Sunday, November 9, 2008

STOP THE BAILOUT CONGA LINE: No Business is "Too Big to Fail"

Just what I was afraid of: Obama and the new more liberal congress aren't close to being inaugurated yet and already they want to take more money from working- and middle-class people to bail out those who don't deserve it.

GM, Ford, and Chrysler had a huge headstart--For decades, the industry had virtually no competition. The playing field was unlevel, in their favor. Yet, soon after the Japanese and Koreans started to make cars, the union-strangled U.S. car industry could not compete on the most important standard of all: reliability.

Year after year, Consumer Reports has made clear that American-made cars break down more often than Asian-built ones. No one ever accuses the Japanese of producing Monday-morning cars.

Even if the United Autoworkers Union drives the auto industry to its knees, the union apparently will continue to insist on lifetime job security and mammoth retirement packages despite the workers producing cars that break down more than the competition's.

Of course, it's hardly all the workers' fault. They can only install the parts that are given to them, and, in talking with auto mechanics in repair shops and workers on a GM assembly line, they're convinced that many parts and systems are inferior to many foreign manufacturers'. 

And certainly, U.S. auto executives deserve a big share of the blame. Their lust for short-term profits fueled their building building mainly high-profit-margin big cars and SUVs, figuring the materialistic American buyer would stay indifferent to thrift and environmentalism. Meanwhile Asian car makers, especially Toyota, recognized that the world is changing.

And now the Democrats want to reward the U.S. auto industry's bad behavior by propping it up with a massive bailout using our money.

It's fundamental that if you want to improve behavior, you reward good behavior and punish bad. The Democrats know that: they're always arguing that raising taxes on gasoline and on tobacco will reduce their use. Yet now, they want to reward the U.S. auto industry for its bad behavior.

If we hadn't bailed out Chrysler 20 years ago, the auto industry would have felt forced to improve. But the industry knowing that the U.S. government would probably never allow the industry to fail encouraged the automakers and auto workers to feel complacent about continuing their inferior practices.

Another auto industry bailout will only encourage further bad behavior and more inferior cars that can't compete with the Japanese or Koreans. And just imagine what will happen when the newest carmakers on the block, the Chinese, get their act together.

There is a huge hidden cost of bailouts: demotivating the small good guy. If entrepreneurs and small companies see that when a big company screws up, the government views it as "Too Big to Fail" and bails out it, that sends a dispiriting message to the small good guy: No matter how good you'll be, the government won't let you compete. No formula could better strip the U.S. of its historic advantage: the power to innovate.

If we prop up the bad with good people's tax money, it will yield only a short-term feel-good. In the long-run, we will become a bad country.

Yet the government is contemplating ever more bailouts. We've already bailed out the financial industry with uncertain results, are bailing out insurance giant AIG (who then congaed to Vegas for a $350,000 celebration) will soon bail out the auto industry, and rushing up to join the line are four more insurance companies,  Citigroup, the airlines, home builders, people who bought houses they couldn't afford, and those who ran up too much credit card debt.

Other short-sighted industry "leaders" are failing too.
  • Levitz Furniture insisted on huge showrooms and overpriced low-quality, poorly styled furniture. They're in Chapter 7 (liquidation) bankruptcy. Meanwhile Sweden-based IKEA is doing just fine. Should you and I bail Levitz out?
  • How about the nose-diving Circuit City, Best Buy, and Macy's, with their enormous, expensive bricks-and-mortar stores while the world buys online. Should you and I bail them out?
  • What about the liberals' darling company Whole Foods, which refused to stop its noble but unrealistic business practices even though that forced it to charge absurdly high prices that most shoppers won't pay. So its stock price has plummeted from 78 to 9 while German-owned Trader Joe's has long checkstand lines filled with happy customers. Should you and I bail out Whole Foods?
  • And then there are the cities and states. Here in California, our governor's already got his hand out for a huge bailout. 
Under the current "Too Big to Fail" mindset, the conga line for handouts will continue to grow until the taxpayers have been stripped of nearly all their money or there is a tax revolt.

I believe the auto and other struggling industries should be left to fix themselves or die.

What about laid-off workers? I'd encourage the private sector to create excellent online training programs. The entrepreneurial among laid-off workers would be trained on how to start a successful, ethical, and important small business. The not-entrepreneurial would be trained in such sustainable fields as health care, biotech, education, global business, elder care, and law enforcement.

I believe that's a surer road to a sturdy long-term economy than the ever-lengthening, Democrat-led bailout conga line.


Anonymous said...

Makes me sick to think about it. And it doesn't even help the little guy/gal - it really bails out the big guys/gals. I suspect most on the assembly line are dying to put out a quality product they can be proud of, that the nation (if not the world) wants.

Pouring money into this is watching it go down the drain!

Obama says he's about change and he's a bright guy. Can't he find a solution that's not gross money dump? Incentives for workers to find different work? Location? Create businesses?

Bailout is a lazy, expensive, ignorant approach not worthy of our nation and abilities--not even close.

Dave said...

I'm split on the issue. Should we accept the fact that we can't compete with Asian brands and give up? The North American market is the biggest and the toughest. The French and British pulled out 20 years ago and they don't seem to have any intention of returning. Remember the AMC (Renault) Alliance and Encore? That project was the final nail in AMC's coffin. The Rover 825 was another failure. Today, Britain's auto industry is almost non-existent. It could be time to throw in the towel.

On the other hand, the collapse of the industry would mean the loss of 2 million jobs. Would we be able to weather the fallout?

Marty Nemko said...

Those are 2 million unsustainable jobs--disproportionately, they are not-good workers working to build not-good cars. We can't expect the taxpayer to prop them up for very long.

The jolt of their being dismissed plus retraining them in areas in which the U.S. can compete will, long-term be better for the economy and for those workers.

News Monkey said...

Bailing out Billionaires: Help us stop the madness. Join our petition to Congress by clicking here:

Okie said...


In what area(s) should these workers be retrained?

Marty Nemko said...

As I wrote, health care and entrepreneurship should be at the top of the list. But biotech, education, and alternative energy technology also belong on the list.

Anonymous said...

Outstanding blog!

Dr. Michael R. Edelstein

Dave said...

This Detroit News columnist favors a bailout, but at least he is asking the right questions.

"But how can those same voices, and the lawmakers listening to them, be assured the Detroit automotive claque with its collective hand out would be leaner, more competitive, more financially robust -- more like Toyota or Honda -- on the other side of this perfect storm?

Would the GM with eight U.S. divisions that slipped into the current abyss, for example, be stronger, smaller and profitable should it emerge from the other side? How? Are the executives who steered GM, Ford and perhaps Chrysler (if it survives) into federal arms the right people to steer them out? If so, why?

As much as I may agree that bailouts trump bankruptcies here, I'm not at all sure GM or Ford -- and certainly not the woefully enigmatic Chrysler -- have made a persuasive case to taxpayers that their money would help ensure a different Detroit auto industry emerges from this unprecedented financial crucible.

Nor do I hear United Auto Workers President Ron Gettelfinger pledging to taxpayers his intention to make the union, its contracts or its work rules more flexible, more attuned to this century and not the last. It's one thing for GM and Ford shareholders to perpetuate the jobs bank, for example, or fund retiree health care benefits. But it's another thing entirely to expect U.S. taxpayers to do so."

Anonymous said...

I listened to your show yesterday. My ears perked up when your guest explained the term "too big to fail."

I think that if this is repeated over and over and becomes part of the public consciousness, it can be very dangerous.

Any corporation or industry can be designated "too big to fail," not just the auto industry. It depends on how important the company is determined to be. If this is left up to the government, and this happens more and more, bad companies can be supported with money that we don't have or can't afford to lend, and good companies that fall on hard times can be driven out of business. Also, it might limit how big a business can get, or want to get. As you said, it can easily stifle competition and innovation, and it could outright kill the free market.

That's how I see it, and I know nothing about the economy, so maybe I'm wrong or jumping to wild conclusions.

Anonymous said...

Marty - FYI, home building giants are lined up, hat-in-hand, right behind the auto makers. CEO's from some of the largest homebuilders in the country met with Pelosi and Reid just two weeks ago, and it would appear they are at the front of the line for the next bailout. The rationale: jobs - the homebuilding industry employs tens of thousands of people.

But even as an industry insider who will benefit from such a move, I cannot support it. Homebuilders let greed, profit and share prices trump common financial sense. Time to lie in the bed they made.

Whose next in the line-up of bailout recipients? Hot dog vendors? Sex industry workers? Why not revive the ice delivery trade while we're doling out cash all over the place?

Anonymous said...

Interesting, Mr. Nemko, that you changed the title of this post to "Stop The Bailout Conga Line." I think it makes an interesting point: the bailout looks like something to celebrate.

Have you or any of your readers had to borrow money before, not to do something like buy a house or car, but because you fell on hard times and thought you had no place to turn? I have. I've borrowed money from my mother a few times, and I always felt embarrassed and ashamed doing so, wondering how I got to that spot. I've paid her back every time, feeling much relief when I did so.

My sisters are different. They both take as much as they can get from my parents or anybody else with a handout, and they feel no shame at all, nor any pressure to pay the money back. They're more like the automakers and banks lining up for money.

I've wondered before, "Why did I work so hard to pay my mother back when I could have just acted like my sisters?" Now I know. Because I equated falling on hard times & borrowing with embarrassment & shame.

Can you imagine how different this bailout mess would be if borrowing taxpayer money & undergoing intense public scrutiny equaled embarrassment & shame for these companies? I bet it would happen a lot less.

Anonymous said...

I agree that GM should not be rewarded for its incompetence, and any bail out should stipulate that the current upper management be replaced by innovators. Any car company that gets taxpayer money should have a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability. That is the only way they can remain competitive with the Japanese automakers.

Anonymous said...

The latest most excellent news is that we're going to avoid the "moral hazard" of helping address the mortgages that started the bailout ball rolling. We've fed (pun intended) money into the banking sector, which turned right around and... used it for acquisitions, therefore creating more banks that are too big to fail.

Now, we're going to help out the credit card sector, auto makers and student loan orginators - but we're still not going to help out folks with underwater mortgages.

So, Marty, this is the worst of all worlds: you didn't like the idea of helping out individuals with bad loans, I recognize. Secretary Paulson listened to you, but he still has 350B burning a hole in his pocket. So rather than help out individuals, he'll help out another gaggle of corporations.


I think we might agree that working on reestablishing laws governing the size and reach of banks and reregulating the derivatives trade (I had not realized until recently that they needed to include language in a late Clinton or early Bush bill repealing laws against "bucket shops" to get the derivative market really running - laws that date from market crashes 20 years or so before 1929) would be a good idea.

I think the loss of the financial sector actually began when the interstate banking rules were repealed.

A recognized use of government power is to defend the state from enemies foreign and domestic. Defending the state against businesses which grow "too large to fail" - and as they grow, frequently distort criminal law, tax policy and foreign policy in ways specific to their interests - seems to me to be a straightforward act of defense. Once a business becomes "too large to fail," it is by definition a threat.

These preemptive strikes have the advantage of being peacable as well.

Marty Nemko said...

Thank you, most recent Anonymous, for a thoughtful post.

I agree that light regulation of corporations--including reregulating derivatives and requiring insurers to have sufficient reserves--is an appropriate action.

Anonymous said...

Well, we've had 30 years of increasingly light regulation, and what we've gotten in return is movement towards fewer, much larger entities.

A striking example is in media, where once most cities had multiple papers, the Justice Department started signing off on what amounts to anticompetitive behavior years ago, so that the papers could be more profitably bundled together and sold to large entities.

Blogging and craigslist are killing the newspapers, of course, but the consolidation trend is occurring in all of the media. The trend is dangerous in the financial sector as well. Perhaps more dangerous, because there is a decreasing pool of business reporters actually covering what's going on, as opposed to business analysts for various fiscal entities who have immense conflicts of interest in choosing what they think is worth reporting.

What I'm suggesting is that the US did extremely well from the end of WWII through the middle of the Vietnam war with its banks very regulated and laws on the books that prohibit many of the wagers that have been legalized since. As we became increasingly unpopular through our support of dictatorships around the world and losing the war became increasingly expensive, our economy was hit hard, and some of our largest companies got into serious trouble. Ultimately, we had an ultra-rightwing president in international affairs imposing wage and price controls at home!

If we're going to prevent companies from getting "too big to fail," I think we have to make a choice:

Is the notion of too big to fail outdated, and we should not interfere at all, or is there still such a thing as too big to fail, and if we think there is, is it time to start taking the kind of regulatory steps that break up institutions which are of that size?

I honestly don't see a middle ground if we're to avoid future bailouts. It's pretty clear that even Greenspan is floored by just how off the hook the derivatives market got; greed outweighing fiduciary duty was not something he thought possible. Sales teams with weekly and monthly targets will distort any industry, but industry mantra for growth is to employ sales managers.

I have a hard time seeing light regulations and the derivatives market working well - the total size of the derivatives market is estimated at 500T according to the Bank of International Settlements, at least as cited here:{B9E54A5D-4796-4D0D-AC9E-D9124B59D436}

If that's even a remotely accurate figure, it means that the derivatives market is on the order of ten times total global GDP.

That's too large a market to regulate to death overnight, but it seems to be too large a market to continue on being as opaque as it currently is. Illuminating it will need to be an international undertaking.

I don't see a lot of the folks involved in it considering developing and applying international standards for evaluation and reporting on that market and applying them to the derivatives casinos around the world as being 'light' regulation, and in fact I wouldn't consider it light regulation, either.

I particularly wouldn't call it light regulation in conjunction with preventing the growth of institutions to a size where they're 'too big to fail.' (And for me, I think that too big to fail does continue to have currency, if only because once you can afford to pay a CEO tens of millions, you're also paying the lobbyists to write tax and criminal code to favor you, and suddenly it's the law of the land that you are, in fact, too big to fail.)

Marty Nemko said...

Someone emailed me a comment and asked me to post it for her. Here it is.

Did I miss something about the fundamentals of business? They provide a product to consumers, they add their overhead,( material costs, salaries, ins., rent, R&D, taxes, etc.) and sell it on the open market for a determined price, in order to derive a profit. Some businesses have to borrow money to expand or enter new associated markets. The bottom line is, either succeed or fail. If you succeed you get a raise in salary, bonus, or split the dividends. When you fail, you minimize your losses, and lick your wounds, close your doors and go back to the drawing board. This is the American Dream. Bailouts are rewards for bad business behavior!!!!!!!!! Loans are temporary revenue that must be paid back, with interest. Not a gift from the taxpayers to reinforce lousy math. If you can't run a business and make a profit, why would any bank or gov. give you a loan at the depositors or taxpayers expense? Don't think anyone has to be a graduate of Wharton Business School, to figure out this latest conga line should have the music shut off, and the plug pulled. Thanks for your insight.