Cartoon of the Day
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Tuesday, December 09, 2008
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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15 Comments:
Good cartoon but there are so many more kinds of folks that should be in that cartoon also...
Cities...
Public School Districts...
Governors...
I’m curious. Is that a public university funded with tax dollars and attended by students with subsidized loans provided by the taxpayers? What’s the definition of a bailout?
Walt G,
+1. Hell, +2.
Premium comment.
Walt,
There would appear to be a difference in scale between a student applying for a grant to the Big 3 asking for billions just to keep them afloat until Jan. Publicly funded institutions like universities and hospitals provide a social benefit that most citizens are willing to fund particularly as such services might not be as readily available or accessible if private funding were the only funding.
A private company creates a benefit only in so far as it satisfies the needs of its customers and provides a return on investment to its shareholders. An automobile certainly confers benefits on its owner but it is essentially a utilitarian commodity like a computer or any other good. If one provider does not supply the good, another will.
Rest assured, the Big 3 will get the money. Such funding may be justifiable given the difficulties of credit financing however, the Big 3 have been limping along for a considerable time.
Why has GM got 8 brands and more than double the number of dealerships of Toyota? Why hasn't the decision been made to streamline the brand offerings yet the idea suddenly becomes part of the restructuring plan to ensure a massive injection of public funds?
The reason the term bailout tends to get used here is the sheer magnitude of the funding.
Merriam-Webster definition of the term "bailout" is "a rescue from financial distress"
That's why we don't call ongoing funding of universities or student loans/grants "bailouts".
QT,
I'm a huge believer in education. I'm a life-long teacher and life-long student. I’ve taught off-and-on for twenty-five years, and I receive my fifth college degree Sunday.
I just wanted to point out that public money is spent almost everywhere. Our value system and not economics drives where the valuable resources will go. Accordingly, it's a matter of opinion how public money is spent. So, what's a better investment using that criteria, $ 1/2 trillion for the "war" in Iraq, or $100 billion for the Detroit Three? (Yes, it will probably cost more than the stated $34 billion). We could always base the Detroit Three loan amount as a percentage of GDP and justify it like that as some people do for the national debt. I guess it depends on one’s perspective. Obviously, I’m a little biased. I have a blood investment in GM’s future.
When my house burned, I was in financial stress, I got a loan, and I paid it back with interest a year early. I was appreciative, but I did not feel "bailed out." I consider the term "bail out" premature before a loan default regardless of Webster's definition.
"So, what's a better investment using that criteria, $ 1/2 trillion for the "war" in Iraq, or $100 billion for the Detroit Three?"...
The answer can be found in our Constitution and our Bill of Rights...
There's nothing in either document that says the citizens have to bail out the losers regardless of size...
BTW aren't socialist safety net entitlements basically a bail out of the individual citizen?
1,
Aren’t you assuming that the goal of modern government is not to redistribute the wealth? I don’t think anyone has read those documents you reference since they were written. Realistically, we are a socialistic society, and the only question is to what degree and which direction we move on that continuum during each presidential administration.
"When my house burned, I was in financial stress, I got a loan, and I paid it back with interest a year early."
Were those funds obtained from a lender operating in the free market and loaned to you based on your credit-worthiness? Or was it a government "loan" given to you because no private lender would have loaned you the money, having no confidence in your ability to pay it back? I'm betting it was the former rather than the latter.
Man, it's a tough crowd here today :)
It was a loan. Likewise, GM has never failed to meet any government mandates or loans even when they were forced to cut truck and SUV production when they were selling like hotcakes, and where they had a distinct competitive advantage over the transplants, to make money-losing cars to meet CAFE standards. They could have banked a lot of money or paid a lot of commitments off with the extra cash during the truck and SUV craze, that is, if they had been legally allowed to do so. It is not unreasonable to expect their cash hoard would have been large enough to weather this recession. The U.S. auto industry does not operate in a free marketplace, so let’s not pretend that it does.
Does anyone really believe that government action, or inaction, did not have a big hand in making this mess?
Walt,
Precisely the problem.
It is quite obvious that the Big 3 are facing a major financial crisis if the testimony of their CEO's is anything to go by. Why else would any executive consider asking for government funds which will come with the kind of stipulations that will lock them into a totally untenable business model namely producing the kinds of cars that Washington politicians think they should.
Bankrupcty might actually be the better choice from the standpoint of the long term viability of the company.
Be careful what you wish for.
A lot of businesses and people are in bad shape. GM/UAW and the like just have more exposure and present a bigget target for people who did not care much for them in the first place.
Perhaps a better indicator of the totality of the problem would be watching how the transplants handle losing money. They don't have a bottomless pit of money either. Let 2009 go by without an increase in auto sales and see where they stand. Are they strong enough to handle the current market, the loss of GM, the loss of their supply chain, and still thrive in the future? This is not just a GM problem!
Walt,
I agree that this isn't just a GM problem and the implications for related industries, pensions, etc. are huge. The fact that politicians will end up stick handling the auto companies is a concern. Most of their meddling to this point has negatively impacted the auto industry.
It is a great deal of money, however, and the way GM in particular has been burning through cash the last several years does give one pause. The decision to make funding contingent upon modifications to the product line as well as other conditions may well guarantee long term failure.
I realize no government is going to give you this amount of money without asking for a pound of flesh to discourage other companies. Makes me think of William T. Sherman's march to the sea. His idea was to create such a path of destruction so total that the south would never again dare to make war.
QT,
Let’s look at who the fiscal responsibility of the politicians who will be running the car companies now. It took from the founding of the country until 1981 rack up the first trillion dollars of national debt. It took another twenty years from the beginning of Reagan’s administration in 1981 to the end of Clinton’s administration in 2001 to rack up another four trillion dollars in national debt to around five trillion dollars. In just eight years, the Bush administration and Congress have added about five trillion dollars to that total. In other words, Bush and the current Congress added as much debt to our country as all the previous presidents and Congresses combined. These are the people who are questioning how other people run their business? Yes, I agree with you, we are in big, big trouble now.
QT said: His idea was to create such a path of destruction so total that the south would never again dare to make war.
Do you think that's part of Senator Richard Shelby's problem with us. I always figured he was just trying to protect his auto industry in Alabama. None of these guys operate out of the kindness of their hearts or fiscal responsibilty. They want money. They want votes. They take care of themselves first.
One of GM’s biggest problems stems from the demographics of an aging and retired workforce. As you can see below, they are not alone. We can clear this little mess up if every household would pay their bills and send in their half-million dollars to the U.S. government. This is YOUR debt and should be financed ahead of time just as GM should have done. Don't leave it to your grandchildren to bail you out.
“As of October 1, 2008, the total U.S. federal debt exceeded $10 trillion about $31,700 per capita. Including unfunded Medicaid, Social Security, Medicare, and similar promised obligations, the government liabilities rise to a total of $59.1 trillion, or $516,348 per household.” (Source: Wikipedia)
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