
Bailouts are bad for the economy. They foster a welfare mentality.
I am not just referring to the hundreds of thousands of people who stopped paying their mortgages voluntarily because they agreed to bad loans and believed the government would step in and pay their mortgage for them. I am referring to corporate welfare plans that Obama and other politicians are calling for. And while I plan to address mostly the corporate welfare angle I want to use the personal welfare mentality as that is easier to understand because it is easier to relate to, once you get that the idea of corporate welfare seems more comprehensible.
Now this is something I had intended on writing about this morning but got too busy, I don't intend for it to be a retread of what Jake and Tony have written about today. (Friday actually, it's been a busy few days.)
Months ago the media focused on Ed McMahon facing foreclosure because he had followed the path of instant gratification and kept refinancing his house and sucking the equity out of it while frittering away his life savings. Then the housing market in LA hit the crapper and Ed, like many others, found himself with a flipped mortgage, that is a mortgage where you owe more than the house is worth. However, CNN spun the interview a bit differently that the facts as I laid them out. But unlike Ed, who had literally pissed away his savings, there are people who when faced with the ugly reality that they refinanced their house one time too many and the mortgage was for more than the value of the house took the path of least resistance and mailed the key for their abandoned house to their mortgage holder.
"Now these people are not like the minority of foreclosure victims and were unable to comprehend the idea of adjustable rate mortgages, balloon payments, and the usual collection of financial jargon incomprehensible to many people buying their first homes. And they are different from the group of people who took out mortgages based on 125% of the value of the house, or 100% mortgages with $50K or greater lines of equity, and kept refinancing to have access to that equity in the home plus the projected equity and were caught when the housing market busted.
These people have stopped paying their mortgages because they believe they don't have to. They listened to the asshats running for office and abandoning any final vestiges of personal responsibility stop paying to live in their house, because they believe, honestly or otherwise, that the banks will not foreclose on them and the government will either force banks to renegotiate terms and principal or pay the mortgages for them. They abandoned personal responsibility and rather than work out a budget that impacts other aspects of their lives they are simply waiting for the government to help them.
We are seeing the same lack of responsibility in the auto industry. They were promised bailouts as concessions to the unions. The auto bailout proponents hide behind the reality that more than a million jobs and countless tax revenues are dependent upon the US auto industry. But these same people are hiding from the reality of Darwinism, survival of the fittest.
The US auto industry faced a crisis in the 1970s when gas shortages forced people to buy the far inferior Japanese imports for the sake of gas mileage. In 1979 the new chairman of Chrysler realized the company would fail unless if restructured itself and obtained loans to retool its factories and become competitive. Iacocca approached Congress and asked the federal government to guarantee loans so it would not go under. Congress approved these loan guarantees and banks came up with the money Chrysler needed to remake itself.
The only concession the US auto industry made to regain failing market share was to produce more cars so customers could walk into a dealership and pick up their new cars a few days later, as opposed to the wait of weeks or months that was customary. The Japanese auto makers were investing their profits into new plants and quality while the American motor companies were focusing on reducing the cost of their products so they could have large inventories.
Eventually the 90s came, Iacocca retired, and the auto industry played their incestuous game of musical chairs in which company executives changed companies eventually retuning to that homogenized look that the industry is famous for. Japan beat the US in quality and the US auto industry sunk, because once again every company needed to play catch up with the Japanese companies, first in gas mileage and then in quality. As that decade ended Ford and GM had caught up in quality but Chrysler still lagged behind.
Chrysler came out with a stable of great looking cars, the Dakota, Magnum, Charger, Avenger, 300, and the PT Cruiser. Chrysler souped up the engines offering the Hemi in the bigger vehicles but never figured out it needed a transmission for its cars, a fact that has haunted them since the introduction of automatic transmissions. And the cheesy plastic interiors don't help them either.
I didn't mean to go off on a Chrysler tangent but I felt it is relevant to explain the difference between Chrysler's loan guarantees of 1979 and the proposed bailout of 2008. Iacocca promised and laid out a plan for change for his company, in order to entice the government to guarantee the loans that Chrysler needed from banks and investors to pull out of it's nosedive, it had sought loans on the free market first and was denied based upon its history of inefficiency and the banking industry decided Chrysler would fall prey to corporate Darwinism and hence they were a bad risk.
This bailout does not ask the auto industry to change, it is just shoveling cash to, not stop, but augment the bleeding. If you have a patient hemorrhaging blood the first thing you do is address the injuries and stop the bleeding. In this case the government is offering to keep the auto industry afloat by injecting cash into it. Not by simply guaranteeing loans, but by directly making them. Not only is it a bad policy for the US to loan money to any industry it is a stupid strategy... you need to address why the patient is hemorrhaging money instead of just pumping more money into it. Just as running an IV into a bleeding patient will spill out on the floor unless you dress the staunch the flow first; pumping cash into these companies will be just as wasted.
The loans Iacocca asked the government to guarantee forced Chrysler to change their corporate strategy and be profitable. It allowed the major lenders to have a say in corporate affairs by having a say in the structure of the board to make sure they got their money from the company. It forced corporate responsibility prior to the loans being made.
The proposed government bailouts, for AIG, the banking industry, the auto industry, and every other corporation and eventually individuals are bad policy as they do not force the corporations or individuals to change and adopt a more responsible business model/lifestyle.
If the auto companies filed for bankruptcy protection and restructured it would allow them to rework their business model and either succeed as stand alone corporations or merge or find partners to continue existing. If they fail, as Chrysler may very well do, they will most likely merge or be purchased by a company like GM or Isuzu who wants their stable of cars and intellectual value, and in the case of Isuzu the dealerships. It would also mean that the manufacturing plants remain open so it is not like the manufacturing jobs will evaporate, but many white collar jobs will suffer.
The companies may emerge from restructuring stronger, or perhaps not at all. But it is a virtual guarantee that without forcing responsibility upon these companies they will return to this situation again. Sooner rather than later.
Essentially the US economy has been on a steady incline for the past quarter century. As the economy has prospered so has the poorest segments of society. That goes for businesses as well. Many inefficient companies, some small and others giant leviathans prospered in spite of themselves. A correction may be necessary to shake out the weaker companies and act as incentive for the stronger ones to adapt and thrive.
Let the auto companies declare bankruptcy, reorganize and restructure, refinance their debt, rework their union contracts. Only that way will they survive; if they are able to. Handouts and entitlements are addictive and will not act as incentive for the recipients to change their business plans, so all it will do is postpone the inevitable, not cure the problem.
And this is all without addressing the toxic subject of the government running the board room.