By on July 23, 2008

If it were only that easy to change Detroit\'s behavior with a handout. (courtesy www.youthchg.com)I don't know how we missed this, but we're not alone; Autoblog didn't find this story until this morning. Anyway, Michigan's Democrats are pushing for a $4b handout stimulus package for their floundering automakers. The Detroit Free Press quotes Presidential candidate Barak Obama pledging support for such aid, stating "America cannot truly prosper unless Michigan prospers" while speaking in Warren, Michigan last week. (Governors of about 49 other states might disagree with that statement.) In a letter pandering to the UAW, Obama promised he "will provide real solutions necessary to help this industry compete and win in the global economy." Of course, his "solutions" boil down to the only "solution" politicians have for any problem: taxpayer money. Barack and other Democrats are pushing for a $50b "stimulus plan" for the auto industry, including loans at "below-market interest rates." Republican candidate John McCain is opposed to the loan idea, but he does support a $300m prize for battery development, tax credits for fuel-efficient vehicles and strict goals for flex-fuel vehicles. Either way, it's going to costs a bundle to correct what fifty years of over-priced, under-performing executives and their yes-men have produced. Or, dare I say it, not.

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50 Comments on “$50b Obama Spend-o-rama to End Detroit’s Drama?...”


  • avatar
    Justin Berkowitz

    Let’s see if I understand this:

    Obama is in with the ethanol producers:
    http://www.nytimes.com/2008/06/23/us/politics/23ethanol.html?_r=1&adxnnl=1&oref=slogin&pagewanted=all&adxnnlx=1216822264-TZwnsIBv6Dshp1nIDe8YVw

    GM becomes a major league flex fuel promoter, despite no apparent benefits nor a plan for implementation.

    Obama supports GM.

    Did someone cut a deal? No evidence whatsoever. Then again, it sure could be.

  • avatar

    Loan em all the money they want or need, that’s how we got into this mess by lending money to people or in this case companies that can’t pay it back or are bad credit risks. Sure it’ll buy a little more time thats all. Ford might need more time but GM has to make even more radical changes and frankly I just don’t see them doing it even if they have more time.

  • avatar
    bluecon

    Thomas Sowell has it right about what is going on in the economy. Well worth reading.

    “We don’t look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating.

    How did the government help create the current financial mess? Let me count the ways.”

    http://www.townhall.com/columnists/ThomasSowell/2008/07/22/bankrupt_exploiters

    http://www.townhall.com/columnists/ThomasSowell/2008/07/23/bankrupt_exploiters_part_ii

  • avatar
    KatiePuckrik

    Stories like this really annoy me.

    I’m a lefty socialist type and proud of it. But The United States is a so called bastion of “free market” economics….except when the ailing company is American, then “free market” economics becomes “socialist” economics…temporarily.

    US Steel industry is in danger of going belly up, government puts illegal (under WTO rules) tarrifs on foreign steel in order to stimulate US Steel.

    Freddie Mac and Fannie Mae are on the verge of collapse, so the government funds a bailout WITH TAX PAYERS’ MONEY, on the grounds that “Freddie Mac and Fannie Mae collapsing would send finanicial shock waves throughout the world…”.

    Now we’re looking at $50 billion OF TAX PAYERS’ MONEY being used to bailout a bunch of companies which were mismanaged and run by a bunch of crooks (“$39 billion loss? Have $14 million, Mr Wagoner!” “Don’t mind if I do!”).

    Yet, if one suggests a Universal health care plan (e.g The UK’s NHS) for the United States or a major investment in schools and univeristies…?

    “Sorry, times are tight we need to cut budgets…..”

    P.S. For the record, I’m not saying the UK is perfect, but as a foreigner, it angers me to see hard working people being forced to bail out companies because they were mismanaged….

  • avatar
    John The Accountant

    Boy reading all these stories makes me want to dump accounting and start a company, build it up over the years, get lazy with my product development, and then expect the government to bail me out.

    We teach our children to “own up” to their mistakes, but we (adults) beg for government bailouts on our homes because we spent more than we could afford?

    I support McCain’s idea of the $300 million dollar prize for the mass produced cheap battery, because that is a great reward for doing something to assist all of America but I don’t like the idea of giving tax breaks/bailouts/free money to any of these firms because of their bad product lineup.

  • avatar
    GS650G

    This is why he is called the Candyman.

    My neighbor is 60 years old and due to retire in 2 years. He is all for Obama because of the goodies he wants from the government. I guess it doesn’t bother him that his kids, grandchildren and all the rest of us have to pay for it all. Socialism at it’s root is selfishness.

    As for private companies being nationalized, show me where that has worked so far.

    I like his ” Just elect me and then you’ll get the details of all my brilliant plans” approach. When GM goes down along with Chrysler he gets to blame the previous administration for not bailing them out sooner. I guess when you’re the Messiah you get these considerations.

    Don’t worry about the UAW, I see a special bill in Congress covering their benefits. Wouldn’t want them to feel any worse for it, would we?

  • avatar
    monkeyboy

    Sorry to say this but Damn good idea!

    Nobody can forsee the depth of this should they fail. Everyone else gets help, Why not GM? God knows they’ve paid taxes and tariffs, and penalties and pensions and salaries for millions. In every state in the U.S.

    Sure they’re run by bastards, but it’s the blue collar or the engineer with 3 kids and a house payment that gets hurt.

  • avatar
    Matthew Potena

    Katie,
    With regard to your comment “Yet, if one suggests a Universal health care plan (e.g The UK’s NHS) for the United States or a major investment in schools and univeristies…?” I would have to argue that the US already spends more on education than we do the military if you total up all the federal, state and local monies used in education. With regard to nationalized health care, that is a debate for another day, but I would comment that any time you divorce the party demanding a service from the party paying for service, you end up with unlimited demand, thus rationing ala, the NHS.

  • avatar
    bill h.

    This full-fledged Obama supporter would just as soon use $50b to invest in one or more areas such as infrastructure renewal, clean energy R&D, toward health care reform or (yes, believe it) rebuild our military capabilities that have been sapped by GWB’s great Mesopotamia adventure.

    That kind of investment would even help the auto companies, in an indirect way.

  • avatar
    mel23

    Let’s just cut to the chase and give the 2.8 something like the ‘family’ farmers get. All kinds of research for free, federal (county) agents available for various kinds of free help, and the best of all, product failure (crop) insurance. Not to mention export subsidies. There’s a body in the USDA called Risk Management Agency as well as one called the Federal Crop Insurance Corporation. So I think GM should be getting billions in aid since their SUVs are rotting on the lots, ditto for trucks and others. Nothing is too good for Chrysler while we’re at it.

  • avatar
    jaje

    Way to go Obama – bail out these poorly run companies with greedy union workers. That’ll teach them! I’d rather see them enter bankruptcy before any money is put forth from the Fed. At least they can clean house and get rid of the glass house gang. GM didn’t fail b/c of economics…they failed b/c they couldn’t adapt or change or care as the company lives in a vacuum and beyond reproach or criticism.

  • avatar
    Pch101

    The United States is a so called bastion of “free market” economics….except when the ailing company is American

    We have privatized profits and socialized losses. It’s all good fun when times are good, but it also contributes to volatility and deeper losses when times get bad. It’s all part of the US pursuit of high GDP growth while trying to use a services-based economy to support it, a policy for which we will ultimately pay the price.

    Thomas Sowell has it right about what is going on in the economy.

    No, he doesn’t. Not even close.

  • avatar
    jkross22

    Good to hear from Obama supporters that actually disagree with his poor showing on this issue. Question is, what are you guys telling YOUR candidate about it?

    It’s important he hears from you. All two of you.

  • avatar
    Landcrusher

    First, I haven’t seen anything to make me question Mr. Sowell’s stories on housing.

    Second, Mathew hit it right on the head. Healthcare is just the prime example of what happens when the person paying is to far seperated from the decision making. Here is another good example: mortgage backed securities.

    By the time a mortgage is securitized, the people involved are several times removed from the information and actors involved in the original mortgage. Many of those actors and middlemen are paid up front, and they are long gone with the cash. This would be a lousy deal that folks would rarely buy into except that when the ratings on the MBS’s were all inflated (government intervention again), the accounting standards (government) allowed companies (highly government regulated and insured financial companies) to put these things on the books and inflate their own portfolio values.

    The whole mess would not have been possible without Fannie and Freddie (government).

    So, yes, I think Mr. Sowell has a point when he looks at government as being a big part of the problem rather than the solution.

    How about one related to the topic, you say?

    Okay. The chrysler bail out/loan guarantees. Do you really think Ford and GM would be in their present situations if Chrysler had been gone since the 80’s? I don’t. I can think of lot’s of ways that event would have changed Detroit.

    Lastly, bankruptcy has become another government bail out system for companies where the owners are hung out to dry, and all their property is given to the people who caused the failure. There must be a law preventing the stock holders from forcing companies into liquidation or something, because if I were ever overly invested in something that was looking for bankruptcy, I would try to throw the board out and start liquidating to get some money back.

  • avatar
    Pch101

    It’s important he hears from you.

    It really isn’t. Legislation is ultimately created by the Congress, not by the president. The president can shout from the bully pulpit, lobby and veto, but that’s about it.

    This is mostly talk to get electoral votes. If and when elected, the actual result will probably bear little resemblance to today’s rhetoric.

    As we have seen quite recently, the federal government will bail out companies when it appears to serve the greater needs of the US economy. The political parties are irrelevant — in specific situations like this, they don’t behave much differently from one another.

    Bail outs cost nothing, just so long as the loans being guaranteed don’t default — the feds actually made a slight profit from the Chrysler bailout. If elected, I seriously doubt that McCain would veto such a plan. He might not smile as much about it, but if it’s going to happen, it’s going to happen, and it won’t matter one whit who’s sitting in the Oval Office at the time that it happens.

  • avatar
    Pch101

    I think Mr. Sowell has a point when he looks at government as being a big part of the problem rather than the solution.

    His emphasis on subprimes is wrong, wrong, wrong.

    This is not a subprime problem, this is a general default problem that is just worse at the subprime level because it’s always worse at the subprime level.

    Your points about securitization are closer to home — there is a separation between reward and risk that encourages excessive risk taking. They created loan portfolios that any loan actuary should have known had high default risks, but their desire for fees made them concoct stories to ignore what was obvious to anyone informed about the market.

    It comes down to having something to lose. When most of the money belongs to somebody else, people allow greed to conquer risk. This applies to fund managers, who profit from OPM (Other Peoples’ Money) and borrowers alike, who have nothing down, i.e. no skin in the game. Like freedom, high returns are another word for nothing left to lose.

  • avatar

    And ultimately a bailout won’t change the final outcome but merely delay it. A company badly managed remains a company badly managed thats why I think it might afford Ford an opportunity but not GM and not Chrysler

  • avatar
    bill h.

    Good response, Pch101.

  • avatar
    carguy

    Totally agree with mel23 – automakers are the new farmers? What’s next – pay them not to produce cars like we do for farmers?
    Government bailouts for everyone is not change that I can believe in but Washington influence peddling as usual.

  • avatar
    Landcrusher

    PCH,

    I think you are picking a bit of a nit. Subprime is a large part of the problem, as you say. Subprimes are a much larger piece of the pie than they ought to be. If reduced subprimes to the percentage of the market they used to be, would we be having quite the problems we are having now?

    I don’t believe we would. The government did indeed push the increase in subprime lending.

  • avatar
    Pch101

    The government did indeed push the increase in subprime lending.

    The government encouraged an increase in all lending. Every category has been impacted.

    The banks wanted to make the loans, because the loans were profitable thanks to the fees. Their risk could be hidden behind the primes, so they were highly attractive, regardless of governmental policy. During good times, the subprime default rates are fairly low, so they can seem appealing to the unwary investor who neglects to consider the long-term averages.

    The real stimulus here is that banking has become a competitive industry, so banks take more risks. When they take more risks, they earn higher returns but make more mistakes.

    Once upon a time, they were boring businesses with low returns and application processes that provided a model for Guantanamo Bay, but the urge to earn has put them onto an inevitable track of reward and failure.

    If you want no defaults, then they need to be run like a utility. If you want them to run in a deregulated market, then you have to expect more failure, along with greater reward. There’s no free lunch, and in this market, it’s paid for with the occasional bank failure and the once-a-decade rescue plan.

  • avatar
    jkross22

    “PCH: Legislation is ultimately created by the Congress, not by the president.”

    B.O. isn’t president.

    “Bail outs cost nothing, just so long as the loans being guaranteed don’t default”

    Ya think GM can pull a Chrysler and get out of the enormous hole they’ve dug? C’mon.

    I’m not convinced that if elected, McCain would support a wholesale bailout. Obama has already said he’d bail them out if elected.

  • avatar
    bluecon

    The banks were forced to make bad loans by the courts. There were hundreds if not thousands of cases were the government took the banks to court and forced them to loan money.

    Until the housing market corrects the economy will not restart and now that the government has started to dig a hole by bailing out all these loser companies they will need to keep digging at least till the election. And the government will just make it worse. The problem isn’t subprime loans as much as the fact that the price of real estate has fallen and the loans are upside down.

    “Freddie Mac and Fannie Mae are on the verge of collapse, so the government funds a bailout WITH TAX PAYERS’ MONEY, on the grounds that “Freddie Mac and Fannie Mae collapsing would send finanicial shock waves throughout the world…”.”
    Freddie Mac and Fannie Mae are very government controlled. Government hacks(mostly Democrats) run the companies and pay themselves huge salaries. The companies do not need to follow the same rules as the rest of private banking and they are required to provide all sorts of government mandates.

    Thomas Sowell
    “The stock market crash of 1987 was at least as big as the stock market crash in 1929. But, instead of being followed by a Great Depression, the 1987 crash was followed by 20 years of economic growth, with low inflation and low unemployment. The Reagan administration did nothing in 1987, despite outrage in the media at the government’s failure to live up to its responsibility, as seen in liberal quarters. But nothing was apparently what needed to be done, so that markets could adjust.”

  • avatar
    Pch101

    Any guy who makes statements such as “The stock market crash of 1987 was at least as big as the stock market crash in 1929.” deserves to be ignored.

    He obviously started with an agenda, then selectively looked for facts to support his position. Since no facts were available, gibberish was apparently good enough.

  • avatar
    mel23

    It’s not entirely accurate to say “the government did…”. More accurate IMO to say that certain very powerful/influential special interests somehow obtained favorable legislation/rules. It’s often done via campaign contributions and sometimes by other means that go straight to some congressman’s bottom line. Recently exposed sweet loan rates to various people in congress from Countrywide are chicken feed. Offering VERY favorable deals in property and businesses is very lucrative. It’s amazing how easy it is to flip these people. Rockefeller was strongly opposed to letting the phone companies off the hook regarding interception of private calls, but did a vigorous 180 after a small contribution to his slush fund. Not like he’s in any danger of losing his seat anyway.

    No doubt it’s just a coincidence that oil prices started their fall quickly after noises were made about reining in speculation. Consumption was headed down prior to that with no impact noticeable.

  • avatar
    Airhen

    Either way, it’s going to costs a bundle to correct what fifty years of over-priced, under-performing executives and their yes-men have produced. Or, dare I say it, not.

    May have been said already, but also include the UAW in that line.

  • avatar
    Landcrusher

    PCH,

    We are arguing big results from small differences.

    If you ask me, banks with federal backing should be highly regulated, and they are. We can can argue different parts of the mess all day, but we will both be correct.

    What part of the mess do you say is the biggest part? I understand you don’t think it’s subprime, though you admit that is a part.

  • avatar
    bluecon

    Sowell is very accurate. The ’87 crash was the largest one day crash in history. Sowell is a very famous and respected American economist. You have never heard of him?

    http://en.wikipedia.org/wiki/Black_Monday_(1987)

    http://en.wikipedia.org/wiki/Wall_Street_Crash_1929

    Fanny Mae and Freddie Mac are basically government organizations.

  • avatar
    Landcrusher

    Concerning the size of the crashes, the answer depends on when you define the end of the crash. I believe TS was making the point that the goverment exascerbated the 29 crash, and caused it to continue. If you define the crash as the first few days of the decline, and compare that to 87, then 87 will likely show a bigger percentage drop. 87 was a really fast drop compared to 29.

    So, PCH, you are partially correct. He is defining the crashes in such a way that it supports his position. However, he is not speaking gibberish, that is hyperbole. He also is not picking facts. He is simply making a point.

    I don’t know what the official definition of “crash” might be, or what defines the end of one so that they can be compared. I suppose one could call the whole depression part of the crash, but that would be less correct than what TS did.

  • avatar
    thebigmass

    Pch101: “Any guy who makes statements such as “The stock market crash of 1987 was at least as big as the stock market crash in 1929.” deserves to be ignored.”

    I’m going to have to disagree with you on this. Black Monday (’87 version) saw a 22.6 percent drop in the DJIA which is as bad as the (initial) loss in October of ’29. Clearly the overall economic effects (and total market losses) were infinitely greater in ’29, but that is the point that Dr. Sowell is attempting to make (though perhaps he doesn’t clearly enough convey this). I will better state his point: the stock market crash of 10/19/87 was equivalent to that of 10/24/29. Whereas the crash of ’29 preceded a continued loss of value and overall economic malaise; the crash of ’87 was followed by relative economic prosperity. The divergent results of the two crashes may be related to the government’s different response to each situation.

    This isn’t to say that Dr. Sowell is correct (though I think that he is for the most part) but to say that you are misinterpreting his statement. Therefore his argument should not be ignored (though of course it should be debated).

    Landcrusher: Your response wasn’t posted when I started mine; my apologies that it seems that I have restated exactly what you said. Excellent post though!

  • avatar
    bluecon

    The ’87 crash was the largest one day crash in US history. Sowell’s point is the government let it take it’s natural course and soon recovered. In ’29 there was all sorts of manipulation that just made things worse. Kinda like in 2008.

    Sowell’s point is accurate.

  • avatar
    thebigmass

    mel23: “No doubt it’s just a coincidence that oil prices started their fall quickly after noises were made about reining in speculation. Consumption was headed down prior to that with no impact noticeable.”

    Politicians have been talking about reining in speculators for months. Why didn’t oil prices drop previously?

  • avatar
    Pch101

    What part of the mess do you say is the biggest part?

    It’s structural. It has less to do with the individual loans than it does with the divorce of risk from reward that encourages risk.

    It is disingenuous for a lender to build its business around the premise that its loans won’t default in predictable ways. That is as logical as a life insurance company pricing premiums as if people don’t die, or car insurers pricing theirs based upon the idea that their policyholders won’t crash.

    People die, drivers crash and borrowers default. Anyone who doesn’t know this should get out of the insurance or lending business.

    Funny thing is, though, is that they did know it. They just didn’t let their investors know that they knew.

    Instead, they crafted stories as to why the allegedly expected default rates were lower than what informed people would believe them to be. Since everyone was getting paid to play, not to be right, nobody cared until they were obviously wrong.

    Concerning the size of the crashes, the answer depends on when you define the end of the crash.

    The circumstances between 1929 and 1989 were very different, there is very little comparison between them. 1929 was ultimately fixed by a massive infusion of government spending, courtesy of Hitler and Tojo, while 1989 was never as deep and was ultimately spared by increasing corporate profits that were boosted through offshoring and efficiency gains. We may as well compare apples with bricks.

  • avatar
    mel23

    Politicians have been talking about reining in speculators for months. Why didn’t oil prices drop previously?

    Possibly because this time it seems to be more serious as indicated by a bill dealing with reigning in speculators being voted on in the Senate yesterday. It has lots of opposition, but lots of support to in the likes of the failing airlines. Wiser on the part of speculators to back off for awhile until our attention shifts to something else.

  • avatar
    bill h.

    My recollection of the ’87 crash, however one measures/compares it, was that it was one of the early instances of automated trading intervention in order to prevent a total collapse of the Dow. I base this on news stories I recall hearing after the fact, which described the interventions.

    If that’s the case, perhaps it was not completely a matter of ‘letting the market decide’….

  • avatar
    Landcrusher

    The investors took the word of the ratings agencies that the MBS’s were low risk. Unfortunately, there are only a few ratings agencies because government regulation has created an oligopoly. All the government approved agencies were wrong (because they virtually all say the same thing all the time). It has been noted by a lot of us free market types that the government’s interference in the insurance and ratings industry was largely THE cause of the lack of diligence by those organizations who haven’t had to compete on accuracy in years because competition was virtually stamped out by regulation.

    Once again, I blame it on Uncle Sugar, so once again, I agree with TS’s premise.

  • avatar
    carlos.negros

    I think the current economic problems were predictable and to some extent could have been avoided. I believe the market is very influenced by psychological factors. As the dollar depreciates against other currencies, consumers see rising prices, especially in a service economy that has been stripped of many industries.

    As people were displaced by the off-shoring of jobs and the importation of foreign goods to replace those that once created jobs in the U.S., the rising foreclosues, debt spirals, and human suffering was not lost on most people. (Except for Phil Graham).

    As our national and personal debt rose, as our schools and infrastructure deteriorated, the unemployed stopped even being counted, people stopped buying. Soon, the foreclosed homes started to impact the real estate market. The old prices were not that inflated compared to international housing trends. It was just that people started to become fearful.

    As people watch the market crash, their retirement savings and 401Ks diminish, big financial institutions topple only to be rescued by the taxpayer, they begin to lose faith in the so-called free market. People will suffer, go without medical care, and die; but the prices will be free. Good for them.

  • avatar
    Pch101

    The investors took the word of the ratings agencies that the MBS’s were low risk. Unfortunately, there are only a few ratings agencies because government regulation has created an oligopoly. All the government approved agencies were wrong (because they virtually all say the same thing all the time). It has been noted by a lot of us free market types that the government’s interference in the insurance and ratings industry was largely THE cause of the lack of diligence by those organizations who haven’t had to compete on accuracy in years because competition was virtually stamped out by regulation.

    I’m sorry, but this is incorrect. This isn’t how it works.

    First, let’s understand that the primary purposes of due diligence are to give the deal credibility as a rated security and to keep investors from suing you. It is not truly due diligence, because there is an agenda from the onset.

    Rating agencies and those involved indirectly in the due diligence process compete with each other for business. Nobody wants to develop a reputation for being a hardass who says “no” or offers highly conservative opinions.

    If someone provides a poor outlook, you make the move to someone else who will give a better one. Almost everyone on the rating side is highly motivated to find reasons to say yes if they possibly can, and nobody wants a reputation that suggests otherwise.

    If we truly cared about having a consistent due diligence process, there would be one central agency that could rate everyone and that had no incentive to care about the outcome. But we don’t and nobody really wants this, because due diligence is a liability plug, not a true attempt to uncover deficiencies.

    Let’s not kid ourselves. Everybody involved in the business of doing deals wants to do more deals. The less restraint, the more deal flow there would be. With rules that are poorly thought out, there will be workarounds to cope with them whereever possible.

    Blaming the rules is inaccurate. It comes down to human nature and a desire for money. Government didn’t create that.

  • avatar
    bluecon

    There was a huge number of lawsuits from the government forcing the banks to loan money to people with poor credit. Look up redlining. Now these same people that the banks were forced by the government to lend to are the victims of the evil banks.

    The real problem is that the low rates and loose credit caused a huge real estate bubble. The less prudent people used the increase in their home price to buy toys like SUV’s, etc. And others saw it as a chance to make easy money.(and it was)

    After the bubble burst like they always do there were a huge number of losers. So now the government blames the banks and throws money at the problem instead of letting it work it’s way out. So after they bale out one mess another pops up. So they keep digging. Very similar to the ’29 stock crash and a big mistake. If they keep it up by printing money and weakening the dollar it is going to result in a huge economic problem.(it has) Now black gold is the big winner and soon it will be real gold.

    The ’29 crash was much more gradual than the ’87 crash. The attempts to correct it caused a disaster.

    Yes government is like 99% responsible for this.
    And PCH do you still think the brilliant Sowell is a fool not worth reading?

  • avatar
    bluecon

    The circumstances between 1929 and 1989 were very different, there is very little comparison between them. 1929 was ultimately fixed by a massive infusion of government spending, courtesy of Hitler and Tojo, while 1989 was never as deep and was ultimately spared by increasing corporate profits that were boosted through offshoring and efficiency gains. We may as well compare apples with bricks.
    The efforts of FDR towards socialism just caused the depression to last longer. The New Deal and the other ideas caused things to get worse. Which shows the briliance of Reagan in sticking to his guns and not using the taxpayer money to worsen the situation. He didn’t bend to the the liberal press and the results speak for themselves.

  • avatar
    carlos.negros

    Gee Frank, I read the article that you linked, and it stated:

    “WASHINGTON — Michigan’s congressional Democrats are pushing for $4 billion in aid to the U.S. auto industry as part of a second economic stimulus bill, one that Sen. Barack Obama endorsed to UAW workers Friday.”

    Later down in the article it stated:
    “Obama and other congressional Democrats have said they would push for a second stimulus plan in September that could reach $50 billion, an idea that the Bush administration has not favored so far.”

    The way I read it, the first part of the article says that Obama is pushing for up to $4 billion in aid to the U.S. auto industry as part of a proposed $50 second stimulus package.

    Personally, I don’t agree with the whole stimulus package thing, but it appears you either mis-read the article or did a FOX news on us.

  • avatar
    Landcrusher

    You said “this isn’t how it works”, but you then did nothing to contradict what I said. All you said was they were incentivised to say yes, vs. my statement that they were not incentivised to be accurate.

    Yes, one party would solve the incentive to give a high rating; however, it would cause a bigger problem over time – inaccuracy. If you have a truly competitive market for the information, then the ones with the best accuracy will be the ones the investors trust. Those would then be purchased by legit players.

    Unfortunately, the government ended the competition years ago. Even if you opened a ratings company and was twice as accurate as the bigger players, very few people would pay for your ratings because they are worthless without the governments stamp of approval WHICH YOU ARE NOT ALLOWED TO EARN UNDER ANY CIRCUMSTANCES! The decision was made, the window was closed, a few existing players were coronated.

    If you have only one player, then their methods will eventually become obsolete – either because they become well known, or simply because without competition they become outdated.

  • avatar
    bluecon

    GM is just a reflection of our society.
    The failure of GM is the canary in the coal mine to our spoiled society. Buy gold.

    It aint 1987 it’s 1929.

  • avatar
    digitalsoul

    The 1987 crash isn’t directly comparable to the 1929 crash because the same federal regulations/banking obligations were in place. Different money, different stock market, different corporations, different society in general.

    Why we’re going back and forth having a discussion about this is mind numbing–yet that serves as a perfect explanation for anything Thomas Sowell writes.

  • avatar
    bluecon

    Except everything Sowell states is an acurate description of the situation.

  • avatar
    Pch101

    You said “this isn’t how it works”, but you then did nothing to contradict what I said.

    Sure I did.

    I realize that you don’t like government. To serve your underlying position, you are trying to evaluate this situation with that metric, to point the finger at government.

    This effort totally misses the point, and you’d better served by first dealing with the facts and then forming a conclusion from those facts, instead of trying to force square facts through a round ideological hole.

    From the standpoint of people who put deals together, due diligence is a sham (or at least somewhat of a sham) because nobody really cares about it as more than anything than as a marketing and pricing tool, and as a form of liability protection. It’s window dressing. That isn’t because of the government, but because it’s just a means to an end.

    There is no demand for a gazillion different rating agencies. Just as GM doesn’t need eight brands, the securities industry does not particularly clamor for an excessive number of rating agencies. Rating agencies are effectively brands, and the market can only support so many of them.

    Adding more of them (the alleged free market solution) would add no value at all, and probably make things worse, because it is the very competitive nature of the companies that helps to provide incentives to make the ratings as deficient as they are.

    Making the business even more competitive would not strengthen due diligence but weaken it further, because nobody issuing securities is going to hire the agency with the nattering naybob reputation.

    If investors really care about due diligence, they hire their own teams or send their own staffs to conduct their own reviews and give them a high bar to hurdle. Since the bar is often fairly low, that suggests that they, too, are interested in being in the game.

    The overarching point is that failure is integral to a competitive economy, so it’s a copout to attribute all of the successes to the free market but then lay the blame for all of the bombs on the government. Free markets produce both good and bad, you can’t just pick and choose.

    The less regulated the market is, the more swings in both directions will be produced. The banking system may be largely insured but ultimately, it is fairly lightly regulated to the extent that bankers are free to pursue all sorts of businesses in order to make money. It is the relative lack of restriction combined with the ability to outsource risk that has created this abundance of relatively risky products.

    You can either run them like a utility and demand less risk in exchange for fewer profits, or else let them run under some version of what we have now but with the understanding that every 10-20 years, something craptacular like this is going to happen. Markets go in cycles, this is how it goes.

  • avatar
    bluecon

    Sowell is right.

    Look up redlining. The government took the banks to court and forced them to loan money to the same people that are now the victims. Except for Sowell nobody will tell the truth for fear of being branded a rascist.

    The government first taxes, then regulates and now they subsidize. The housing bubble was entirely caused by the government.

  • avatar
    Landcrusher

    PCH,

    “I realize that you don’t like government. To serve your underlying position, you are trying to evaluate this situation with that metric, to point the finger at government.”

    No, it’s how I see things. We all have our prejudices. It’s not a matter of “try”. It’s not a matter of will. It’s how my brain works. Yours has it’s own prejudices, and if I don’t have a good enough challenge to them, your mind won’t change either.

    You see the business people involved as being unethical (sham). It’s your prejudice. I see them working inside a system, and willing to accept a sham if that’s how the system works. It is my opnion that once the government steps in with a certain level of regulation, they take responsibility for the continued sham. I wouldn’t blame the government if they did not interfere. Tort could take care of these shams, if it were not for the government interference.

    There is the same demand for rating agencies now as there were more car companies forty years ago. We didn’t need more car companies, we needed a better one. That’s the way the market works. What would our car choices look like today if we had banned imports forty years ago?

    If a market is out of control due to lack of regulation, then that’s the way it is. Unfortunately, I can’t think of a single market of any importance that has been allowed to whipsaw long enough for the market to find a solution. Lastly, if we don’t point out the problems with the interference, then that interference will not improve. Whether you desire interference or not, skeptical analysis of it is necessary.

    There is NO benefit to the ratings oligopoly as presently established. We would be better off with a standards and certification board that would allow new companies who wish to provide the service to enter the market fairly.

    If government wants to stop redlining, then they should figure out a way to make lending in redlined areas more attractive instead of looking for a free lunch. Perhaps a little hard work to break up the cycle of crime and poverty in those areas would be the real solution.

  • avatar
    Pch101

    I see them working inside a system, and willing to accept a sham if that’s how the system works.

    That’s what I’m saying. The whole thing is a wink and a nod. Everyone knows it, nobody wants to change it.

    The calls for “reform” are ridiculous, because nobody who actually knows anything about the process truly wants to “reform” anything. (They may make changes for cosmetic purposes, but workarounds will not be far behind.)

    We didn’t need more car companies, we needed a better one.

    There’s no such thing as a “better” rating agency. Nobody is demanding such a thing.

    We would be better off with a standards and certification board that would allow new companies who wish to provide the service to enter the market fairly.

    Not really. Whether you have three agencies or three hundred, it’s all window dressing, just the same.

    Again, you miss the point: There’s no real demand for “true” due diligence (if there is such a thing.) The due diligence can’t and won’t allow for every contingency, and cannot be used to predict market trends.

    In any case, there will never be more than several agencies, because it’s a branded product and brands of this sort lose their value if there are too many of them. Regulated or not, the markets will still produce fallout on occasion, as we have just seen.

    If government wants to stop redlining, then they should figure out a way to make lending in redlined areas more attractive instead of looking for a free lunch.

    Sowell doesn’t know what he’s talking about. Default rates on all types of loan products, from prime mortgages to car loans to credit cards, are all increasing.

    Defaults are not limited to one category of loans, despite what Sowell thinks about affirmative action or what you think about government.

  • avatar
    Landcrusher

    We need to wind this down.

    On the ratings agency, I believe there is demand for a better one, since all the existing ones obviously suck. The idea that there is no such thing as a better ratings agency is no better than saying there isn’t a better presidential candidate (so keep the guy we got?).

    Their purpose is investor confidence which is something that is now lacking. At any rate, I don’t believe in limiting competition, and see no reason why this industry should be singled out. There is no cost to the taxpayer for allowing more companies to play.

    As for defaults, they are all bad. What we are experiencing is a sudden increase. I believe, like TS that the reason we are seeing this NOW is greatly due to changes in regulations and other government meddling.

    We disagree. I won’t dismiss your explanation if you don’t dismiss mine. It seems we are really arguing over which reason is the proximate cause, rather than which reasons have had an effect. I would welcome any changes that I thought would help on either end. I am not going to support bail outs that reward bad lenders or foolish borrowers. If there are folks who we can be sure were mislead, then I would support helping them fight the lender for relief.

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