Why are we bailing out every company that is having financial difficulties?

Where are the people (i.e., government officials) who should be demanding responsibility from these companies?

11/24/2008 12:39:47 PM

has the system failed us, or us the system

11/24/2008 12:47:42 PM

Yes

Your basic Randian understanding of economics absolves you of the ability of comprehending a connected economy

However

Suffice it to say that letting Citi fail, and the entire US auto industry fail as well at the same time would probably be a pretty bad shock to the economy.

You know, over a hundred thousand unemployed workers overnight, with hundreds of thousands more as the support industries collapsed as well.

You know what happened the last time an administration took the 'welp, thats tough, use your bootstraps!" approach? Great Depression.

[Edited on November 24, 2008 at 12:53 PM. Reason : >.<]

11/24/2008 12:53:05 PM

Actually the Great Depression happened last time an administration decided to forgo the bootstrap approach...

[Edited on November 24, 2008 at 1:00 PM. Reason : well, not the last time, but the most extreme example]

11/24/2008 12:59:27 PM

^^ I think that's mostly true, but i also think that GM and to some extent the banks are being glutton and intend to use the public money to stuff their own pockets, not avert disaster.

And really, except for the stock market volatility (which is primarily because investors are panicking because of reports that they should be panicking), it doesn't look like things are going to take a catastrophic turn to me. GM and Circuit City have been circling the drain for a while now, and the banks were greedy but bad government policy was partially to blame for their failures. I don't see a problem bailing the banks out as long as they pay the money back, but I don't see why GM shouldn't be allowed to fail on its own, and have its assets bought out. The goal of forcing them to submit a plan for restructuring, but i'm not convinced the government has the mechanisms in place to truly assess how well they are following their plain, or even if their plan is a good one. Congress certainly is not equipped to do this, and there is no government arm that I know of that would have this expertise.

And I am also a little concerned that Obama is going to use the banking issue as his 9/11. I hope that his team can keep focused on the true goal of sustained development, not overly ambitious side projects.

[Edited on November 24, 2008 at 1:03 PM. Reason : ]

11/24/2008 1:03:14 PM

Quote :

"The US has one of the most vibrant, dynamic, and efficient automobile industries in the world. It produces several million cars, trucks, and SUVs per year, employing (in 2006) 402,800 Americans at an average salary of $63,358. That's vehicle assembly alone; the rest of the supply chain employs even more people and generates more income. It's an industry to be proud of. Its products are among the best in the world. Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru."

11/24/2008 1:06:49 PM

Quote :

"You know what happened the last time an administration took the 'welp, thats tough, use your bootstraps!" approach? Great Depression."

Quote :

"Actually the Great Depression happened last time an administration decided to forgo the bootstrap approach..."

Hmm, both statements are debateable.

Hoover wanted the free market to sort itself out and it did just that by free-falling for a few years.

FDR tried to fix things with the New Deal and likely compounded the depression.


Both Keynesians and Friedman-esque supply-siders would say that a capital infusion and aggressive fiscal policy to stem the run on banks could have kept the recession of '29 from turning into the Great Depression.

[Edited on November 24, 2008 at 1:08 PM. Reason : 2]

11/24/2008 1:07:11 PM

Quote :

"Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru"

Mazda is owned by Ford (major stake).
Subaru

Mitsubishi is on the brink of nonexistence, and has been for years.

BMW is shifting some manufacturing to back to Germany - Z4 coupes are no longer produced in SC

Mercedes doesn't really have a massive US infastructure.

That leaves Nissan, Toyota, and Honda - whose combined US employment is doubled by GM.

So, yes, get ripped.

[Edited on November 24, 2008 at 1:18 PM. Reason : GM stake in Subaru sold to Toyota.]

11/24/2008 1:14:35 PM

Quote :

" Hoover wanted the free market to sort itself out and it did just that by free-falling for a few years."

Hoover couldn't let people escape from a flood without his help, why would anyone think he would consider letting the free market sort out a depression?

Evidently by "letting the free market sort itself out" you mean doubling the income tax on those earning over $100k, quadruppling the income tax on those earning less than $100k, imposing punitive tariffs on everything, and bullying business into imposing wage and price controls. Which of these was designed to let the free market sort anything out?

The monetary system in 1929 was not a free market. So, it was not the free market that destroyed 33% of the money in the US economy, that was the men working for the Fed that hoarded gold into government vaults instead of lending it as U.S. law required. But they were trying to salvage a government imposed gold standard, monetary stability be damned.

11/24/2008 1:22:05 PM

Because Republicans love capitalism until capitalism happens to them. It's easy to blame the poor and downtrodden until you are one of them.

11/24/2008 2:11:47 PM

Why, I didn't know that Barney Frank, Barack Obama, and over half the Democrats were in fact Republicans.

This news is certain to shock the hell out of many, many posters around this forum.

11/24/2008 2:27:51 PM

Paulson is. Can you really fault anyone in congress for not being able to understand what they were voting for? The most blame you can place on any of them is that they trusted a Republican SoT when he told them the sky would fall if they didn't vote for his bailout bill.

11/24/2008 2:36:00 PM

ignorance is a great reason to let them off the hook.

11/24/2008 2:39:11 PM

Quote :

"Paulson is. Can you really fault anyone in congress for not being able to understand what they were voting for? The most blame you can place on any of them is that they trusted a Republican SoT when he told them the sky would fall if they didn't vote for his bailout bill."

...and that they didn't listen to the thousands of constituents calling and writing them to tell them "no" to this boondoggle.

But hey - what do those plebs know, anyways?

11/24/2008 2:40:11 PM

Quote :

" Evidently by "letting the free market sort itself out" you mean doubling the income tax on those earning over $100k, quadruppling the income tax on those earning less than $100k, imposing punitive tariffs on everything, and bullying business into imposing wage and price controls. Which of these was designed to let the free market sort anything out? "

Hoover was a stalwart believer in volunteerism and this core belief structure is why he tried to convince, rather then force, financial institutions and investors to curb their rampant speculation.

As for the taxes, a majority of American's didn't even pay federal income tax at the time so that really only effected the wealthy.

PS- trickle down theory is bogus.

Quote :

" The monetary system in 1929 was not a free market. So, it was not the free market that destroyed 33% of the money in the US economy, that was the men working for the Fed that hoarded gold into government vaults instead of lending it as U.S. law required. But they were trying to salvage a government imposed gold standard, monetary stability be damned. "

Are you joking?

The fact that there was such little regulation and requirement on how much capital a bank had to have vs how much it could loan out that a lot of financial institutions were loaning stupendously greater amounts then their reserves and assets could cover.

The Fed didn't take a proactive approach to bolster financial institutions specifically because of Hoover's hand's off belief.

11/24/2008 2:47:12 PM

Quote :

"Hoover was a stalwart believer in volunteerism and this core belief structure is why he tried to convince, rather then force, financial institutions and investors to curb their rampant speculation."

http://en.wikipedia.org/wiki/Smoot-Hawley

But it was a totally voluntary tariff.

11/24/2008 2:52:04 PM

You're actually trying to force a link where there is none.

I'm not arguing that Hoover was a beacon of great statesmenship but he actually was a very very very popular conservative until 'Reaganism' took a hold of the movement and crucified him exactly because of that act and his tax policies.

The tax policies were necessary, by the way, as the federal government was running something like a 60% deficit.

11/24/2008 3:04:05 PM

Quote :

"As for the taxes, a majority of American's didn't even pay federal income tax at the time so that really only effected the wealthy."

They didn't pay taxes, before Hoover. After Hoover the lowest tax rate was 4%. Compare that to today when the lowest tax rate is effectively negative. Before Hoover, the highest paid 25%. After Hoover, they paid 63%. The rest of society (middle class) faced similar tax increases. Nevermind the crushing of the international trading system by tarriffs.

And such drastic tax policies would be suicidal in fair-market conditions, how can they be necessary during an economic disaster?

And if the goal is to stabilize agrigate demand, taxing consumers so the government can spend is self defeating: it screws up the incentive to earn without actually increasing spending. Hence the suggestion that governments run deficits during economic downturns and surpluses otherwise. But in the middle of the worst economic catastrophy in history, 1937, we had a balanced budget.


[Edited on November 24, 2008 at 5:42 PM. Reason : .,.]

11/24/2008 5:41:30 PM

Does anyone know or have a link to just what the damage from Lehman was? Has it been calculated anywhere?

If Citi has 300 billion in toxic debt, can we not assume that most of the other big banks (BoA, lookin at you) have similar levels of bad debt and are going to need a backstop?

11/24/2008 7:36:49 PM

^

I don't know that Citi has 300B in toxic debt and I have not seen any numbers on this.

So, far the Citi situation has looked odd to me all around. Citi has done many many things wrong but by my calculations Citi was in better shape last week than over much of the year. They had roughly $50B in cash. They had some pretty aggressive writedowns on MBS.

The biggest kink in their armor was of course, US Credit Cards. They have a lot of exposure here but the numbers that I had heard were bad but not that bad. We were talking losses in the single digit Billions.

So Citi did not seem on the brink to me. Moreover, the restructuring that Pandit had put in place creates what looks at first blush like about $30B in operating profit every year.

To me it wasn't a forgone conclusion that they couldn't absorb the losses.

Now to be clear. I am not a Citi fan. I have been on Citi's case for over a year now, but as of last week things were looking better to me not worse.


That being said, the market obviously felt differently and the Fed and Treasury knew that Citi under no conditions could be allowed to fail. So it seems that they basically offered Citi a pretty sweet deal to take on new capital.

From my read Citi gets 20B in capital and losses limited to 67B on 306B in assets. This means Citi can take the full 306B in writedowns and still be well capitalized on the strength of its cash.

Moreover, Citi gets all of the upside on those assets.





As for the was Hoover a free-marketer debate. I think it misses the point. I don't know Hoover's basic philosophy and I don't think it matters. We don't have to resort to philosophy. We have empirical evidence. Unless your position is the-devil-may-care if we go into another crisis in the mold of the Great Depression or the more recent and data heavy Japanese Depression then the evidence suggests that we need to avoid a massive collapse in the financial system.

The only question then is, would Citi failing bring down the entire system. Its hard for me to look at it and say no.

11/24/2008 8:15:56 PM

Quote :

"Because Republicans love capitalism until capitalism happens to them. It's easy to blame the poor and downtrodden until you are one of them."

Wow.

11/24/2008 9:01:07 PM

Quote :

"The biggest kink in their armor was of course, US Credit Cards."

I disagree with this. American Express does the vast majority of their business through credit cards, but they are not going to need a bailout. I think the main link we are seeing with all these failing businesses is bad management. Management that was willing to risk their leverage their company's future, and now all that debt is going bad. It seems like such a simple concept to me - it is STAGGERING how many of these company's leaders didn't get it. And of course, it is THESE companies that taxpayers are being forced to dump their money into. It makes me sick.

I think Rule #1 for each bailed out company should be a complete overhaul of management.

11/24/2008 9:22:19 PM