"The line between private sector and public sector, which became blurred in 2008, may become almost impossible to see in 2009."

Peston sums the situation up, as per usual on BBC:

"The past 18 months was a story about the collapse of lending to banks and by banks - and about how we as taxpayers came to the rescue by providing £600bn of loans, guarantees and capital to the banks, to keep them afloat.( WE WERE ALWAYS ON THE HOOK WITH A SYSTEM OF IMPLICIT AND EXPLICIT GOVERNMENT GUARANTEES TO INTERVENE IN A CRISIS )

The story of the next year will be about the implications of this continued shrinkage in the availability of credit and about the implications of this massive, unprecedented support given to banks by taxpayers( LET'S NOT DO IT AGAIN ).

As a nation, our fortunes in 2009 will be conspicuously tied to the fortunes of our banks as never before. ( I'M NOT SURE I FEEL COMFORTABLE WITH THAT, GIVEN THEIR RECENT PERFORMANCE )

First, an economic recovery rests on the ability of banks to support viable businesses during what increasingly looks like a severe recession. ( TRUE )

Second, and as important, the balance sheet of the British public sector can be seen as the aggregated balance sheet of some substantial banks - because the state now controls three banks, Northern Rock, Bradford & Bingley and Royal Bank of Scotland, and will have a huge stake in a soon-to-be created fourth, LloydsTSB/HBOS. ( TRUE )

It means that if the perceived credit-worthiness of our banks - with their trillions of pounds of assets and liabilities - were to deteriorate further, that would have an impact on the perceived credit-worthiness of the state( YES ).

As never before, it matters to all of us that the banks run themselves in a prudent way( HEAR HEAR ). In an extreme and highly unlikely case, if the markets viewed our banks as recklessly managed basket-cases, that would have an impact on the value of sterling and on the ability of the government itself to borrow( TRUE ).

So our prospects and welfare depend to a huge extent on an institution that was created a few weeks ago by the Treasury to manage its investments in the banks, UK Financial Investments (UKFI). ( GOOD LUCK BRITS )

It's probably no exaggeration to say that - for the coming year or two at least - UKFI will be as important to all of us as the Treasury, or the Bank of England or the City watchdog, the Financial Services Authority.

UKFI's primary aim is to "protect and create value for the taxpayer as shareholder"( I AGREE WITH THIS POLICY ) - while also making sure that the banks we own provide "competitively priced" loans to small businesses and homeowners "at 2007 levels"( TRUE ).

Those objectives are not quite irreconcilable( IN THE US THEY ARE ) - in that the banks over which it has sway should be capable of providing substantial credit to the housing and small-company markets without chucking good money after bad, even though this is a dire period of economic contraction and proliferating bankruptcies( I AGREE ).

But, for the avoidance of doubt, UKFI has no ability to increase the supply of credit in the economy as a whole.

Remember that the ability of banks to lend is anyway being undermined by losses on the stupid loans they made in the boom years and also by the collapse in the price of houses, property and shares, which slashes the value of vital collateral that backs loans( VERY TRUE ).

So many banks are lending less to big companies, they are lending less for commercial property transactions, they are lending less to City institutions, they are lending less in the form of unsecured personal loans( TRUE. IT MAKES SENSE. ).

Lots of overseas institutions are cutting back significantly on the bounteous credit they provided directly to the real economy in the UK during the preceding few years( TRUE ).

Also many bigger companies that borrow directly on wholesale markets by selling bonds and other securities are finding it much harder and more expensive to raise money( VERY TRUE. A BIG PROBLEM ).

And credit provided between companies that buy and sell to each other is being massively restricted, by a collapse in the availability of insurance for such credit( TRUE ).

All of which can be summed up as "ouch" for businesses and households - and is the primary reason why some companies are going bust, and why those that will survive are reducing investment and cutting jobs( I WOULD ADD FEAR AND AVERSION TO RISK, SINCE THE "OUCH" SEEMS TO BE UTTERED IN TOO HIGH A VOICE ).

So even with £600bn and rising of support for banks from taxpayers, our banks simply don't have the resources to keep afloat real companies - manufacturers, exporters - that are vital to the future of the British economy( SOME WILL FAIL ).

Which is why early in the new year, the Treasury will announce details of yet more taxpayer lending, this time to ensure that credit is provided to viable and strategically important companies - such as the more efficient carmakers( THAT'S ABOUT IT. JOBS.)

The line between private sector and public sector, which became blurred in 2008, may become almost impossible to see in 2009."

I disagree. We both have Hybrid Systems, in which the public and private commingle. All that's changed is the mix of the mingling, so to speak.

"Neither gives a reliable figure for the future cost currently being incurred and it is not obvious which is better. "

David Friedman makes a good point about wages and the Big Three:

"The one problem I can see with estimating the labor cost per hour using current expenditures for both current and past workers is that the number of employees and their terms of employment change over time. If, as seems likely—I haven't checked—the number of employees is substantially less than it was in the past, then dividing current pension payments by the current number of workers gives too high an estimate for the per worker cost being incurred for pensions to current workers. On the other hand, if pension terms now are more generous than they were for many of the currently retired workers, that would bias the numbers the other way. Similarly for medical costs--if we assume they will be higher in the future than they are now, then using current costs paid underestimates future costs currently incurred.

All of those are details and none of them were mentioned in Eric Boehlert's column. At the simplest level, and assuming the companies aren't trying to include both pension costs incurred and pension costs paid, which would be double counting, he is wrong. What he regards as a blatant deception is a better estimate for the real cost per hour of employing auto workers than it would be if corrected in the way he wants it to be."

However, the point he is making applies to the total money that the company pays on wages and compensation. It might well be that those costs need to adjusted downward to save the company. It is also possible that Bankruptcy would do that.

On the other hand, it doesn't address the issue of each individual worker's compensation, since a reduction in total compensation could take many forms. I do not believe that the UAW workers are wealthy. That seemed to be the point of much of the criticism of the worker's wages. In other words, why have sympathy for such well off workers?The workers know that their company can go bankrupt, that they can be laid off, that they might have to accept lower compensation, that they might never receive their pension money, etc. Being a UAW member doesn't preclude hardship.

How you view the issues of wages in this situation depends on what you want to know or to show. If you want to show that worker's compensation is too high, then you can make that point by looking at total wages. If you want to know what workers earn, you can look at their current wages and benefits. That's all that they are sure that they are going to get. I can agree that wages might need to come down, but I do not believe that these auto workers are wealthy or greedy.

The argument that these workers are wealthy is, from a Burkean perspective, dangerous. This system exists because people accept that it is either fair or reformable. When enough people start believing differently, things could go very sideways. I don't want to bet on things working out. It is one thing to claim that a company needs to cut labor costs, it is another to belittle the wages and aspirations of individual workers.

"What happened to the ideology? On closer inspection, it turned out to be something of a cover all along."

Robert Reich also has a pretty good idea of our Political Culture:

"Greenspan’s real failure of imagination was his inability to believe there are useful market rules beyond those that protect private property and prevent outright fraud. This, presumably, was why he kept insisting for so long that government be held at bay( WHO KNOWS WHAT HE REALLY BELIEVES? ).

But now the United States has chosen to deal with the financial crisis by buying up a significant fraction of the shares of the nation’s major banks and its largest insurance company, underwriting the loans of a large portion of the nation’s home-lending industry, and is on the verge of underwriting the nation’s largest automobile makers. Yet little if any of this largesse has found its way to the broader public( A VERY BIG SOCIAL PROBLEM WITH THE BAILOUTS ) – to homeowners in danger of defaulting on their mortgages and losing their homes, small businesses close to insolvency, state and local governments cutting public services because of budget shortfalls, families unable to afford health insurance, or young people unable to obtain loans to finance university tuition. ( TREASURY AND THE FED ARE TRYING NOW )

The ideology of a perfectly self-correctly free market( THEY DO NOT BELIEVE IN THAT AT ALL ) has given way to what might be described as a raid by America’s biggest banks and corporations on the public purse, supposedly justified( ACTUALLY JUSTIFIED AS NECESSARY TO THE FUNCTIONING OF OUR SYSTEM, AND CONSIDERED A FORM OF FDIC INSURANCE THAT ONLY A FEW PEOPLE SEEM TO BE AWARE OF ) by benefits to the broader public which seem never to materialize( THE INVESTMENT CLASS IS THE BROADER PUBLIC IN THEIR VIEW ). What happened to the ideology?( THE ONE ABOUT GOVERNMENT GUARANTEEING TO HELP THEM IN A CRISIS? IT'S WORKING OUT JUST AS PLANNED. SURELY YOU KNOW THAT? ) On closer inspection, it turned out to be something of a cover all along( THAT'S IT ).

During the same years Greenspan called for deregulation of financial markets( ONLY THESE ), Wall Street was accelerating its bankrolling of the U.S. Congress( THAT'S THE FDIC INSURANCE I WAS REFERRING TO ). Securities and investment firms contributed larger and larger amounts of money – not just to conservative Republicans who might expect such support but also to Democrats who had never been so graced before( OF COURSE. THAT'S OUR SYSTEM ). According to Center for Responsive Politics, Wall Street firms dramatically increased their contributions to both parties during these years. Their share of total donations to the Democratic Senatorial Campaign Committee, for example, rose continuously, from 5 percent during the 1999-2000 election cycle to 15 percent by the 2007-2008 cycle.

The money was accompanied, and often raised, by Wall Street lobbyists who pushed Congress in the same direction Greenspan urged – blocking regulation of derivatives, weakening oversight of subprime mortgage lending, and preventing the Securities and Exchange Commission from doing its job. ( IN OTHER WORDS, GETTING GOVERNMENT OFF THEIR BACKS WHEN IT SUITED THEM )

To take but one example, the collapses of Enron, WorldCom, and several other giant corporations in 2002 revealed a troubling pattern of credit-rating agencies repeatedly assuring investors that such companies were good investments until just before they went under. When the Securities and Exchange Commission asked Congress for additional authority to oversee the credit-rating agencies, Wall Street and its lobbyists blocked the measure( IT WAS CLEAR WHY BACK IN THE S & L CRISIS ). With hindsight, it’s clear why. Wall Street investment banks were paying the agencies to rate various mortgage backed securities after first advising the firms that issued them – and collecting fees – on how to package them to get high ratings. Years later many of these same securities, based on risky loans, would prove to be worthless, threatening financial institutions worldwide. ( ALL TRUE )

Apparently Greenspan hasn't learned anything from all this( HE'S NOT SURPRISED. COME ON. ), but the rest of us have no excuse. The real choice ahead is between democratic capitalism and authoritarian capitalism( MELODRAMATIC ) . China is perfecting the latter. But unless we are careful we – the citizens of democratic capitalist nations – will discover that our form of capitalism has become more authoritarian( WE HAVEN'T YET? OH MY. ) than democratic. The current economic crisis surely poses a test for capitalism( A SOCIAL TEST. READ BURKE ). But it is also a test of democracy( AN ECONOMIC TEST. READ HAYEK )."

Our system is a Welfare State in which various Interest Groups compete to get the government's aid and largess. Almost everyone wants government intervention. All they differ in is the details of what they want the government to do. However, De-Regulation is not an end in itself, but a system in which the Government gives certain businesses more leeway while continuing to explicitly and implicitly guarantee government help in a financial crisis. What was not anticipated was the size of the crisis and ineffectiveness of the government's response.

I don't know exactly what Democratic Capitalism means to Reich. We have it. What we've had for the last eight years is just a peculiarly obnoxious form of it. It's up to the New Administration and Congress to do a better job of governing. It's hard right now how to see it being worse.

I suppose that my biggest difference with Reich is that I believe less government would alleviate some of these problems. However, that will not be possible without a growing and prosperous Middle Class, which I do not believe that we have now. I base that belief on using my eyes to see the obvious, which must be much harder to do than it seems.

"Japan’s exports plunged the most on record in November "

Bloomberg with some ugly numbers from Japan:

"By Toru Fujioka

Dec. 22 (Bloomberg) -- Japan’s exports plunged the most on record in November as global demand for cars and electronics collapsed, signaling more factory shutdowns and job cuts are likely as the recession deepens.

Exports fell 26.7 percent from a year earlier, the Finance Ministry said today in Tokyo. Economists surveyed by Bloomberg News predicted a 22.3 percent decline. The drop was the sharpest since comparable data were made available in 1980.

The Bank of Japan lowered its benchmark interest rate to 0.1 percent last week after business sentiment dropped the most since 1975 and the yen surged to a 13-year high against the dollar. Honda Motor Co. said last week that it may shift manufacturing overseas if the currency strengthens further( INTERESTING. WHERE? ).

“Japan’s export crash is finally upon us, and this is the worst thing that could happen,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “The recession will be very severe as companies adjust investment, production and labor.”

The yen traded at 89.70 per dollar as of 9:35 a.m. in Tokyo from 89.50 before the report was published and 87.14 on Dec. 17, the strongest since 1995. The Nikkei 225 Stock Average edged 0.6 percent higher after the U.S. government agreed to provide General Motors Corp. and Chrysler LLC with emergency loans.

Gross domestic product shrank in the past two quarters, sending the world’s second-largest economy into the first recession since 2001. The government last week forecast zero growth for the year starting April 1.

Toyota, Sony

Honda, Toyota Motor Corp. and Sony Corp. are among the companies that are shedding thousands of workers and closing production lines as profits dwindle. Car exports slid 32 percent last month, the most ever, and semiconductors slumped 29 percent, the ministry said.

Today’s report showed the global recession is spreading to the emerging markets that propped up exports earlier this year as demand from the U.S. and Europe evaporated. Exports to Asia fell 27 percent, the most since 1986, after the first decline in six years in October. Shipments to China, Japan’s largest trading partner, fell 25 percent, the steepest drop in 13 years.

“There are no markets that can make up for the drop in demand for Japanese-made goods,” Dai-Ichi Life’s Shinke said.

Exports to the U.S. tumbled a record 34 percent, and those to Europe slid 31 percent, the second-most ever.

Imports fell 14.4 percent, the first decline in 14 months, as oil costs eased and the yen gained. That wasn’t enough to prevent a trade deficit of 223.4 billion yen (2.5 billion), the third shortfall in four months.

Yen’s Damage

The yen strengthened 25 percent against the dollar this year as the global financial crisis prompted investors to sell riskier assets purchased with money borrowed in the currency( THAT'S THE CAUSE. THE FLIGHT TO SAFETY AGAIN ).

Honda President Takeo Fukui last week said the government should take action to halt the yen’s rise. Every 1 yen gain against the dollar cuts Honda’s annual operating profit by 18 billion yen ($201 million), according to the automaker. About 90 percent of Honda’s revenue comes from overseas.

Companies are also struggling to obtain funding as the market turmoil dissuades investors from buying corporate debt( THE SAME AS HERE ). To help businesses get financing, the Bank of Japan last week decided to buy commercial paper for the first time( SOUND FAMILIAR ).

Sales at home are unlikely to make up for the collapse in demand from abroad. Households, whose confidence is at a record low, pared spending in each of the eight months to October as wage growth stagnated and job prospects worsened.( JAPAN IS A SAVER COUNTRY )

The Finance Ministry last week submitted an extra budget for the year ending March that includes 2 trillion yen in cash handouts for households as Prime Minister Taro Aso tries to spur spending. That may be too little, too late, economists say.

“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad( SOUND FAMILIAR ? ).

No wonder there's a global recession. There's no learning curve anywhere. I wonder what Asano is saying now?

"But if I’m right (or London Banker, or Tim Duy, or Stephanie Pomboy) things could be considerably ugly as the situation proves too big for the Fed"

David Merkel on The Aleph Blog with a list:

"1) There are firsts for everything. Americans paid down debt for the first time, according to a Federal Reserve Study that started in 1952. America has always been a pro-debt and pro-debtor nation( SPENDER NATION ). It goes all the way back to the Pilgrims, who paid back the merchant adventurers who funded them at a rate of nearly 40%/yr over a 15-20 year period. But, the Pilgrims did extinguish the debt. Us, well, I’m amazed at the decrease, but we need more of that to restore normalcy to financial institutions.

2) Dropping to 45%, though, is the amount of aggregate home value funded by equity. With the decline in housing values, the fall in the ratio was inevitable. The low ratio puts downward pressure on home prices, because it means that more homes are underwater ( IT STILL HAS A GOOD SIDE ). Perverse, huh?

3) It’s a long interview, but Eric Hovde (my former boss) has a lot of important things to say regarding the financial sector. Few hedge funds focused on financials remained bearish on the sector, but Hovde’s funds survived to 2007-2008 where his bets paid off.

4) Is there a Treasury bubble? Yes, but it may persist for a while because of panic, central bank buying, buying from pension funds and endowments, mortgage hedging, and more( TRUE ).

5) Now these same low yields whack Treasury money funds. How many will close? How many will cut fees? How many will break the buck, and credit negative interest? An unintended consequence of monetary policy. Another unintended consequence reduces liquidity in the repo markets. Yet another unintended consequence is the reduction in investment from Japan and other nations that don’t want to hold dollars at low rates( WHO KNOWS? ).

6) Brave Ben Bernanke is fighting the Depression. If his theories are right( I AGREE WITH BERNANKE ) (and mine wrong), if he succeeds, he will face a difficult challenge in collapsing the Fed’s balance sheet as inflation re-emerges, without taking the wind out of the economy ( TRUE ). But if I’m right (or London Banker, or Tim Duy, or Stephanie Pomboy) things could be considerably ugly as the situation proves too big for the Fed and the US Government to handle( TRUE ).

7) Inflation is the lesser evil at this point.( I AGREE ) It would raise the value of collateral over the value of the loans, dealing purchasing power losses to those that made the bad loans, but not nominal losses.

8 ) I have said before that the Fed and Treasury are making it up as they go( TOO MUCH ), and Elizabeth Warren now confirms it for the Treasury. My Dad (turned 79 yesterday) used to say, “The hurrier I go, the behinder I get.” So it is for the TARP bailout( A HYBRID ). Policy made hastily rarely works. Spend more time, get it right. The market won’t die as you work it out.

9) But will AIG die, or the automakers?

• Sales are slow for assets at AIG. ( THEY WILL BE. BUYERS CAN TAKE THEIR TIME ) (no surprise valuations are crushed, and all likely buyers face lower P/Es and higher debt costs.)
• And who knows where the writeoffs end? As I said long before the failure of AIG, don’t trust the financial statements ( TRUE ). The palce was too complex, and the culture of fear inhibited objective financial reporting.
• GM’s suppliers are seeking cash. Just one of the costs of financial stress.( WOULDN'T YOU )
  
• Suppliers worry over a lack of demand if the automakers fail. They should retool for Japanese and European automakers. ( MAYBE )
  
• From Credit Slips, the important idea is that without a good business plan the automakers are toast anyway. I predict they will be back hat in hand in half a year even with a bailout( THEN WE CAN LET THEM FAIL ).
• A GM bankruptcy would take a long time, and a prepack would not get done before the cash runs out. Maybe, but I would still take it through bankruptcy, with the US Government as the DIP lender. ( THE BAILOUT NEEDS TO BE SEEN AS JUST THAT, BOTH FOR SOCIAL REASONS DEALING WITH PERCEPTIONS OF FINANCIAL TYPES BEING THE ONLY ONES SAVED, AND THE GOVERNMENT GUARANTEES ARE ESSENTIAL TO GETTING OUT OF THIS . THAT'S WHY INVESTORS ARE FLEEING AGENCIES FOR TRASURIES )
  

10) Even VCs are looking at the survivability of their portfolio holdings. Who can survive and become cash-flow positive in a tough environment. Who needs little additional funds?

11) Leveraged loans are attractive, but it is a situation of too many loans with too few native buyers. Watch the loan covenants, so that you can get good recoveries in a default. If you are an institutional investor, this is a place to play now that will deliver reliable returns net of defaults. For retail investors, the closed end funds typically employ too much leverage — it is possible that one could collapse before this crisis is over.

12) Residential mortgages continue to weaken along with property prices. Two examples: Alt-A loans and second mortgages.

13) I have a lot of respect for Dan Fuss. This is a tough time for anyone taking credit risk. That said, it could be a good time to take on credit risk now, if you have fresh money to deploy.

14) Two views of the crisis: one that focuses on structured finance, particularly CDOs, and one that focuses on macroeconomics. I favor the latter, but both have good things to say.

15) Michael Pettis is one of my favorite bloggers. He notes the weakness in China, and notes that the current economic situation is ripe for trade disputes. ( I'VE BLOGGED ABOUT THIS POST )

16) You can give the banks funds, but you can’t make them lend. Would you lend if you didn’t have a lot of creditworthy borrowers? ( YOU CAN MAKE THEM LEND )

17) The export boom is dead, for now. Fortunately, imports are falling faster, so the current account deficit is falling.

18) I blinked when I saw this Wall Street Journal Op-Ed. Sorry, but the secret to changing the residential real estate market is not lowering interest rates( IT'S A WAY THAT THEY CAN BE SEEN AS HELPING HOME OWNERS ), but writing-off portions of loan balances. Most delinquents can’t make even reduced payments, half re-default, and can’t refinance because the property is underwater. Yes, I know that the government is pressing to have Fannie and Freddie suck down more losses by letting underwater loans refinance, but if you’re going to do that, why not be more explicit and let the losses be realized today by resetting the loan’s principal balance to 80% of the property value, and giving the GSE a property appreciation right on any growth in the home value on sale, of say 150% of the amount written down?( THAT'S A POSSIBLE SOLUTION )

19) On commercial property, when do you extend on a loan vs foreclosing? In CMBS, if the special servicer has no bias, or if a healthy insurer/bank holds the loan on balance sheet, you extend when you are optimistic that this is just a short-term difficulty with the property, and you think that the property owner just needs a little more time in order to refinance the loan. More cynically, extensions can occur in CMBS because the juniormost surviving class directs the special servicer to extend because it maximizes the value that they will get out of their investment, because a foreclosure will wipe out a portion of their interests, since they are in the first loss position. With a less than healthy bank or insurer, the same procedure can happen if they feel they can’t take the loss now. (I know that in a extension/modification there should be some sort of writedown, but some financial entities find ways to avoid that.)

20) Time to go bungee jumping with the US Dollar? As Bespoke pointed out, the Dollar Index has just come off its biggest 6-day loss ever. Should we expect more as the US heads into a ZIRP [zero interest rate policy], with aggressive expansion of the Fed’s balance sheet, much of which might be eventually monetized? The best thing that can be said for the US Dollar is that it is already in ZIRP-land, and much of the rest of the rest of the world is being dragged there kicking and screaming ( TRUE ). As the interest rate differentials narrow in real terms, the US Dollar should improve.( TRUE )

But, there are complicating factors. Future growth or shrinkage of the demand for capital will have an impact, as will future inflation rates. Even if the whole world is in a global ZIRP, there will still be differences in the degree of easing, and how much easing the central bank allows to leak into the money supply ( TRUE ).

This is a mess, and over the next few years, expect to see a whole new set of metrics develop in order to evaluate monetary policies and currencies ( TRUE ). For now, put your macroeconomics books on the shelf, because they won’t be useful for some time ( TRUE ).

A good post.

"Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. "

I have a different take on this than James Henley on Postive Liberty. I believe that the Automaker's Bailout is happening precisely to ward off posts like his:

"Not so widely reported in the auto bailout story is the link between Bush and principals of Chrysler owner Cerberus Financial Management. Amost immediately after stepping down as Bush’s Secretary of the Treasury, John Snow became chairman of Cerberus. Former Republican Veep Dan Quayle, who has been lobbying hard on this issue, runs one of Cerberus’s investment units. And Cerberus has just received a $4 billion loan from the government, thanks to Bush’s decisiont to tap the Troubled Asset Relief Program (TARP) funds. This decision is troubling on multiple dimensions.

First, the hint of crony capitalism just can’t be waved away by noting that Bush also made a loan, a bigger one, to GM. GM’s failure is a more serious issue than Chrysler’s by far, because it employs far more people, not just directly, but because of its larger production level, indirectly as well. And the death of Chrysler is not likely to be wholesale–the Jeep brand remains a valuable commodity that Cerberus could sell to recoup at least some of its loss, and thereby keep some of their production plants going.

Second, we once again see the president making decisions that bypass the legislative process and distort the purposes of legislation he himself has signed. The TARP money was authorized by Congress for the purpose of bailing out the financial markets. However good an idea it may be to also bail out the auto industry, the people’s representatives have chosen not to do so. But Congress’s decisions no longer matter to presidents. The evisceration of representative democracy continues apace, and we all collectively yawn as legislative power continues to shift away from the legislative branch to the executive branch.

Third, Cerberus may have gotten what they most wanted, the ability to avoid responsibility for the loan if Chrysler doesn’t survive. They originally asked for $7 billion, curiously similar to the $7.4 billion they paid Daimler to acquire Chrysler just last year. Although that was $30 billion less than Daimler paid for Chrysler nine years earlier, most observers still couldn’t figure out why Cerberus thought it was a good deal, even at the fire sale price. The amount Cerberus asked led to the suspicion that they were looking for the taxpayers to cover the upfront price of their bad business decision.

But that’s not the really bad part of it. One of the reasons Congress balked at giving Chrysler a loan was that Cerberus did not want to open their books. The suspicion remains that Cerberus’s coffers are capable of providing the funding needed, but Cerberus closely guards its figures and wasn’t willing to make them public in order to disprove that notion.

But that’s not yet the really bad part of it. Another reason Congress balked was that Cerberus wanted Chrysler alone to be responsible for repayment of the loan. That way, if Chrysler still went under, Cerberus would be wholly off the hook for the taxpayer money it begged for. A nice trick, if you can swing it, and it appears that Bush has allowed his former Sec Treas to do so. At least as reported so far, the details of the loan don’t hold Cerberus responsible for repayment. Yet again we see that Republicans, despite their long-standing claim, are not a party of fiscal responsibliity. If one group of them isn’t spending the public’s money like drunken sailors, another group of them will quickly step in to do so.

My prediction for the new year? Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. If only Carter had let Chrysler die 30 years ago."

The bailouts cannot be confined to simply a financial bailout. That already has plenty of charges of conflict of interest and cronyism. Many people see the Automaker's Bailout as a Jobs Bill, as opposed to a bailout of the employers. That is the reason the Fed and Treasury Department are working so hard to do something for the Automakers and Home Buyers. They need some Bailout money to effect the lives of Middle Class Citizens. Solely bailing out the Financial Sector will be perceived as Cronyism by Definition.

Also, if unemployment were to drastically rise after a failure to Bailout the Automakers, and bailing out the Financial Sector had failed to keep that from happening, that would be a disaster of enormous proportions for the Bush Administration.

By definition, the Big 3 are Bush Cronies in the minds of many people. That is why my bailout plan included replacing the management, even though their incompetence was more than enough reason. But the UAW and the auxiliary jobs associated with the auto industry are viewed as a Middle Class issue, and dearly important to some people, especially the ones who find the Financial Sector Bailout dubious.

The Cerberus connection should be investigated, in order to make sure that they did not receive special treatment in this bailout, but their power and connections with the Bush Administration are not enough to kill this deal. We are battling Deflation. Some people don't see that as a big deal, but I disagree. We do not know how to deal with deflation other than causing inflation, which is what we are trying to do now. Failure to bail out the automakers could be a second Lehman, and two Lehmans could send us into a Deflationary Spiral. Beyond a certain point, in order to get inflation, the result could actually be hyperinflation. We're not there yet, and we don't want to be.

This crisis has taxed all of our knowledge and expectations as it is. We cannot afford to move the battle to territory we have no real map or experience for. That could lead to not only economic, but social problems. Problems that this Burkean takes very seriously.

"Toyota was receiving subsidies worth $300m to build its Mississippi plant"

Another Helicopter post. From Richard Adams in the Guardian:

"The worst piece of economic news coming out of the US in the last week wasn't yesterday's move by the Federal Reserve to cut its fed funds interest rate to a Depression-era floor of zero. True, the fact that official interest rates are hovering around 0% is eye-catching, but the move was more symbolism than anything else – since some US Treasuries are already being traded at close to zero interest. In other words, the Fed's cut was merely a reflection of reality.

(And in case anyone in the UK or Europe was feeling smug about this event, don't worry – the Bank of England and the European Central Bank will be joining the "zero club" soon enough in 2009.) ( TRUE )

And no, the worst piece of economic news wasn't even the more significant discovery that US consumer prices fell by 1.7% last month, given that it raises the spectre of deflation, a dangerous spiral of falling prices and consumers sitting on their hands, asking why they should buy now when things will be cheaper next month? ( WON'T HAPPEN )

No, potentially the worst piece of news passed by almost without notice: the decision by the Japanese carmaker Toyota to hit the brakes on its construction of a new factory in Mississippi. That decision wrapped up the past and future prospects for the US into one unhappy package. If Toyota cancels its plant, the US economy won't collapse, of course. But it is more than just a bad omen. It's a warning of what is to come for the Federal Reserve and the incoming Obama administration.

Toyota's new car plant wasn't just any assembly line. It was to be the first US factory to make the famous Prius hybrid. Toyota had already invested $300m in it – but it may prefer to kiss that money goodbye than commit the extra $1bn needed to open it. That's a vote of no-confidence in the US economy for starters. More importantly, the Prius was to the 2000s economic bubble what the Aeron chair was to the dotcom boom. For the last couple of years it has been impossible to buy a new Prius off a dealer's lot – the waiting list was too long. Then the sharp spike in the price of oil this year gave another reason to buy the fuel-efficient Prius. Hence Toyota's decision to build a plant in Mississippi. ( MIGHT IT HAVE SOMETHING TO DO WITH THE FALLING PRICE OF OIL, AND THE STRENGTH OF THE YEN? )

But let's not forget that the major economic story of the last couple of weeks – before Bernard Madoff made the front pages – was the begging by Detroit's Big Three carmakers for a government bail-out.

Opponents of the bail-out made much of Detroit's inability to compete with the Japanese manufacturers such as Toyota (a situation largely the result of Congress's decision to restrict car imports from Japan in the 1980s, but that's another matter)( BUT A GOOD POINT. IT LET THE US AUTOMAKERS FEEL FREE NOT TO INNOVATE ), arguing that this would be throwing good money after bad. Most Republicans opposed giving the money to General Motors and Chrysler, including those southern senators who boasted a thriving car industry based on new foreign car factories built in their states. ( PURE POLITICS )

Among the Republicans who shot down the bail-out were Roger Wicker and Thad Cochran, the senators from the great state of Mississippi. But here's the question that could haunt them and their constituents: if the Detroit bail-out had passed, Toyota would have been less likely to have put its Prius factory on ice, and the 2,000 jobs that were to come with it. (Toyota has a choice that GM doesn't have. The Japanese firm can scrap its plans for Mississippi and ship in cars from Japan instead. But that doesn't bring any jobs to Tupelo.)

After all, it's not just sales at Ford and GM that are suffering: in November 2007 Toyota sold more than 16,000 Prius models. Last month it sold just 8,000. The problems of the auto industry are long-term – over-capacity, in the main – but with a short-term kicker: car sales are intimately connected to personal borrowing, since most Americans rely on loans to buy a car (especially new ones). Since the credit crunch has trickled down from Wall Street, it has become harder to get credit to buy a car, since lenders are now more cautious. On top of that, the state of the economy is such that people are delaying a big purchase like a car (or a house) if their income is being squeezed and they decide to pay off earlier debts ( TRUE. I POSTED ABOUT THIS EARLIER ). Even cutting prices may not work ( TRUE, BUT IT WOULD HELP ). The dreaded deflation effects mentioned above may make matters worse. ( INDUBITABLY )

Toyota won't be the only foreign investor changing its plans in the face of a recession. Rebuilding US balance sheets, both commercial and personal, is going to take some time, as businesses and consumers untangle themselves from debt. That task will be made longer and harder if the dinosaurs of Detroit collapse, whether they deserve to or not, or if a new wave of manufacturers such as Toyota are scared away by the toxicity of the economy. (Toyota was receiving subsidies worth $300m to build its Mississippi plant,( FANCY THAT.FREE MARKETS YOU SAY ) in case anyone thinks only Detroit has carmakers who want government funds to help them.)

The woes of Toyota and Mississippi, GM and Detroit, and the fed funds rate hitting zero are all connected. The US economy – along with much of the rest of the so-called developed world – has entered what economists call a "liquidity trap", where holding cash (which earns 0% interest, but is entirely safe) is as good an investment as any other low-risk asset. At that point, central banks may as well just print money to re-inflate their economies – as the FT's Martin Wolf ( DOES EVERYBODY READ WOLF? ) remarked: "As Robert Mugabe has shown, anybody can run a printing press successfully."( I BLOGGED ABOUT THIS POST ) (Certainly, deflation isn't a problem in Zimbabwe.) In that case, why not bail-out Detroit and offer zero-interest loans to the likes of Toyota as well? After all, building eco-friendly, greener cars such as the Prius was part of the Obama economic platform. ( THEY MIGHT WELL DO IT )

The longer-term problems will remain, such as cleaning out the Augean stables( CALL HERAKLES ) of bank balance sheets – and the time has surely come for more radical action in that regard. But in the short term, there's no point in building a new factory if no one is buying cars ( SHARP ).

Milton Friedman once wrote about using helicopters to drop cash on a population and provoke price rises. Time to polish up the rotors and rev the engines. ( IT'S A LOVELY SOUND )

"Southern states, which have fronted billions in local taxpayer dollars in the past two decades to attract foreign auto plants"

I mentioned in a previous post that Southern GOP Senators claiming to defend the free market in the Big 3 Bailout was largely BS. I've no doubt that Ideology played some small part in their positions, but the main reasons were Sectionalism and protecting their constituents, and skewering Labor Unions who are a major Interest Group in the Democratic Party. I mentioned that Southern Auto Plants have received government favors in order to be lured to those southern states. I term that Government Intervention.

Here's Matthew Yglesias:

"Nice piece from Mike Lillis at The Washington Independent about the tenuous commitment to free market ideology shown by the union-busting southern conservatives who want the domestic auto industry to die, in order to benefit Dixie-built cars from foreign-owned firms:

“We don’t think it is the role of government to intervene,” Sen. Jim DeMint (R-S.C.) told the Fox Business Network last week. “We need to let the market and the laws work the way they are already in place.”

Yet this argument — that the government has no business interfering in free markets — ignores an increasingly frequent tradition among Southern states, which have fronted billions in local taxpayer dollars in the past two decades to attract foreign auto plants. Those incentives, arriving in the form of tax breaks, training for new employees and even land, have enticed BMW to South Carolina, Mercedes to Alabama and Nissan to Tennessee. The result of the government subsidies has been the steady emergence of the South as an auto-manufacturing powerhouse. Some are dubbing it the “New Detroit” – a region where real estate is cheap and the labor’s not unionized.

Not coincidentally, these Southern states are represented by the same coalition of GOP senators who led the fight against the recent Detroit bailout proposal. That legislation would have provided $14 billion in emergency bridge loans to General Motors and Chrysler, both of which say they lack the finances to survive the month. Rallying behind the animated opposition of GOP Sens. Bob Corker (Tenn.), Richard Shelby (Ala.), Mitch McConnell (Ky.) and South Carolina’s DeMint, Senate Republicans killed the legislation.

This is, of course, but a small slice of the larger southern politics tradition which has always insisted since the end of the Civil War that cheap labor and a low-tax, low-service, high-inequality social and economic system are the key to prosperity. This approach left the South perennially poorer than the rest of the country, but over the past couple of decades this made-in-dixie failed approach to economic development has come to dominate national policy. Not coincidentally, during this period the United States has begun to fall behind high-wage, high-service, low-inequality northern European countries in terms of average living standards."

If people are resorting to incentives to lure industry and jobs to their area, it's not immediately clear how that lowers wages and living standards for that area. It might be true that it has a negative effect on the whole country, but, then, there wouldn't be any Sectionalism, which there clearly is. I list Sectionalism under Interest Groups.

Nevertheless, this does provide yet more evidence that we don't have a "Free Market" system, but, rather, a Mixed Economy or Welfare State, in which various Parties and Interests vie for Government Largess, which, to be fair, they are helping to pay for. This would seem to give them some claim on government aid, depending, of course, on the merits of each individual case.

Plant my ass, man! That's all you talk about, "the plant"! Everybody know what "the plant" is. "The plant" just short for plantation!

Since we're discussing the Automaker's Bailout, my movie pick of the day is "Blue Collar":

"And Senate Republicans now run the risk of being portrayed as Marie Antoinettes with Southern accents."

William Kristol with a post that takes a perspective that I believe is more effective for the GOP:

"In 1953, the president of General Motors, Charles Wilson, was nominated by President Eisenhower to be secretary of defense. During his confirmation hearings, Wilson was asked if he’d be able, as defense secretary, to make decisions contrary to the interests of G.M. He answered yes, but added that he couldn’t imagine such a situation, because “for years I thought what was good for our country was good for General Motors, and vice versa.”

It wasn’t a ridiculous view. It was widely shared — by big-business-loving Republicans and big-union-embracing Democrats, by big-car-driving suburbanites and big-tank-occupying soldiers.

Today, G.M., Ford and Chrysler get no respect. Maybe they don’t deserve much. Detroit has many sins to answer for, and it’s been doing plenty of answering. But — and I say this as someone who grew up in non-car-driving family in New York and who is the furthest thing from an auto aficionado — there is a kind of undeserved disdain, even casual contempt, that seems to characterize the attitude of the political and media elites toward the American auto industry.

As Warren Brown, who writes about cars for The Washington Post, recently put it, “There is a feeling in this country — apparent in the often condescending, dismissive way Detroit’s automobile companies have been treated on Capitol Hill — that people who work with their hands and the companies that employ them are inferior to those who work with their minds and plow profit from information. How else to explain the clearly disparate treatment given to companies such as Citigroup and General Motors?”

Now there are other ways to explain the disparate treatment of G.M. and Citigroup. Finance is different from manufacturing, and banks from auto companies. It may be that the case for a huge bank bailout was strong, and that the case for a more modest auto package is not. Still, it seems to me true that the financial big shots haven’t been treated nearly as roughly in Congress or in the media as the auto executives, who have done nothing remotely as irresponsible as their Wall Street counterparts."

I think that this is a widely held view. It accords with the view that the Financial Bailout is a Crony Bailout.

"What’s more, in their disdain for the American auto companies, the left and right wings of the establishment agree. Of course, the particular foci of criticism are different — the left berates the auto companies’ management, the right the United Automobile Workers. But even on the left, while Democratic politicians still try to look out for the interests of the U.A.W., there’s not really that much sympathy for the workers. The ascendant environmentalists disdain (to say the least) the internal combustion engine and everyone associated with it. Most of today’s limousine liberals are embarrassed by their political alliance with the workers who built those limousines.

Meanwhile, on the right, free-market analysts have explained that our regulatory scheme of fuel-efficiency standards is counterproductive. But despite the fact that the government is partly responsible for the Big Three’s problems, the right hasn’t really been stirred to enthusiastically promote a deregulatory agenda to help the auto companies. What excites it is mobilizing to oppose bailouts for unionized workers.

Last week, Senate Republicans picked a fight with the U.A.W. on union pay scales — despite the fact that it’s the legacy benefits for retirees, not pay for current workers, that’s really hurting Detroit, and despite the additional fact that, in any case, labor amounts to only about 10 percent of the cost of a car. But the Republicans were fighting Big Labor! They were standing firm against bailouts! Some of the same conservatives who (correctly, in my view) made the case for $700 billion for Wall Street pitched a fit over $14 billion in loans for the automakers.

So Senate Republicans chose to threaten to filibuster the House-passed legislation embodying the George Bush-Nancy Pelosi deal. The bill would have allowed President Bush to name a car czar, who could have begun to force concessions from all sides. It also would have averted for now a collapse of the auto industry, and shifted difficult decisions to the Obama administration."

This is pure Interest Group Politics.

"Instead, Bush will now probably have to use the financial rescue funds to save G.M. — instead of being able to draw from sums previously authorized for the green transformation of the auto industry, a fight he had won in the negotiations with Pelosi. And Senate Republicans now run the risk of being portrayed as Marie Antoinettes with Southern accents.

Whichever party can liberate itself from its well-worn rut to propose policies that help both American businesses and workers has a great opportunity. That party’s leaders could begin by offering management and labor at the Big Three a little more sympathy, and heaping upon them a little less calumny. Where’s Charles Wilson when we need him? "

The French Revolution again. Along with Posner, Kristol makes two people considered to be on the right of our political spectrum who get the Political Economy of the situation. Perhaps we can't count them out yet.

As for the final point, he makes a case of it. However, I do believe that the UAW should make major concessions and the Management be replaced, quite simply because the Taxpayer's money is being invested. For me, it follows from Bagehot's notion of onerous conditions.

"I still fear the psychological effect of a formal declaration of bankruptcy at a time when many--probably most--Americans are anxious"

I've already written that Richard Posner has the view closest to my own on the Big 3 Bailout:

"We blogged on November 18 about whether the government should provide money to the U.S. auto manufacturers to keep them alive. (I was for; Becker was against.) In the short period since then, there have been important developments bearing on the issue, culminating this past Friday in the blocking by Senate Republicans of the Democrats' modest ($15 billion) auto bailout bill, and the announcement by the Bush Administration that it might, after all, agree to use part of the $700 billion financial-sector bailout to keep the U.S. auto manufacturers going until President-elect Obama takes office. So Becker and I have decided to return to the issue.

The issue has a political and an economic dimension. From a political standpoint, the current position--no bailout legislation, but possible allocation of part of the financial-sector bailout money to the domestic auto manufacturers--represents, unusually, a victory for both political parties. The Republican Senators have stood up for principle--that freedom to fail is basic to capitalism, that wages and benefits should be set by free labor markets rather than by powerful unions, which are worker cartels, that government should not manage businesses, and that government expenditures should be minimized--and for the interests of Toyota and the other foreign manufacturers that have plants in the United States; for those plants are mainly in the South, which is the stronghold of the Republican Party. By opposing an auto bailout the Republican Senators have also distanced themselves from the Bush Administration, which is at once unpopular and believed by many Republicans to have betrayed Republican small-government principles. There is a grave risk that, as I argued in my November 18 posting, a collapse of the domestic auto industry could have serious adverse consequences for the U.S. economy as a whole, which would expose the Republican Senators to criticism. But that risk is buffered by the Administration’s apparent willingness to bail out the auto industry without new legislation."

I might take that "Free Labor Markets" line seriously if I could find businesses and businessmen who really believe in such a thing, where it doesn't mean free in this particular instance, but not in the ones that we deem inappropriate. The word "Free" is used mighty loosely. I completely agree with the characterization of what I term the difference between Economics and Political Economy, and how the politics of this is playing out.

"The Democrats (including the incoming administration) have scored points among their constituencies by standing up for union workers, for the “greening” of the automobile industry, for states in which the domestic auto industry is centered that voted Democratic in the November election (Michigan, Ohio, and Indiana), for the principle of active government, and for trying to avert a deepening of the current depression. ( I AGREE )

The bailout bill was a mess, but a harmless one, if I am right that the domestic producers should not be allowed to collapse at a time of profound and, it appears, worsening economic distress. The bill was a mess because of the conditions that it would have imposed on the industry, conditions that earned the justified ire of the Republican Senators because of its failure to lean hard on the collective bargaining agreements negotiated by the United Auto Workers, because of the divided control of the industry that the bill if enacted would have brought about--divided among the manufacturers, a federal "car czar," and intrusive congressional oversight--and because of the considerable element of fantasy in the idea that Congress plus the President can revitalize the domestic auto industry. Nowhere is it written that the United States, let alone the midwest, where the domestic auto manufacturers are centered, has a comparative advantage over other countries, or other regions of the United States, in manufacturing motor vehicles. Evidently it does not, and Congress and the President cannot change that, as Japan learned from the failure of its "industrial policy" administered by Japan’s once-admired Ministry of International Trade and Industry."

I do not believe that this deal will actually pass my stated conditions for a bailout, but we'll see.

"For the problem of the Detroit manufacturers is not just a matter of higher wages, to be solved by renegotiation of their collective bargaining agreements. The wage difference (actually the benefits difference--the hourly wages of the auto workers employed by the domestic manufacturers are only slightly higher than the wages of the workers employed in the U.S. plants of Toyota and other foreign manufacturers) is an important but not the decisive factor in the decline of the domestic auto industry. The difference in the wage and benefits package between employees of the domestic manufacturers and of the foreign ones in the United States has been exaggerated by treating as a part of that package the annual payments to retired workers divided by the number of hours worked annually by current workers. The money owed the retirees is a fixed cost, like any other debt. Eliminating those payments, like reducing the industry's bond debt, would improve the industry's balance sheet by reducing its fixed costs, but would not reduce the cost of making cars, or increase their quality. Merely wiping out existing debt, the main consequence of reorganization in bankruptcy, does not improve the efficiency or competitive position of the reorganized firm, which is why most reorganizations end in liquidation. What would improve the efficiency of the domestic auto manufacturers, besides reducing wages and current workers’ benefits, would be jettisoning union-imposed work rules; that was part of Republican Senator Corker’s ingenious proposal (of course rejected by the union) to condition a bailout on the union’s agreeing to a reduction in the wages and benefits of the Detroit auto makers' workers to the level prevailing in the southern automobile plants of the foreign auto companies. The adoption of his proposal would have been tantamount to putting the United Auto Workers out of business--if unionized workers have the identical wages, benefits, and working conditions as nonunionized ones, why would anyone pay union dues?"

I can think of a number of reasons:

1) Not every business treats its workers the same.

2) There might incentives involved in the places where these southern plants are located, that are not available or possible in other areas of the country.

3) If there's no retirement plan or health plan, workers might want to join together to get such coverage.

4) The negotiations are effected by many government rules besides labor related ones, like tax incentives for health and retirement plans, etc., that need to be bargained out between workers and employers.

5) History. This situation involves similar issues with conflicts between countries and tribes; namely, when do you date the beginning of the process that led you to the current negotiations. Oftentimes, each side has a different irreconcilable starting point than the other side.

However, if I took a close look at the actual negotiations, I might well want more concessions from the workers. But I would need to know all of the specifics.

"I doubt that anyone in Congress or in either the outgoing or the incoming Administration really thinks that a bailout bill will place the domestic industry on the path to salvation. The conditions imposed to achieve the "reform" of the industry are window dressing. All three domestic manufacturers (yes, Ford included) are insolvent, and while they are unlikely to close down and liquidate completely if forced into bankruptcy--Americans will probably buy 10 million motor vehicles in 2009 and they are unlikely all to be made by foreign companies (the foreign share of the U.S. car market, including both imports and cars manufactured in the U.S. plants of foreign companies, is about 50 percent, though they could take up some of the slack created by the collapse of the Detroit manufacturers, since the foreign companies’ sales are down too). Even with an infusion of federal money, there will be many plant closings and layoffs and many bankruptcies and liquidations of auto parts suppliers and auto dealers."

This seems correct.

"But formal declarations of bankruptcy by the domestic manufacturers would, I believe (as I argued in my November 18 posting), have a substantial added negative effect on the economy. Consumers are markedly reducing their purchases of durable goods because their savings are so depleted that they cannot, as in previous economic downturns, reallocate savings to consumption. Instead they are reallocating income from consumption to savings. The result is a downward spiral: consumers spend less, so output drops, resulting in layoffs that result in further reductions in consumption and in turn in output. The spiral will eventually bottom out, but it will bottom out at a lower level if hundreds of thousands of employees of auto manufacturers, auto parts suppliers, and auto dealers are terminated more or less all at once and consumers planning to buy a car in 2009 are scared off by the uncertainties associated with bankruptcy. (Will warranties be honored? Will parts be available? Will the dealership from which one bought a car survive? Will service standards slip? What about the car’s resale value? And should one believe the soothing assurances that bankruptcy is no big deal for the customers of the bankrupt firm, as long as it does not liquidate, when all the other soothing assurances by the government have proved unfounded?) Because motor vehicles are highly durable, it is easy to be prudent and defer replacing one’s existing vehicle until one’s economic situation clarifies."

I agree.

"Granted, with General Motors having publicly acknowledged hiring a leading bankruptcy lawyer to counsel it and announced that it will be shutting much of its North American operations for a period of months, there is increasing public recognition that the Detroit automobile industry is bankrupt in all but name. But I still fear the psychological effect of a formal declaration of bankruptcy at a time when many--probably most--Americans are anxious about their economic situation. Individually, consumer prudence is wise; collectively, it will exacerbate the depression."

This is one of my fears as well. It will increase the fear and aversion to risk and flight into safety, thereby exacerbating this crisis.

"The realistic goal of an auto-industry bailout is not to reform, revitalize, or restructure the domestic industry; it is merely to postpone its bankruptcy for a year or two, until the end of the depression is at least in sight and consumer confidence is restored to the point at which the bankruptcy of the domestic manufacturers can be taken in stride. To attain this goal does not require imposing conditions on the use that the auto manufacturers make of the bailout moneys. The conditions that the bill would have imposed and that any other form of government funding will impose are not an economic but a political necessity because of widespread anger at the incompetence of the industry; a majority of Americans oppose any bailout of the Detroit manufacturers. At the very least, the Obama administration should be allowed to decide the fate of the companies; that argues for a modest government loan that will keep them out of bankruptcy until, say, February."

I agree with this although, again, I have pretty stringent requirements, including on the UAW, which will probably not be met in order to support a bailout. My main reason for supporting this bailout, even though there's a lot of anger at the Car Executives, whom I would need to see replaced before I would accept the bailout, is that the government cannot be seen as bailing out only the financial services sector. However, the sincere attempt being made to help the automakers out in order to keep people employed might have deadened the impact of such a fear.

"What does an auto industry default cascade look like? "

Tracy Alloway on Alphaville with a post about why the Automakers would be bailed out through TARP:

"What does an auto industry default cascade look like? Like this, from Bank of America:

And that’s the reason why the US government may well be considering bailing out the country’s flailing auto industry using Tarp funds, according to the Wall Street Journal. It may even go so far as to request the second tranche of the Tarp to do so, according to the article.

Why the desperation determination to bail out what seems like a dying industry? BoA’s Jeffrey Rosenberg explains:
A GM default with no [government] support could lead to payment defaults by GM to its suppliers. The most concentrated of these, Axle, provides little of its sales outside of GM so a default by GM likely cascades into a default at Axle, but becomes limited there. However, consider the exposure of Lear. Here, a default of GM could significantly restrict the ability of Lear to supply Ford. If a payment default from GM lead to a default of Lear and an inability to supply Ford, that could impair Ford’s ability to provide payments to other suppliers. Next, with Ford as its major supplier, Visteon could face payment difficulties.

…

The systemic risk argument of a set of cascading payment defaults is borne out in the close linkages between suppliers and manufacturers. However, as we have argued before, Debtor-In-Possession (DIP) financing helps to forestall such a systemic risk outcome by allowing companies to continue to operate, and in this case, to continue to make payments to their suppliers, and avoid such an event.

By BoA’s reckoning, it would take about £30bn in DIP financing to save General Motors alone (about 2 times working capital plus a £10bn cushion).

Does that seem like a lot? Yes, but when you see graphs like the above you start to understand why the government is concerned about systemic risk.

Of note however, is how potential DIP financing would work. The Fed Reserve has, under “unusual and exigent conditions,” the ability to lend to corporations on a securitised basis — though the funding requires a bankruptcy so the Fed and Treasury can obtain senior claim on all assets. Back to BoA:
Repayment of the loan would contemplate a restructured GM achieving long term viability such that loan proceeds could be paid off over time, say 5-10 years, refinanced or sold to the private market under demonstrated viability several years out.

A 10-year bet that the US auto industry will recover? A rather big gamble for the government (and taxpayers) then."

The gamble that the Treasury Dept. doesn't want to take is with employment and production falling off a cliff. The actual economic sense of the bailout, without Political Economy thrown in, is minimal, and rests on a great deal of Wishful Thinking. I've given pretty stringent requirements for the bailout, which I doubt will be met, but I understand the fear underlying this bailout.

If you believe as I do, that the government not bailing out Lehman caused a crisis of faith in the government's willingness and ability to get us all out of this mess, then you can understand why this bailout is necessary. If you don't think that this is what the underlying assumption and context really is, then I can easily understand your being against this bailout.

"namely get the automakers the loans they need, and avert another Lehman Brothers-scale collapse."

Since I believe that the markets and investors are counting on government bailouts, I agree with this assessment by James Surowiecki:

"I think this is a mistake, and that, in fact, the market has held up fairly well today precisely because investors believe there’s a reasonable—though by no means certain—chance that the Treasury Secretary, Henry Paulson, will do what needs to be done, namely get the automakers the loans they need, and avert another Lehman Brothers-scale collapse. Literally within minutes of the market opening, both the White House and the Treasury Department issued statements saying that they were considering using TARP money to help the automakers, and their language was unusually forceful. Treasury said it “will stand ready to prevent an imminent failure until Congress reconvenes,” while Perino said, “given the current weakened state of the U.S. economy, we will consider other options if necessary—including use of the TARP program—to prevent a collapse of troubled automakers.” That’s not a firm commitment and, given past history—including the decision to let Lehman Brothers fail and Congress’ failure to pass the first version of the TARP—there’s no guarantee that what needs to be done will be done. But, to me, it certainly sounds as if the Bush Administration is serious about acting now that Congress has dropped the ball.

I don’t think I’m the only one who feels that way, either. Look, for instance, at what happened to the auto stocks today. Ford was as low as $2.12 a share in the opening moments of trading, but as news spread that the bailout might still happen, it rocketed upward, and at one point it reached $3.21. In other words, it rose forty-five per cent in a couple of hours. G.M. needs the government’s money more than Ford does, and so its upward spurt was even more impressive: after being as low as $2.66, its shares reached $4.23. That’s a sixty per cent move. It’s simply implausible to believe that this would have happened if investors were not expecting some form of government intervention. And it’s no coincidence that the rest of the market also rose from its early-morning lows after the Administration spoke. Investors may be wrong to think that the Treasury Department will end up stepping in, but the hope that it would clearly averted a massive sell-off today."

I also think this expectation is a major reason that the Treasury is trying to step in. They and the Fed now understand this.

"now we know their true motivations was to let millions of workers lose their jobs for raw partisan purposes. "

This is what mainly explains the GOP position on the Big 3 Bailout, although other party aspects no doubt enter in as well. From ProGrowthLiberal on EconoSpeak:

"Countdown discussed a memo entitled "Action Alert - Auto Bailout," which was sent to Senate Republicans Wednesday morning and states:

This is the democrats first opportunity to payoff organized labor after the election. This is a precursor to card check and other items. Republicans should stand firm and take their first shot against organized labor, instead of taking their first blow from it. This rush to judgment is the same thing that happened with the TARP. Members did not have an opportunity to read or digest the legislation and therefore could not understand the consequences of it. We should not rush to pass this because Detroit says the sky is falling.

But didn’t many of the same Senate Republicans who filibustered the auto bailout bill vote for TARP? Jonathan Chait notes a little irony in how these Senate Republicans played their hand:

if the White House follows through on its suggestion that it might use TARP funds to stave off bankruptcy, the GOP maneuver will have been a total disaster. Remember, the Republicans have leverage because they still have 49 Senate seats and the auto companies need their loans right away.And, indeed, Republicans have used their leverage to force wage concessions and not force the auto companies to start producing low-emissions vehicles. But if they've overplayed their hand to the point where the White House floats a loan until January, then the GOP's leverage will nearly collapse. When the new Senate and White House convene, the Democrats will cut a much better deal for themselves, with fewer or no wage cuts for workers and tougher environmental standards.

In other words, their ploy may have failed and now we know their true motivations was to let millions of workers lose their jobs for raw partisan purposes."

I don't see it as a principled move to correct some flaws in labor relations, which might be a good idea. This, as politics, is a very bad move.

"If we're bailing out Wall Street and the Big Three, the public will insist that public services be restored. "

I think that Robert Reich get's the logic, except on the Automaker's bailout:

"What now for the automakers? The Troubled Assets Relief Program -- TARP -- was enacted to save Wall Street but it's already been so twisted out of its original shape by Hank Paulson that a bit more twisting to save the Big Three from bankruptcy over the next few weeks won't be difficult. The White House was behind the auto rescue, and Bush doesn't want to leave yet another failure on the portico as he leaves. Democrats certainly won't object, and Senate Republicans will growl but so what?

TARP funds will be offered as a bridge loan to Detroit, especially GM and Chrysler, to keep them going until early January. The new Congress convenes January 6, and its first order of business will be to amend TARP and make it official (Bush will be President until January 20, of course, so this will be one of those odd-ball pieces of legislation featuring a new Congress and an old President).

But the real immediate need right now lies with state and local governments. States and locales are already showing shortfalls in the range of $70 to $100 billion this fiscal year, and they can't officially go into deficit. That means they're starting to whack public services -- teachers, police and fire, social workers, admission to state universities, garbage collections, you name it.

Most of the public has no idea what happens on Wall Street and hasn't even heard of TARP; and a big portion of the public doesn't really believe that if the Big Three implode they'll be hurt. But when it comes to their own local services, it's a different story. To them, these are the only things government really does. And cuts in these services, on the magnitude just starting to happen, will create a generate holler on Main Street so loud as to crack the windows of every member of Congress back home this holiday season."

I don't agree with his characterization of the Big Three. Many people consider them important to jobs in the US. If he doesn't believe me, he should post on liberal blogs and find out how many people will mention the jobs associated with the automaker's bailout, as opposed to the financial sector bailout which smells of cronyism and saved the jobs of rich buffoons, in their opinion.

"If we're bailing out Wall Street and the Big Three, the public will insist that public services be restored. If not through TARP, then through the big stimulus package that will be signed January 20 or 21st. The federal government is bailout out America. But who's bailing out the federal government? You and I, as our limited savings move into the safe haven of T-bills, along with a whole bunch of Asians."

The public is already insisting. I'm surprised that he hasn't gotten the news. Paulson and Bernanke have, that's why you have the Fannie/Freddie Infusion and the Automaker's Bailout. These gents know that a bailout of only the financial sector has a reservation at the table of cronyism and favoritism waiting for them. They'd prefer not to have to eat there.

"This is the angry soil in which populist backlashes can take root."

Robert Reich gets the Political Economy of these bailouts right:

"The government is doing a lousy job helping distressed homeowners. And according to John Dugan, the Comptroller of the Currency, the little that's been done has had surprisingly little effect. Nearly 36 percent of homeowners holding mortgages whose terms were adjusted to give them more leeway defaulted on payments within three months, and almost 53 percent were behind on payments by six months.

What's going on? It's hard to know for sure, because the homeowners who have qualified for help so far were supposed to have been fairly good credit risks to begin with. My guess is the worsening economy is making it harder for just about all homeowners to pay their mortgages, and those who were teetering on the edge months ago -- although perhaps good credit risks before that time -- are now way under water. Two of the biggest culprits: Layoffs and fewer working hours. With far less money coming in, more and more people have to choose between paying their mortgages and trying to keep up with larger and larger credit card debt. They're trying to manage both while paying the medical bills and the food bills and energy bills, and they can't make it.

It wouldn't surprise me if many of these Americans were starting to look at the size of the bailouts of Wall Street and the bailout of the Big Three -- at the executives, well-paid professional employees, upscale creditors and shareholders, and even well-paid blue-collar workers, who are the major beneficiaries of this federal largesse -- and conclude that a fundamental principle of fairness is being violated.

These Americans aren't revolutionaries. To the contrary, they're deeply conservative. They've worked hard, but their hard work hasn't paid off. Some have tried to save, only to see their savings disappear. They're worried about the future and about their kids' futures. They never expected anything like this.

This is the angry soil in which populist backlashes can take root."

I think that this is the bottom line. A bailout of just the financial sector would be a political disaster, given how arbitrary and seemingly ineffective the actions taken so far have been for the general economy. That's why Felix Salmon was wrong about those figures of borrowers defaulting again. People expected that lenders would do more to help people than in normal times. As well, that's why the best argument for the Fannie/Freddie infusion is political. The Fed needs to be seen helping people in real life, as they see it.

I don't like big, fast, and clumsy political changes, and Populism leads to them.We need to harden the soil against such movements.

"Some companies are too powerful to fail": That's Our System

John Kay in the FT has interesting post this morning that echoes some of the points that I was using in talking about Yves Smith's post on the US fear of Nationalization:

"Great banks are “too big to fail”. The predictable consequence of governments accepting this argument is a queue of other companies “too big to fail” lining up at the front door of treasuries. Insurers were next. This week, the car manufacturers secured their subsidy."

It is predictable, but also, in some sense, necessary, because politically, it would be very hard for a bailout of just financial services to be accepted by the citizenry of the US.

"The failure of any business has ripple effects on suppliers, employees, distributors and customers. If the business is General Motors such effects are larger. But since GM is many times larger than most companies, the subsidy needed to keep going is correspondingly larger. There is no reason to think that the ripple effects are larger, relative to the size of GM, than the consequences of the failure of a smaller business relative to its size."

That's not the point, but he understands that.

"So the return on the taxpayers’ dollar is not likely to be larger if their largesse goes to a big company. Indeed, since the large company has readier access to a range of alternative funding options, a need for government support is more likely the result of deep-seated competitive weakness than temporary shortage of funds which can so easily cripple a smaller business."

Not exactly. The government is the implicit guarantor for these businesses at all times, and legislation has been passed favoring these businesses over time. It certainly can mean that they are competitively weak, but the system operates for the benefit of the weak and strong large businesses alike. It's a kind of insurance policy.

"That is true of the carmakers, whose problems are of much longer standing than the current downturn. In automobiles as in many industries, economies of scale are technological, the diseconomies of scale human. Human factors in business are generally more influential than technological ones in determining the long run fate of a company."

The automakers have been a major part of this system.

"The memory of a meeting in one of Britain’s largest companies – now no longer so large – is engraved in my memory. We discussed how best to persuade the regulatory authorities of the cost advantages arising from the company’s size. But the room was crowded with people who had nothing substantive to contribute. They were there to defend and advance their political position in the corporate hierarchy. The meeting itself demonstrated that the arguments we were presenting were false. Politics overrode productivity."

But Politics is important. So is Political Economy, which includes this kind of messy exchange between politics and productivity.

"As has been true in Detroit. Arrogant, complacent and only belatedly sensitive to competitive pressures and changing customer needs, the big three have been in relative decline for half a century."

True. That's why they've been lobbying congress throughout this period.

"But there really are economies of scale in political lobbying. The cost of presenting your case is independent of the size of the benefit you seek. The larger the business, the more likely that legislators will see constituency interest or political advantage in being helpful. Big companies have government affairs departments but for small groups the cost of access is prohibitive. Only large companies have access to the sharpest shooters."

That's the system.

"Too big to fail, but big enough to exert political influence. The malign consequences are evident in many areas of public policy. Large media and software companies write intellectual property rules, while the interests of users go unrepresented. Big pharmaceutical and defence companies employ thousands of lobbyists. Consumer interests come a distant second to producer interests in the formulation of trade policy. In the past two decades the financial services industry has become the most powerful and effective lobby of all. The cash contributed to political campaigns has now been repaid many times over from the public purse."

That's because lobbying is an investment.

"But few things corrode business efficiency and effective markets more insidiously than the discovery that it is more profitable to win the favour of politicians than to win the approval of customers. In Italy, and in some other European states, an inefficient large-business sector is parasitic on the vibrant small- and medium-sized enterprises, which are the mainstay of the economy."

That's true.

"The problems are worse in Russia and in many potentially emerging economies. In these countries, the nexus between the political and business elite undermines both democracy and business efficiency."

That's not good to hear.

"The populist trustbusters who framed anti-monopoly legislation more than a century ago feared that the cost and technical advantages of large companies would be more than offset by damage to economic efficiency and pluralist institutions from the political power they might acquire. These early trustbusters were right."

I agree. But the work to be done to dismantle this current system is going to be long and arduous because, again, that is and has been our system, and it seems very resilient and impervious to challenge and change at the moment. We need to plan and prepare for the the long run, and seek small victories that will allow us to get some important things done under the radar, so to speak, and before the system realizes that, this time, it really has a challenge from people who want a smaller and more effective and efficient and representative government. But anyone who says that they're surprised by the government response in this crisis needs to get out a bit more into the real world of Politics and Political Economy.

"The Return Of The Detroit Three"

Here's a post for other John Sayles fans besides me. Justin Fox on Curious Capitalist again:

"I'm watching the House Financial Services Committee hearing on the auto bailout, but I'm not going to give it the extensive treatment that I gave to yesterday's Senate hearing. The House hearings are almost never as good as the Senate ones anyway, and I've got other stuff to do. I will

write something later about the drama in general.

Update: Here's my article."

Here's my comment:

donthelibertariandemocrat Says:

1. Friday, December 5, 2008 at 2:56 pm

   Too bad they didn't get stuck in Secaucus.

"This is paradoxical, since the reason Congress is considering bailing them out in the first place is to preserve jobs "

Robert Reich sees a paradox in the Automaker's Bailout. So, what's a Paradox?

"A statement that seems contradictory or absurd but is actually valid or true. According to one proverbial paradox, we must sometimes be cruel in order to be kind. Another form of paradox is a statement that truly is contradictory and yet follows logically from other statements that do not seem open to objection. If someone says, “I am lying,” for example, and we assume that his statement is true, it must be false. The paradox is that the statement “I am lying” is false if it is true.'

If you studied Ancient Greek, you'll immediately recognize the word "para". It's a preposition meaning generally "at the side of". In the accusative, it can mean "to the side of, contrary to". The Greek cases imply motion or direction. The Genitive is away from, the Dative is at, the accusative is towards or to. So, "paradox":

"1540, from L. paradoxum "paradox, statement seemingly absurd yet really true," from Gk. paradoxon, from neut. of adj. paradoxos "contrary to expectation, incredible," from para- "contrary to" + doxa "opinion."

What's the Paradox that Reich sees:

"As a condition of getting a federal bailout, the Big Three are promising, among other things, to cut costs. Among the costs to be cut will be jobs. This is paradoxical, since the reason Congress is considering bailing them out in the first place is to preserve jobs and avoid the social costs of large-scale job loss (unemployment insurance, lost tax revenues, pension payments that have to be picked up by the Pension Benefit Guarantee Corporation, and so forth) ."

The Paradox is like being cruel in order to be kind. You've got to lose some jobs in order to save some jobs. In a recession, this paradox is often encountered. The Automaker's Bailout is hardly unique in exhibiting this paradox.

"We should take a lesson from the Chrysler bailout of the early 1980s. The ostensible reason Congress voted for it was to preserve Chrysler jobs. Yet once the bailout was underway, in order to generate the money it needed to restructure itself, Chrysler laid off more than a third of its workforce. Most of these jobs never came back."

There's a good reason to believe that will happen here as well.

"And it's much the same with the mammoth bailout of Wall Street. Absent an explicit understanding of why public money is needed and what it's to be used for, taxpayer dollars end up bolstering executives, creditors, and shareholders rather than the workers and communities that need the most help."

First of all, like Roubini, that scenario would violate the conditions I would need in order to support this deal in the case of the Automaker's Bailout. But, in the case of the Financial Bailout, it is certainly true that a number of the people we're aiding are wealthy. Sometimes, they are very wealthy. And that's one of the main reasons to try and help the Auto Workers. If you are perceived to be helping Wealthy Financial People and not Average Workers ( The argument over their exact wages is preposterous. They are perceived to be middle class workers, which they are. To argue that these Auto Workers are wealthy won't go anywhere. It's a kind of willful misunderstanding of the issue. Rather like G.E. Moore's willful misunderstanding of the Skeptic's Arguments. Philosophy is full of such willful misunderstandings, and studying it helps you appreciate and defuse them. ), then you are setting yourself up for some very serious political problems and conflicts going forward. These kinds of conflicts we have largely managed to avoid in the US, and we certainly shouldn't let this financial crisis undo that precedent.

So, that's a paradox, as well:
1) We need to use government intervention here in order to defuse a social and political condition which would lead to a very much larger and permanent influence of government over our lives in the future.
Here are a few more:
2) If we had nationalized the banks, etc., using more government intervention in the beginning, it would have ended up costing us less, and being easier and quicker to return the banks, etc., to private ownership.
3) If we print money now and cause inflation, this will be good, even though, going forward, we will be facing inflation, which is very bad.
4) We need to add to our debt now, in order to be able to be in a position to effectively deal with it in the future
5) Although Reason is used to answer the Skeptic, and its advance leads to more and more useful science, Reason also makes the Skeptic's case and argument much more powerful, as does modern science.
6) In Tractate Sanhedrin, the more heinous a crime, the harder it is to convict someone of it.
Now, I love Paradoxes. They are part of human existence. And now you know why Raymond Smullyan was needed to fashion the glass that a libertarian Democrat needs to be poured into.