Wednesday, September 17, 2008

Lessons From the 1979 Chrysler Bailout

A good way to see the current problems is to look back to the first big bailout of modern times. Before A.I.G., before Fannie and Freddie, before Bear Stearns, there was Chrysler.

In 1979, when it was still the 10th largest company in the country, Chrysler found itself on the verge of collapse, largely because high oil prices had made its gas guzzlers unappealing. Company executives and union leaders came to Washington, hat in hand, arguing that Chrysler’s demise would wreak unacceptable damage on the American economy. Congress and the Carter administration responded by arranging for $1.2 billion in subsidized loans. The Reagan administration helped further in 1981 by restricting Japanese imports.

On its face, the Chrysler rescue was a huge success. Under Lee Iacocca, the company came out with the K-car line of smaller vehicles, like the Dodge Aries, as well as the original minivan. By the mid-’80s, Chrysler had repaid the loans. Mr. Iacocca appeared on the cover of Time magazine as “Detroit’s comeback kid,” and his autobiography became a No. 1 best seller.

But if you take a moment to think through the full Chrysler story, you start to realize that it’s setting a really low bar. The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.

Barry Ritholtz — who runs an equity research firm in New York and writes
The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80% of all new vehicles in this country. Today, it sells just 45%.

There is a similar chance for us to be fooled about the extent of today’s problems. Some day, house prices will stop falling and the financial markets will calm down. But the underlying problems aren’t going away on their own.

At its core, the current crisis stems from two problems. Regulators, starting with Alan Greenspan, assumed that a real estate bubble couldn’t happen and that Wall Street could largely police itself. And households, struggling with incomes that haven’t kept up with inflation in recent years, said yes when those lightly regulated banks offered them wishful-thinking loans. No bailout can solve either problem.

David Leonhart in
yesterday's NY Times


At 9/17/2008 8:58 AM, Blogger Walt G. said...

What if you think of Chrysler as a fifty-five-year-old cigarette smoker who gets lung cancer and has no insurance? Should he get a life-saving surgery to prolong his or life?

Some would say “no” because it was his fault he got the cancer and public money should not be spent. After all, he probably will only live twenty or thirty years at best and it is his fault. Let’s call this the “hell no, let him die” choice.

Others, however, would say “yes” he should get the surgery at taxpayer expense. After all, he still has twenty or thirty good years left to contribute to society, pay taxes, raise his family without public support, and possibly quit smoking. Let’s call this the “hell yes, let him live” choice.

Which option would you choose given just the two alternatives mentioned above? Of course, people will say this is not a fair comparison because Chrysler and a human are not the same thing. I suggest those people think again. Companies are people that have an effect on a lot more people.

When we use a decision-making framework that runs that gamut of beliefs, values, and economics, problems are more easily solved than simply asking some drunk on a bar stool what he thinks.

At 9/17/2008 9:35 AM, Anonymous Machiavelli999 said...


Using your logic, no one should ever be fired and no company should ever be allowed to fail.

I mean if I work for a small start-up and I lose my job and get cancer, what am I supposed to do...die?

How is it fair that just because I work for a smaller company, I don't get bailed out?

This "pulling on heartstrings" logic leads people to making really, really bad decisions and has given birth to ideas such as communism.

And Barry Ritholz is right. If Chrysler was allowed to collapse, somebody would step in and buy up their manufacturing facilities for cheap and make the cars the market demanded. This new company would probably rehire much of the same labor. The only difference is they would not be bound by stupid union rules and a bloated bureaucracy. The same holds true today.

If we are making analogies between the economy and humans, it would be a similar to going through painful but necessary surgery, having a recovery for 6 months, but then going on to lead a much more productive and healthy life.

At 9/17/2008 9:46 AM, Anonymous Anonymous said...

One of the things you tend to forget Mark, is that CAFE standards were signed in 1975 (under Pres.Ford I might add), and that because of that *regulation* (gasp!) the fleet efficiency of cars increased dramatically (as you have often pointed out). Of course none of that applied to trucks/SUV's, which is why our real fleet efficiency peaked in 1988.

I suppose you could argue that this regulation killed Chrysler at the time, but it wasn't like their vehicles fit the market at the time.

So Bob Lutz comes out and says CAFE sucks and people should be able to buy the 1mpg Super-Excursion a few years ago, while that was a cash-cow for GM...and suddenly they have to change their tune in response to the market, and their behind the 8-ball again, with the Japanese holding a commanding lead.

So why have mpg standards? Because American car company CEO's are short-sighted.

At 9/17/2008 9:51 AM, Anonymous Anonymous said...

The real question, "when must pragmatism trump philosophy?" In Carpe Diem World, I suppose never, because it is strictly and absolutely idealistic in its pursuit of Objectivism.

Can you run an economy like that? I suppose there's a reason no one is tapping MP on the shoulder to become a FOMC member...

At 9/17/2008 10:10 AM, Blogger Walt G. said...


I'm not suggesting heart transplants for people who are seventy-years-old. I am just saying you have to look at the total picture and weigh your decisions. Does economics take preference over values? Sure they do, sometimes. Chances are, if the failure of your company affects few people, you're a goner. That might not be the case if millions are affected. The problem is exponentially more severe in that situation, and a new dimension is added to the decision-making process.

Solving problems means looking at alternative choices that do not always appear to be the popular or the best choice using someone else’s criteria. Here’s my insight: Usually the person dealing with the problem did not cause the problem; however, they are in charge of “fixing” it. I deal with this everyday, and I find that problems do not get fixed until the finger-pointing session is over and cooler heads prevail.

At 9/17/2008 10:47 AM, Anonymous QT said...

History is what happened not what mighta, coulda...if only you had...

Concocting hypothetical scenarios about events that never took place and the possible effect of these events on decisions at GM or Ford...are these really the lessons of 1979?

Perhaps, we should also consider how many angels can dance on the head of a pin.

At 9/17/2008 11:49 AM, Anonymous QT said...

"At its core, the current crisis stems from two problems. Regulators, starting with Alan Greenspan, assumed that a real estate bubble couldn’t happen and that Wall Street could largely police itself. And households, struggling with incomes that haven’t kept up with inflation in recent years, said yes when those lightly regulated banks offered them wishful-thinking loans. No bailout can solve either problem."

The Grey Lady can always find "income stagnation" as the reason for just about every problem.

It isn't income stagnation but excessive leveraging that is at the root of the problem. Why did rational people take on debt loads that they could not possibly support...because at the time, they could. Interest rates were at historic lows making debt cheap and affordable. President Bush & the beltway were trumpeting home ownership. Bush even went so far as to tout zero down mortgages.

Financial advisers were telling homeowners to take out mortgages to "unleash the capital" in their homes and invest on the stock market. The idea was to write off the interest and generate capital gains with the trade-off of increased risk.

Interest rates were kept too low for too long encouraging a bubble in the market with the supply of housing in the U.S. reaching a 16 year high.

Is it any surprise that people respond to incentives taking the opportunity to borrow at historic lows, that the construction industry responds to demand, and that demand goes down & prices fall when interest rates inevitably rise and there is a glut of supply? Is it any surprise that the most affordable mortgages are not fixed rate but variable ones or ARMs that borrowers suddenly find they can no longer afford?

Unfortunately, there were lots of mistakes made by the Fed, lenders, borrowers, home builders, financial advisers, investment banks and politicians.

At 9/17/2008 12:31 PM, Blogger Walt G. said...


You've presented a nice balanced assessment of the problem. Solving the problem will be a two-step process: 1) Minimizing the loss while at the same time minimizing the pain, and 2) Keeping the problem from happening again. Many people will attempt to solve #2 before #1; however, the immediate problem is #1, so that has to be tackled first. Blinders to #2 might make that job more efficient.

Here’s a real-world type of problem I face in my capacity: Forcing an investment of a $25,000 piece of safety equipment that is not required by OSHA to prevent a 1% chance of someone losing their hand in 5 years. If you attempt to force the equipment on the business, they may take the job away from 2 workers who make $50,000 per year and ship it to a non-union shop where the safety requirements are less stringent (cheaper). What option do you choose? Would the option be different if it was your daughter operating the machine? How would you justify your decision for either choice in the best-case scenario where nothing bad happens and worst-case scenarios to co-workers who lose their jobs or victims who lose their hand?

At 9/17/2008 3:22 PM, Anonymous Anonymous said...

Solving the problem will be a two-step process: 1) Minimizing the loss while at the same time minimizing the pain, and 2) Keeping the problem from happening again. Many people will attempt to solve #2 before #1; however, the immediate problem is #1, so that has to be tackled first. Blinders to #2 might make that job more efficient.

Walt, don't you worry that in doing #1, minimizing pain, the feds are encouraging not achieving #2, preventing a reoccurrence? Socializing the losses and minimizing the pain will encourage continued risk-taking. These bailouts are not allowing the market to weed out the poor performers, they're just shuffling a bigger crisis down the road.

At 9/17/2008 4:06 PM, Anonymous QT said...


The other half of #1 was "minimizing the losses" not just the pain.

When one looks at the implication to the global financial system of the failure of AIG, the recent actions of Paulson & Bernanke have attempted to stabilize the situation, change the management, and guarantee the government a slice of the upside returns. Similarly, with Fred & Fan, changing the management, barring lobbying, suspending dividends, and reducing the size of the portfolio going forward appear to be fairly prudent aspects of the deal.

There are no easy answers.

Walt g,

Have to agree that the focus needs to be #1 for the present. #2 will need to be considered very carefully.

The example that you give helps to illustrate the complexity of risks associated with a decision.

Although the media will likely blame the decision maker, most pundits (as well as the rest of us) would likely pass on the job of FED chairman.

At 9/17/2008 4:34 PM, Anonymous Anonymous said...

QT, I did realize that he also cited minimizing losses (not a snarky comment). I just don't think that bailing out poor performers will do anything to keep the problem from happening again. Yes, the losses and pain are minimized in the short term, but if the effects of bad business practices are not felt, this risky behavior will be repeated.

Preventing a reoccurrence should be the foremost focus. If that means letting someone feel the pain and fall flat on their face, as they did with Lehman, fine. At least, it will send a message that everyone had better get their ship in order and not expect anymore government cheese.

I understand the argument that allowing them to fail would trickle down and cause too much pain, but I dont' buy it, not in a 14 trillion dollar economy.

Either we are a capitalistic society or not. If we are going to socialize the losses, let's go ahead and nationalize these companies and send the profits back to the taxpayer.

By the way, where the hell is juandos today?

At 9/17/2008 5:26 PM, Anonymous QT said...


I completely agree with you regarding bailing out substandard business practices. Arguably Fred & Fan did have some poor accounting practices and have never really cleaned up their act.

One must also acknowledge that this crisis has created unprecedented instability putting even well managed companies at risk. AIG example is particularly illuminating.

See article

At 9/17/2008 5:30 PM, Blogger the buggy professor said...

1) Thank you for the link to the Leonard column, Mark. Lots of sound comments there.

As I read through it, I noted a couple of paragraphs, though, that run contrary to your past efforts to defend the course of the US economy in the Bush-W era. Mind you, the overall macroeconomic performance has been generally good --- if that means the growth of GDP, productivity, and per capita income.

2) Wait though.
• If, however, it means that the real average wage has stagnated in the last 7 years --- unique in the history of the USA business cycle upturn --- then that is a different matter.

• If it means, too, that the top 10% income earners have gathered 90% of the income generated by our economy since the end of the 2001 recession, then that is a different matter as we.

• And if it means that we have been running unprecedented current account deficits --- allowing China and Japan and gangster regimes like Russia, Saudi Arabia, and (most likely) Iran to accumulate a couple of trillion dollars worth of US financial assets --- we are, it seems, in a very different world than a success story . . . especially if, additionally, we look at the failure of the Bush tax cuts to be matched by spending cuts, and find that national debt has risen 3 trillion dollars.

• Nor is that all. If we are in an economy in which the top 24 hedge-fund holders earned more last year for their financial hanky-panky than all the CEOs of the top Fortune 500 combined, we are, it seems, in an economic world very similar to the late 1920s.

• Now including, please note, a re-run of the financial meltdown of that era, with fortunately one big difference: Ben Bernanke and Secretary Paulson are not about to do a replay of Andrew Mellon and let crucial financial institutions crash with system-wide spillovers of a disastrous sort.

• And if it means, finally, that we have allowed disastrous financial instruments to be developed that were far beyond the control of US regulation --- never mind Alan Greenspan's presumably libertarian-inspired insouciance in the face of these disastrous develpments --- then the US economy has performed in ways in which there has been a huge, huge gap between the fantastic financial rewards for the very rich and rich and the rest of the American people.

3) Against this background, here are the two paragraphs from the Leonard article worth noting here then:

..."The Bush administration, the Fed and Congress, meanwhile, continue to focus on the immediate crises, with little attention to the underlying reasons that the economy has gotten into this mess — a stagnation of incomes, an explosion of debt and a decidedly outdated, and limp, approach to government oversight. Remarkably, the presidential campaign has gotten less serious, while the economy’s problems have become more so.

So, yes, Mr. Bernanke and Mr. Paulson have done a nice job of playing defense. But when will someone start playing offense?..."

4) On a very personal note, for which it’s worth --- probably nothing for anyone else --- my wavering as an independent voter between Obama and McCain-Palin (McCain's unique innovative slogan, unheard in previous elections) has now definitely swung in favor of Obama.
McCain is an admitted ignoramus in economics. His main adviser, now fortunately back in Texas (until, maybe, he becomes our next Secretary of the Treasury), isn't an ignoramus, just a hard-boiled ideologue, who likes to call the vast majority of Americans whiners. And his Vice-Presidential candidate --- the least qualified since Dan Quayle --- isn't just a poor choice, it's likely to be a disaster when you consider McCain's age if he enters the presidency next January.
She isn’t just ignorant about economics, finance, foreign policy, and military policy, she is, it seems, a brash, cocksure type who specializes in brazening her way forward, elbowing and clapper-clawing anyone in her way . . . including, it seems, a vengeful streak when it comes to settling scores with others. (The Republican Senate majority leader in Alaska insists that the inquiries into Palin’s alleged misbehavior and abuses in office should go forward, exactly as it was intended: as a bi-partisan effort to deal with possible illegal activities on the part of the governor in office. I hope so. It strikes me as scary that she could actually end up becoming our president if McCain gets elected and dies in office.)


Michael Gordon, AKA, the buggy professor

At 9/17/2008 5:55 PM, Blogger Walt G. said...

anonymous 4:34 said: "Either we are a capitalistic society or not."

You hit the nail on the head. Too many people don't see that we are not a capitalistic society or a socialistic society. Those are extreme ideals that do not exist in the real world. It's not a black or white call here, and it never will be with a government run by people, it’s actually some shade of gray that people can't agree on.

We have to trust our leaders to make difficult calls that are often unpopular. We have social, political, and economic dynamics at work. You can see the extreme here—social and economic—don’t forget what else is in the mix: Politics. Remove politics and we have anarchy. If such a thing could exist, who would benefit from an anarchist society? Capitalists? I doubt it. So, we are back to discussing what shade of gray we can live with: Are we not?

Politics, it is often said, determines who gets what and when. I want mine now. I am, however, willing to work hard to achieve my goals. Personally, I believe, we will get through this economic mess stronger than when we started.

At 9/17/2008 8:15 PM, Anonymous QT said...

Walt g,

I believe that shade of gray called the "mixed economy". :)

At 9/18/2008 7:21 AM, Blogger Walt G. said...


Mixed-up economy :)

At 9/18/2008 7:50 AM, Blogger OBloodyHell said...

> Concocting hypothetical scenarios about events that never took place and the possible effect of these events on decisions at GM or Ford...are these really the lessons of 1979?

qt, it IS relevant to consider current demands for bailout vs. the results of earlier bailouts, esp. when people use the prior bailout as an example of how "bailouts can work".

I tend to agree with the primary analysis -- that it may well have been better for the auto industry as a whole to have not performed the Chrysler bailout, walt's arguments to the contrary.

walt focuses too much on the immediate personal & individual impacts without examining some of the long-term consequences and the "lost opportunities" which may well have been much better in the long run. I understand his position, it's one that has direct personal consequences for him one way or another. I still suspect that the world would have been better if Chrysler had not been bailed out. There would have been issues, for sure, in the short term, but the problems might have been fixed since then, instead of being allowed to fester.

I know one person who was a devoted purchaser of Ford Mustangs in the late 80s early 90s. He finally got sick of the crappy design and workmanship and quit buying them after the third less than satisfying purchase. And that's not a low-end car, either.

P.S. As an additional plus we would not have had to put up with Iaococca's excrebly ghost-written "auto"-biography (read P.J. O'Rourke's scathing review of it. It's hilariously bad. Almost as bad as the Jimmy/Rosalyn Carter screed he reviewed about the same time. Collecteed into "Age and Guile", IIRC.)

At 9/18/2008 7:56 AM, Anonymous Holden Caufield said...

Barry Ritholtz can mobilize his Tin Foil Hat band of conspiracy theorists and blame everything on UFO's , Area 51 , the Fed , Bankers ,speculators , etc. , in a book !!!!

Sign me up for the first copy , I'll read it after I finish my 40th reading of Catcher In the Rye



At 9/18/2008 8:01 AM, Blogger OBloodyHell said...

> especially if, additionally, we look at the failure of the Bush tax cuts to be matched by spending cuts, and find that national debt has risen 3 trillion dollars.

Prof, you cannot look at those large numbers without comparing them to both the current numbers they are a percentage of as well as to historical percentages.

Neither the trade deficit nor the national deficit are all that large when it comes to the US economic engine. If a person is making US$56,000 a year and has a total debt allocation of $12,000, is that really, really all that much?

Argue it though you might, you also need to consider that, like it or not, there is a war going on. If you compare the US debt to other war times, that's generally going to be favorable, too.

And them having lots of debt links them to us in a way which isn't conducive to war or military action. That provides a measure of input-responses which we would otherwise lack. *Their* economy and national well-being is tied into ours.

I'm not claiming I'm even remotely happy with the failure of the GOP to follow up on 90% of the "Contract with America", and, if the Dems had their heads out of their asses, and put forth a middle-of-the-road candidate, I'd happily punish them with suitably targeted protest votes. But they've gone and nominated a jackass who's trying to find a spot so far left that Ralph Nader can't see where he is. If they nominated a middle-of-the-roader, I could, in good faith, vote for them. As is, fuggeddaboutit.

At 9/18/2008 8:05 AM, Blogger OBloodyHell said...

> then the US economy has performed in ways in which there has been a huge, huge gap between the fantastic financial rewards for the very rich and rich and the rest of the American people.

Prof, you've been drinking the Dem Koolaid. The notion that the average person today isn't a hell of a lot better off than they (*or* an equivalently educated & experienced person) is NOT a hell of a lot better off than 20 years ago is a whoooole lotta hooey.

This might be true for overpaid union hacks (sorry, Walt) but it's not true for most of the rest of us.

At 9/18/2008 8:08 AM, Blogger OBloodyHell said...

from qt's WSJ article:

> And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

LOL. Which will promptly be squandered by Congress in an orgy of additional spending allocations that year, with many and varied long-term commitments included.

You *KNOW* that is the real problem at the base of this.

At 9/18/2008 8:49 AM, Blogger OBloodyHell said...

> Prof, you've been drinking the Dem Koolaid.

PS. in support of this argument, I point to this earlier CD thread

At 9/18/2008 9:23 AM, Anonymous QT said...


One might also consider this article regarding income which does not support the stagnating wages theory.

The idea of bundling mortgages that pay a steady stream of income into securities is not really all that unusual. The only problem with these securities was the minor percentage of sub-prime and the possibility of default when loans exceeded the value of the assets completely destroying the market for all such products and banks having to set aside capital when these loans were taken back on the balance sheet or write the assets off generating hugh losses. Some of these assets have been written down to 37% of the face value. Have or will housing prices drop by 63%? Not highly chances are pretty good that many of these mortgages are still perfectly sound investments.

AIG demonstrates how difficult it is even for a company with plenty of collaterol turns its assets instantly into cash on demand.

The fact is that this is a highly complex situation 1) a housing market problem 2) a liquidity problem created by the collapse of the market for mortgage backed securities.

You will pardon me for finding the author's facile, superficial analysis just a bit much. There are many people working very hard to try to sort this problem without the cheap shots from the peanut gallery at NYT.

At 9/18/2008 10:10 AM, Blogger OBloodyHell said...

Varifrank makes an excellent comment about it all (short enough that I'll reproduce it here, in full, but link for the original source below:

As a taxpayer I'm just asking, as a capitalist I'm appalled, as a shareholder I'm furious

Now, I say this as a complete capitalist, but if a business gets so large that its failure would collapse the market( Like AIG is purported to be), then is it fair to say that the business should be broken up by the government to keep that from happening?

"Too big to fail" should not be "Taxpayers pick up the tab". If you are too big to fail, maybe we need to make you a little smaller.

That goes for you too GM...

At 9/18/2008 10:51 AM, Anonymous qt said...


The Great Depression demonstrated that perfectly sound banks can fail causing a domino effect. I doubt that one can innoculate any financial system against a major loss of confidence.

Isn't that what we are really looking at, namely the collapse of the market for mortgage backed securities and the effects on the financial system. Yes, there's too much leverage and yes, these instruments were sometimes not adequately priced for risk.

I don't know whether it is practical for the government to break up all large multi-nationals on the basis of a very extraordinary set of circumstances: the perfect storm of rising interest rates, falling house prices, loan defaults, a major liquidity crunch, economic downturn, rising unemployment and a major loss of confidence.

A business operates on the principle that it will continue in business rather than arranging its assets for liquidation at any moment.

At 9/18/2008 10:52 AM, Blogger Walt G. said...


The auto industry loans were already approved when the legislation passed. We're just waiting to see if the government will put their money where their mouth is. These are loans to comply with federal regulations. We are not talking about a consumer-driven market place, and I am pretty sure that the Big Three did not screw up and dry up the credit industry.

I have to agree with you about the UAW and GM being a big part of their own problems in the past. However, you really need to see the inside changes to know how much different we operate now than in the past. We are getting back work that we lost years ago because we can now competitively make many of our old products. Did we change enough? Is it too late? Only time will tell.

At 9/18/2008 11:19 AM, Blogger OBloodyHell said...

> I don't know whether it is practical for the government to break up all large multi-nationals on the basis of a very extraordinary set of circumstances:

qt, I do believe that it's a matter of huge is bad, period. When a single group is so all-fired important that its failure to perform correctly is considered so severe that the government must intervene as a result of the dire implications to the economy (by, as you note, perfectly valid and stable banks falling in a cascade effect), then that organization is too large.

Far be it from me to advocate "government intervention" but this is the sort of case where such may well be justified.

And it is fully within the bounds of the government in the first place. It is, unlike most uses, a reasonable application of the Interstate Commerce Clause.

Up until a couple decades ago, banks were not allowed to operate across state lines, specifically to prevent this kind of mass aggregation which means a small number of badly managed banks can cause a domino failure of perfectly well-managed banks.

And perhaps there is a more moderate size limitation which will control the risk while allowing a measure of size efficiency to be applied.

To me it's a self-evident fact, that it is not in the public interest to allow ANY business to be "too large to be allowed to fail".

We may need to step in and fix some of these problems. But maybe a part of the fix needs to be something to limit the chance of a recurrance. And I don't think you can do that while allowing them to be the size they are.

> I am pretty sure that the Big Three did not screw up and dry up

Walt, my comments were more on the fact that, AFAIK, Honda, Toyota, Hyundai, Nissan, Volkswagen, Audi, etc., are not having major financial problems. That may be partly related to interventions by their own governments, but *I* think that it's rather odd that US manufacturers are having an ever-increasing problem selling cars to US consumers, who, more than anyone, they should understand and be prepared to satisfy. That their market share has fallen to a dysmal 45% is remarkably telling, and it should be something that you see as a wakeup call, not as a reason for needing Federal help.

I *want* American companies to succeed. In the USA as well as in the World market. Maybe they can't always succeed in the external markets due to protectionism in other countries, but that's no excuse here. And perhaps if those companies were shocked by having one of them fail, then maybe -- just maybe -- that might make the others get a clue that they can't claim they are "too important" to fail.

I think that the Fed ought to demand that, in order to get bailed out, that GM break itself back up into smaller components, so that they will be competitive again. Ditto Ford, which could and should split off its Ford and Lincoln car lines, along with Ford trucks.

Yes, there's possibly some "efficiency" loss when that occurs... but the competitive forces will cause them all to streamline themselves and work to be the ones which sell the most.

Just as the breakup of Ma Bell has massively lowered telecom prices, so, too, is a breakup of the Big 3 likely to increase efficiency, reliability, and overall quality for the US industry (I'm assuming that costs probably can't be lowered a lot -- but that does not mean that segmentation, specialization, and competition won't work magic in this arena like it does in every other one).

At 9/18/2008 12:11 PM, Anonymous qt said...


The activities of the Fed and the Treasury are justifiable in the fact of an unprecedented crisis. Agree with Walt that the present financial system and the interconnectedness of the global economy are entirely different from the world of the 1930s.

With regard to "huge is bad", I am concerned that there is a shift away from free market economics and back toward the Keynesian, New Deal interventionism. Big government is not the answer as Fan & Fred attest (I don't really consider these two to be private since they have access to loan rates lower than their competitors and of course, lots of friends on Capitol Hill).

Markets and business are again being discredited rather than recognizing that we have a very serious financial situation.
Financial problems favor Obama although some of his plans are severely worrying. I am almost glad to hear that the middle class will be picking up the tab because the alternative is massive deficits. His trade protectionism and referring to deductions for capital cost allowances as tax breaks are bizarre.

The bright spot on McCain is that he doesn't think he knows everything. He will actually listen and be guided by ECONOMISTS vs. Mr. God's Gift to the Universe who thinks the sun shines out of his a** and sea levels recede at his command.

Basicaly, we have too many people looking for a rope to hang a dog.

With regard to Big 3 loans, a bailout pkg would force a change in CEOs. Rick Wagoner is not my favorite although perhaps, Walt can offer more insight on his performance.

At 9/18/2008 12:42 PM, Blogger Walt G. said...


I’m not sure how to judge Rick Wagoner’s performance because we have never had a situation like we have now to judge him with.

Internally, though, I can speak to that. The UAW and GM are working more together than they ever have—it’s amazing. Ten years ago we had a new door put in a meeting room so we did not have to enter the room through the same door as management—I’m not kidding. 1998 was a very bad year.

Now, we take complaints from the shop floor about how we used to do things and we have to explain to them we cannot make a decision that will cost GM that much money unless it also helps the plant. We are not always on the same page today, but at least we are in the same book.


The new regulations mainly affected the SUV and truck markets. Would the potential failure leading to a bankruptcy be from customers not liking GM products and putting them out of business, which is a natural event in a free market, or due to the cost of meeting new regulations?

At 9/18/2008 2:04 PM, Anonymous QT said...

Walt g,

Thank for your reply. Have to agree that these are very peculiar conditions.

Glad to hear that the unions and GM are working together for the benefit of customers, employees and shareholders.

In these times, being a critic is easy. Working through the crisis and trying to develop solutions that do not lead to future problems that's the tough assignment. Just trying to sort out the mechanisms that are driving this crisis is challenging.

I have very little doubt that we are only getting a fraction of the problems reported by the media. It usually takes years for all of the facts to be known on many historical events. Outside of the Treasury and the FED, there probably are only a handful of people in the industry who really comprehend the full extent of what is going on.

We don't even have a handle on what is happening within GM let alone the global financial system.

At 9/18/2008 3:23 PM, Blogger the buggy professor said...

1) Believe it or not, Christopher Cox --- appointed to head the SEC by President Bush-W in 2005 to ensure that it never applied its legal regulatory powers in any way that would impede the runaway financial hanky-panky that was unfolding all around him --- has belatedly, just in the last 24 hours, started to get tough as a two month-old kitty-cat with "naked shorting" and other financial scams that have . . . well, let us say, exploded with force in all directions during his watch.


2) A little clarification is in order.

"Naked shorts" is a term taht refers to future purchases of securities without first either borrowing the shares or failing to ensure that the buyer will actually borrow them before selling in the future. Such naked short-selling allows speculator-traders to commit to selling the shorted-shares he doesn't actually own. Instead, that trader commits himself to sell the future-delivered shares --- which he expects to fall in value --- at today's prices when the due date for both materialize.

The more the price falls by the time of the due date, the more the naked trader --- who has never actually had the securities, at any time --- is able to reap a profit. (Of course, the opposite can also happen in price movements.)


By contrast, legal short-selling is different.

It requires that the investor first borrow the securities from a bank or stock-broker, agree to pay a fee for such "borrowing", legally take possession of the securities, then --- when the due-date of the shorted bet materializes --- hope that the price has fallen, sell them at a profit to a third-party buyer, and pay back the money to the bank or stock-broker, pocketing the profits (if any). So in legal short-selling, a trader actually takes possession of the securities he bets on and has clearly committed to paying for them, plus whatever interest and fees the bank or brokerage house charges once the due date occurs.


If you still can't quite grasp the difference, consider naked short-selling something that goes on when a speculative trader actually owns no asset (securities) and never takes possession of them, nor has any intention of taking possession of the bet-on securities in the future. He just hopes that moving figures around on a balance-sheet with dollar commitments will lead to making money in the future once the gamble of a fall in the price of the securities in question materializes.


3) Such naked short-selling, though illegal since 2005 as highly destabilizing, was not enforced effectively by the Cox-headed SEC . . . any more than most of the other regulations were. Cox, you see, believed like Alan Greenspan in self-regulating financial markets, run by rational, calculating sellers and buyers, who understood the transactions, weighed options, took into account risks, and --- once the transaction was made --- we would all benefit . . . we meaning, in Adam Smith terminology, the greater good of society.

And, from what we know --- witness the now suddenly discovered tough-tone by the Cox-headed SEC --- such naked short-trading has been going on since 2005, and most likely in droves . . . not least with international buyers and sellers across national boundaries (including ours), and with hedge-funds almost certainly big users of this technique.


4)Against this background, you can now turn to the new SEC ruling, found at this link:

Will this dilly-dally belated SEC decision save the day for Chris Cox . . . suddenly transformed from licking the milk off big investors' boots, into the Lion-King.

Not if John McCain has his say in the White House.

Only a couple of days ago, Senator McCain told us the fundamentals of the US economy were sound as could be --- had transformed himself into an angry spokesman of Main Street, denounced Wall Street, and yelled for the head of Commissioner Cox!


5) Meanwhile, while all this travesty is going on, Senator McCain's swaggering Governor Moose-Hunter --- who assured us last week she's a specialist on Russia, the tip of Siberia visible, you see, from across the Bering Sea --- says that she is ready to take on any question about any country world-wide, and how it bears on US foreign policy.

The claim was made last night in some townhall speech with McCain . . . Palin the real celebrity-star. Only, with the braggadocio no sooner sounded than she was hustled off the stage by her handlers before anyone could ask her a specific question.


6) In a way, I feel sorry for John McCain . . . in numerous respects, an admirable man and exemplar. That includes his moderate bi-partisan role in the Senator for years and years. But he wants to be elected, and his straddlings and choice of Vice Presidential running mate and his unconvincing transformations into the populist champion of the little guy against the big financial fat-cats aren't convincing, are they? And so far, alas, do little to his credit.

Michael Gordon, AKA, the buggy professor


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