to CEO Bill Allen’s post-War efforts to remake the company.  Producing for B-29s for unlimited demand, Boeing learned to neglect costs, a short-term problem after the War.  More importantly, the War empowered a bureaucracy at Boeing that was hostile to the commercial market, where Boeing had never succeeded, and wanted the company to continue focusing on producing for the government.  In 1948, Congress considered implementing an actual industrial policy, with a plan to bail out the struggling industry in return for decision-making authority for Washington, D.C., but Boeing helped block the project. (The book to read on all this is Eugene Rodgers’s Flying High.)

SFE blog Chris’s Color Commentary offers some thoughts on some of the confused narratives about the financial crisis:

When Hoodoo Mixes with Voodoo

…you get some really bad gumbo.

This is the feeling I got from a recent article I read in the Guardian, found here. I feel that is important to indicate some flaws with some of the arguments.

[...]

In short, free markets are nothing more than free individuals doing what they feel is best for themselves. Speaking out against it takes an immeasurable amount of arrogance.  It necessitates that you can be judge and jury in the lives of others, rather than allowing them to do the best they can with what they have.

Those who live in glass houses…

….shouldn’t eat bad gumbo.”

In 1979 Congressman Ron Paul gave a speech on the House floor in opposition to the bailout of Chrysler.  His words are extremely relevant to the new round of bailouts being discussed today.  Some excerpts:

“Do we in Congress have the authority, either moral or constitutional, to cause this suffering? I can find no provision in the Constitution authorizing Congress to make loans or loan guarantees to anyone, let alone to major corporations. Nor have I yet seen a valid moral argument concluding that we, as representatives of all the people, have the right to tax the American people – most of whom receive less in wages and benefits than Chrysler workers – to support a multibillion-dollar corporation. What right have we – and I pose a serious question that deserves an answer – what right have we to force the American taxpayers to risk their money in a business venture which private investors dealing in their own funds have judged to be too risky? Chrysler paper is now classified; that means that any private investor who is handling funds for his depositors, shareholders, or clients may be judged as violating his fiduciary responsibilities should he invest in Chrysler. Don’t we have a trust equally important from the American people? Are we not betraying their trust by voting for a Chrysler bailout? I believe so.”

And

“Last year there were 200,000 bankruptcies in this country, according to U.S. News & World Report. Yet we have selected only the largest for our aid. This is discrimination of the crassest sort. We ignore the smaller victims of this government’s policies simply because they are small. Only the largest, those with the most clout, the most pull, get our attention. This aristocracy of pull is morally indefensible. What answer can be given to the small businessman driven into bankruptcy by government regulations when he asks: “You bailed out Chrysler, why not me?” No justification can be given for this discrimination between the powerful and the powerless, the big and the small.

It is an axiom of our legal system that all citizens are to enjoy the equal protection of the laws. That axiom is violated daily by our tax laws, and now by this proposed corporate welfare plan for Chrysler. Apparently some citizens are more equal than others. That is a notion I reject, and I hope you do, too. I urge you to reject this proposal for all the reasons I have stated.”

I highly encourage you to read the whole speech.

One of the sad things about government involvement with anything is that it makes enemies out of people who have no reason to quarrel on a free-market.  Take the question of worker compensation.  I don’t care what wages other people freely negotiate with their employers, and it’s none of my business.  I interact with people everyday who earn various wages; I don’t know, and I don’t care to know what they earn.

Enter government.  We often have debates about whether or not public school teachers, for example, are over or underpaid.  This is not something any of us are qualified to determine, just as we’re not qualified to decide whether a chemist or an engineer should be paid more.  That’s up to the market, which is nothing more than the revealed preferences of millions of freely acting people.  But when government takes our money by force (taxation) and decides to spend it we (rightly) feel that we should have some say over the spending, since we are part of a representative government.  Hence debates over teacher and other government employee compensation, which tend to divide otherwise amicable parties.

The extent of such debates grows everytime government does.  Earlier today I posted a graph illustrating how much employees of the big three make compared to other workers.  I didn’t post it because I think I know what wages they deserve, or that I should be deciding who gets what.  I never would’ve noticed or posted anything about their wages if they were simply operating privately in the free-market.  When they decided to seek my tax dollars however, they became a target for my (and everyone else’s) critique of their business model, spending, compensation, etc.

I have no interest in getting into debates over what wages anyone should be paid.  Nor do I have an interest in having my money taken and given to certain businesses, industries, workers or professions against my will.  Until the latter stops, it is sadly legitimate to engage in the former.

The proposed big three bailout is a bad idea for many reasons.  The graph below, from economist Mark J. Perry’s blog Carpe Diem, is striking.  A bailout would mean all the people on the yellow bar to the far right would be forced to subsidize those on the blue bar to the far left of the graph.  Robin Hood in reverse.

The financial bailout was not neccessary.  Even if all the big Wall Street banks failed, there would still be people who wanted to lend money and there would still be people who wanted to borrow money.  Do you think they would be unable to find each other?

The bailout of the big three is not neccessary either.  Even if all three Detroit companies failed the auto sector would still motor on ahead.  There are still people who want to buy cars and there are still people who want to make them.

The bailouts are a giant wealth transfer from normal, productive citizens and businesses to businesses who are losing money - because of their own poor decision-making and management.  The economy will not be healthy again until we stop rewarding bad companies at the expense of wise and efficient consumers and producers.

I don’t care what the rent-seeking fatcat taxeating grovelling lobbyists from the bailout-hungry big corporations tell you, the world would be better off if we were left to use our own money the way we see best; on the things which bring us the most value.

We need to cut the pigs off at the trough.  If we do not, we stand to lose much reasonable, peaceful, voluntary social cooperation and commerce and devolve into a mess of panicked special interests clamoring to please politicians, instead of clamoring to please customers as a free-market would require.

It’s not that complicated; the bailouts are immoral and ineffective.

(Not to mention, bailouts are a distraction from the causes of many of our current economic problems.  The same political class who overspent, over regulated, and overinflated the currency is now deflecting attention from these causes and attempting to swoop in as savior and give more of your money to well connected interests, the big three being the most recent.)

By Briggs Armstrong at Mises.org:

General Motors has once again approached the federal government with its hand out. It should not be forgotten that in September of 2008, Congress gave the “big three” automakers a loan totaling $25 billion. Now they are back. This time they say that with a mere $50 billion they can turn things around and become profitable in the future. The management of GM and Ford as well as the UAW have been meeting with Nancy Pelosi to arrange a deal. GM claims that if the government does not give them the money they demand it will spell doom for the company and thus the entire US economy.

Let’s consider the impact of GM ceasing to exist — highly unlikely even if they declare bankruptcy. Hypothetically, GM would close its doors and all 266,000 workers would be unemployed, never to find work again, or so GM would have the public believe. GM maintains that it is really in the best interest of the country and economy to continue to support their failing business model. After all, in what kind of a world would the government allow a company that employs 266,000 workers to fail?

Descending into an abstract economics lesson about shifting resources to marginally more productive activities may be ineffective; therefore, I will approach this issue from a more philosophical angle.

The basis of GM’s claim is essentially that they are too big or too important to fail due to their massive labor force. But how massive is their labor force relative to other American companies? It may be surprising that the following companies employ a larger number of workers than GM: Target, AT&T, GE, IBM, McDonalds, Citigroup, Kroger, Sears, and Wal-Mart. It is also worth noting that Home Depot, United Technologies, and Verizon all employ nearly as many workers as GM.

The question must be posed: Should the government bail out all 12 of these companies and, if so, at what cost? I doubt that if Wal-Mart, with their 2.1 million employees, went to the government or the American people and demanded a bailout that they would receive much sympathy, let alone money. But if we are going to base worthiness of bailout on number of employees alone, then Wal-Mart is almost 7 times more worthy than GM.

(I have largely neglected Ford, whose executives are also demanding a bailout. I believe that it is enough to simply state that Abercrombie & Fitch employs almost 7,000 more workers than does Ford. Would the failure of Abercrombie & Fitch’s threaten the economy? I think not.)

It is unethical to force taxpayers to pay billions of dollars in order to bail out a company with a failing business model. After all, they cannot even claim, as banks did, that it is an industry-wide problem. Because if it were industry-wide, Toyota, Hyundai, Honda, Volkswagen, etc. would all be joining their American counterparts on Capitol Hill with their collective hands out.

What is the best solution? In a word, bankruptcy. By filing for bankruptcy protection, GM can escape the death grip the UAW has on the business. Bankruptcy would allow for restructuring on an unprecedented scale. There is a good chance that a highly competitive company could rise from the ashes of what we today call GM. Even if GM itself was unable to survive bankruptcy, the resources freed from its grasp could be hugely beneficial to other automotive companies that make products that American consumers value more. As taxpayers, we have a right to object to this misuse of our money.

We nationalized large chunks of the banking, finance, and insurance sector, why not the auto industry!  Wise words from Don Boudreaux over at CafeHayek.com on why bailing out the “big” 3 is stupid:

Re “Nationalizing Detroit” (November 10): How ironic is it that the gaggle of politicians now ascendant in Washington croak especially loudly about their ‘courage’ in standing up to corporate interests while they seek to force taxpayers to hand over $50 billion to private corporations?  And how odd is their belief that the same businesses that these politicians are sure don’t respond negatively to being taxed will respond positively to being subsidized?