By on January 13, 2011

The Congressional Oversight Panel, which oversees the TARP program on behalf of the legislative branch, has released an update on the auto bailout [full PDF here] acknowledging the successes of the government intervention, while airing a number of important concerns. As has been typical of mainstream media coverage of the auto bailout, the good news has already been well-reported. The report, for example, notes that the bailout brought GM and Chrysler’s capacity utilization up, labor costs down, and allowed them to “[start] to reverse” their decades-long declines in market share. Furthermore, estimated government losses on the bailout have been halved, from $40b to $19b. The report’s summary concludes

While it remains too early to tell whether Treasury‟s intervention in and reshaping of the U.S. automotive industry will prove to be a success, there can be no question that the government‟s ambitious actions have had a major impact and appear to be on a promising course. Even so, the companies that received automotive bailout funds continue to face uncertain futures, taxpayers remain at financial risk, concerns remain about the transparency and accountability of Treasury‟s efforts, and moral hazard lingers as a long-run threat to the automotive industry and the broader economy.

Which brings us to the concerns that have received considerably less media attention…

As COP Chairman Ted Kaufman points out in his video introduction to the report, it is functionally impossible to asses the success to the auto bailout for the simple reason that there exists no set standard for success.The report notes

To analyze the success of Treasury‟s intervention in the automotive industry, there must first be a definition of “success.” Treasury has provided its own views on what would constitute a success. In testimony before the Panel, senior Treasury advisor Ronald Bloom defined success as primarily a question of return on investment: “the greater percentage of the money that we invested that we get back, the greater success.” The investment was not, however, made purely for the purpose of seeing a return on those funds. Mr. Bloom also testified to the importance of job preservation and listed a number of other measures for determining whether the program was successful, including the question of “whether these companies have addressed the long-term problems that we identified,” such as “a declining market share, a poor profitability profile” and failing to increase their ability to provide “good, stable jobs.”  Austan Goolsbee, Chairman of the Council of Economic Advisers, appeared in a recent video [link added] released by the White House to explain the “Rebirth of the American Auto Industry.”  According to Mr. Goolsbee, although taxpayers may soon see a return of the funds invested, the investment “was never really about the stock market.  It was about saving American jobs.”

If the success of the overall automotive rescue, and of the government‟s means of implementing that program in accordance with the principles listed in Section H.1, above, is measured by Treasury‟s ability to meet its own definition of success, the program must: (1) provide a return on investment; (2) create or at least preserve jobs that would have otherwise been lost; and (3) set the companies on a path toward ongoing stability.  Treasury‟s challenge, given its goals, lies not only in the difficulty of the goals themselves, but also in the fact that they may be mutually exclusive at times. [Emphasis added]

The ways in which these goals conflict has long been a staple of TTAC’s bailout coverage, and include several key points.

  • As TTAC pointed out back in May of last year when GM bought subprime lender Americredit, GM’s “need” for an in-house subprime lender conflicts obviously with the goals of the GMAC/Ally Financial bailout. To the extent that GM succeeds in improving sales through its new in-house lender, GMAC/Ally will suffer, hurting the taxpayer’s chances of repayment from that company. The report concurs, calling Treasury’s decision not to explore the option of folding GMAC/Ally back into GM “disconcerting.”
  • The short-term success of both GM and Chrysler, which determines taxpayer payback, can conflict with their long-term viability, a reality that pits two of Treasury’s main goals against each other. TTAC has also noted:

GM’s understandable impatience with government ownership is pushing it into risky territory. And the dangers of redlining a car business through risky loans isn’t limited to the risk of default: brand degradation, falling resale values, and boom-bust bubbles all come with the territory. Which is not to say GM is incapable of handling more subprime business… but rushing into risky positions in order to goose short-term performance has been a consistent bugbear of The General’s.

  • The financial turnaround of both GM and Chrysler required a significant loss of jobs.
  • The relative success of GM’s IPO trades off with the chances of successful IPOs from both Chrysler and Ally. The report points out:

In the case of GM, Treasury still holds a substantial share of the common stock, which it must sell at a price approximately 64 percent above the IPO price to realize a profit on the government‟s overall investment.  Investor interest in GM must therefore remain high enough to absorb such a large number of shares.  GMAC/Ally Financial faces various uncertainties before investors are likely to welcome an IPO.  And, in the case of Chrysler, the earliest an IPO is likely to occur is 2012, making it difficult to predict both Treasury‟s ability to sell its entire stake and the amount Treasury is likely to receive in such a sale.  In any case, $3.5 billion of Treasury‟s investment in Chrysler has already been written off, so even a very successful IPO is unlikely to recoup all of the money invested in that company.  Moreover, as discussed in Section E above, Treasury holds only an 8 percent equity stake in Chrysler and is unlikely to be able to exercise its call option to obtain more.  This leaves Treasury with a stake that is too small either to command a control premium or to exercise any control over the timing of the IPO.  Finally, it is not clear whether the market will have an appetite for shares of another large American auto company soon after the GM IPO.

  • The goals of the government as both an investor seeking to maximize return for taxpayers and the goals of exiting investments as quickly as possible as befits a “reluctant shareholder” also trade off with each other. The COP identifies the recent sale of Chrysler Financial as an area in which the Treasury demonstrably passed on an opportunity to maximize its investment, allowing Cerberus Capital to profit from its desire for a rapid exit. According to the report:

The case of Chrysler Financial may provide an example of the government forgoing potential upside in order to exit an investment as quickly as possible.  The issue is not that the implied value of Chrysler Financial increased by 33 percent in the seven months following the sale of Treasury‟s stake to Cerberus in May 2010.  The Panel acknowledges that there is no exact science to determining the most opportune time to exit an investment.  Rather, the government’s exercise of due diligence in response to the overture from Cerberus to buy out its stake appears to have been surprisingly limited and did not envision other valuation scenarios for Chrysler Financial that would involve a strategic buyer for the asset.

In short, the COP found at least two incidents in which the Treasury not only chose not to pursue maximum payback for taxpayers, but did so without fully exploring its options. The COP report charitably chalks these failures to Treasury’s conflicting goals, but they could just as easily be the product of sheer incompetence. Either way, Treasury did not stick strictly to its first goal (maximize return on investment). The success of its second goal (save jobs) is impossible to determine due to uncertainty about an alternative scenario, although the report does conclude that

It is likely, however, that, had GM‟s bankruptcy been a more prolonged process, a larger number of workers would likely have lost their jobs

As for the third goal (long-term viability), the report concludes that this goal is largely dependent on factors which Treasury can not control, arguing that

Even if the three companies‟ financials are relatively sound now, the domestic automotive sector as a whole must make a strong comeback in order for them to thrive

And even if all three of these goals are eventually fulfilled to the satisfaction of the COP, there remains one final problem: moral hazard. The report notes:

Treasury is now on course to recover the majority of its automotive investments within the next few years, but the impact of its actions will reverberate for much longer.  Treasury‟s rescue suggested that any sufficiently large American corporation may be considered “too big to fail,” broadening moral hazard risk from its TARP rescue actions beyond the financial sector.  Further, the fact that the government helped absorb the consequences of GM‟s and Chrysler‟s failures has put more competently managed automotive companies at a disadvantage.

And this, in a nutshell, has long been TTAC’s core complaint about the bailout. In a deeply competitive industry, where companies gamble with billions of dollars at a time, rewarding failure sets an incredibly dangerous precedent. Especially when the “more competently managed” competitors also employ Americans to manufacture a high proportion of their US sales volume domestically. The “additional views” addendum to the COP report holds up this invitation to moral hazard as “the most significant analysis” in the COP report (after noting that the bailout could have funded four Nimitz-vclass carriers or 25 years of NIH breast cancer research), arguing

The TARP has all but created an expectation, if not an emerging sense of entitlement, that certain financial and non-financial institutions are simply “too-big-or-too-interconnected-to-fail” and that the government will promptly honor the implicit guarantee issued for the benefit of any such institution that suffers a reversal of fortune.  This is the enduring legacy of the TARP.  Unfortunately, by offering a strong safety net funded with unlimited taxpayer resources, the government has encouraged potential recipients of such largess to undertake inappropriately risky behavior secure in the conviction that all profits from their endeavors will inure to their benefit and that large losses will fall to the taxpayers.  The placement of a government sanctioned thumb-on-the-scales corrupts the fundamental tenets of a market economy – the ability to prosper and the ability to fail.

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48 Comments on “TARP Oversight Report: Bailout Goals Conflict, Moral Hazard Alive And Well...”

  • avatar

    Politics is a moral hazard.

  • avatar

    and yet the various financial institutions who got a bailout must be laughing in their Porsches that their bailout has been forgotten while the auto companies get all the hate and scorn…

    • 0 avatar

      Here’s a list of all the banks that have closed;
      I doubt the employees of those banks were laughing and if they had a Porsche, they certainly didn’t have a way to pay for it afterward.
      That’s a lot of people. People with bills, mortgages, and families. Everyone cries for the UAW line worker but not the people who buy their products. Nor did many cry over the hundreds of dealerships who were forced to shut their doors.
      Between these small banks and the auto dealers, how many thousands do you think were put out of work? Do you think they feel ‘bailed out’?

    • 0 avatar

      That’s because most of them are busy PAYING IT BACK..

      A partial list:
      JPMorgan Chase (JPM, Fortune 500),
      Goldman Sachs (GS, Fortune 500),
      American Express (AXP, Fortune 500),
      Bank of New York Mellon (BK, Fortune 500),
      State Street (STT, Fortune 500),
      Northern Trust (NTRS, Fortune 500),  
      Capital One (COF, Fortune 500),
      Morgan Stanley (MS, Fortune 500),
      BB&T (BBT, Fortune 500) and
      U.S. Bancorp (USB, Fortune 500)

      And LOTS of others. 

      Yes they are laughing in their Porsches… ’cause once the bailout is repaid in full most people don’t even remember who they are.

      Almost 3/4f of the TARP money has been repaid by the banks. I know people in Washington don’t like to talk about it… But it worked.

    • 0 avatar
      George B

      Tony, large banks were forced to borrow money from the government with strings attached.  An offer they couldn’t refuse.  When most of these banks paid back loans they didn’t want in the first place, the government turned a profit which helps offset the losses from bailing out Citibank, Bank of America, General Motors, and Chrysler.
      The problem is the market wants to correct the oversupply of banks and car manufacturing by liquidating the weaker competitors.  Taxpayers had to pay to make sure Chrysler Sebrings were built when consumers were clearly voting against that last place model.  Similarly, there seem to be bank branches on every corner with mostly empty parking lots.

  • avatar

    Very well written TTAC article that concisely yet thoroughly explains why the bailout is not logically defensible.

    Which in turn is why some GM apologists here have admitted as much and said [paraphrasing]: “Heck, the govt should have just nationalized GM and run it as an environmental and social experiment to maintain employment and without regard to profit/loss”.

    • 0 avatar

      On the other hand, it’s also not logically indefensible. It’s unknown what would have happened had the Treasury not stepped in.

      I don’t believe that government should be involved in matters like the bailout, but I can understand the rationale behind the Treasury rescuing GM and Chrysler. It was the fear of the unknown, and the possible repercussions had the government just let things be.

      There will never be consensus about the auto bailout, and the debate will rage for eons, but if GM and Fiat repay most, if not all of the bailout funding, and both companies remain viable and relevent, I would consider it a qualified success.

  • avatar
    Telegraph Road

    The USA Today has a funny editorial cartoon today about the auto bailout:

    • 0 avatar

      Not funny and inaccurate both. GM stock was bought by the TBTF institutions using money from the Fed’s POMO program. Government money to hide the fact that the stock isn’t worth the paper it would be printed on if you got certificates.

    • 0 avatar

        I thought  it was funny.

    • 0 avatar

      The bailout skeptics will find fault with the process no matter how successful it is as it offends their ideology. It certainly wasn’t ideal but compared to the rest of the stimulus (tax cuts included) it worked rather well in preventing a million or so unemployed which then needed unemployment benefits.

  • avatar

    Good point TonyJZX.  Most Americans are not involved with Wall Street.  Their involvement with the financial industry begins and ends with their checking account.  Cars are a very different matter, especially when it comes to American cars.  As TTAC readers know, American cars are a cultural issue, not simply a business.  We (I at least) are angry that these companies failed.  Their failure means WE failed.  I think that the bailouts have given us a sense of shame for being Americans and that feeds the anger.  We would feel no shame if Goldman Sachs went belly up.

    • 0 avatar

      Actually I would celebrate if GS died. It needs to be killed along with the other TBTF banks to bring some semblance of democracy back to this country.

    • 0 avatar

      It would only work if you don’t have any retirement or other investments involved with them.  Or a mortgage.  People are more chained to the network of financial institutions than I think they realize, and now they’re stuck with the choices they made, just as with the car companies and all their suppliers.

    • 0 avatar

      Dosen’t matter who holds your mortgage … if the holder goes belly-up, your mortgage is just one mor asset within that institution that will be sold off … the new holder buys a contract, but for you as a borrower, the only change you may see is that your cheque will be addressed to a different lender ans sent to a new address.  Period.

    • 0 avatar
      Telegraph Road

      Well, even here you can see why I mistook AR for Arizona.

  • avatar

    Seen the price of Cheerios lately (or their generic equivalents)?
    Something else I have noticed, at least here atop the Ozark Plateau where it does take the drayage concerns awhile to plod along to deliver the vittles hereabouts from the rail heads located northwards.
    More frequent boxes of food such as macaroni and cheese, instant taters and other foodstuffs with a stale taste to them.
    All are within the imprinted “sell by” date and have been purchased at various stores from Wal-Fart Super Store to a local chain known for non-low prices but with supposedly high cleanliness standards, helpful employees, etc. where I thought non-stale edibles may be easier to obtain.
    Nope, paid a premium for the highest priced name-brand instant taters, opened the box and……. the contents smelled stale AND the end product did also.
    Is this area a dumping ground for rejected batches of foods?
    Will cars/trucks be next? Vehicles unable to pass muster at the end of the assembly line shoved to the side until a pile is amassed then send ’em down to hillbilly heaven?
    At the least, we’uns likely got the freshest, tastiest roadkill this side of the other side of the holler way over yonder.

  • avatar

    I’ve gotta’ say that this is a tough one, and I don’t think there’s any simple or easy way to reconcile all the conflicting interests, duties and so on that are at play in this kind of issue. Trying to balance issues of economic stability, the consequences of widespread unemployment and so on with the need to treat all automobile manufacturers and related business interests fairly and equitably seems to be a no-win situation. It will always be easy to second-guess the government on this one, from a multitude of perspectives, but I honestly think there was no clear best strategy here. Each alternative would have resulted in a different set of harms and evils, and reconciling them all seems pretty much impossible.
    In the end everyone will judge the bailout from their own predisposed point of view, and whether it was the best possible strategy that could have been followed will remain a never-ending debate.

  • avatar

    I’ve never been a fan of screaming day traders and the emotion of the moment driving investment. No sense of long term goals, investment, etc. That for the moment living trickles into the boardroom where capitalists who’ve isolated themselves from the mainstream, think they can profit daily from the mainstream. But then short term memory runs smack into long term self awareness. What happened to GM is an example of misguided pride, a sense of capitalist entitlement that lacks endurance. I’m reminded of the old GM board demanding that any redesign of the SBC have the same bore centers, etc, to what end? Allow for future advertising about deep meaning to an engine? It’s the same reason Buick was allowed to survive, some sense of soul ownership of history completely disconnected from the future reality. GM might have better be called Average Motors for what they built is exactly that, average for a giant misguided multi-brand monstrosity that eventually stumbled into the waiting arms of the USA. Maybe it was luck and a sense of familial investment that saved Ford in the short term. In the long term, who really knows because global means global. English car companies came to a crashing end for similar reasons. Failure to adapt. As an evolutionary biologist, all I can say is that nature doesn’t give one hoot about what you think of yourself. Time sifts the chafe from the wheat.

    • 0 avatar

      The situation is complicated by the fact that the rate of change in contemporary technological society calls for an ability to adjust and learn that is pretty much constant. The old time reliance upon tried and true methods simply doesn’t apply in the rapidly changing social and economic environment of today. Methods have to be flexible and easily revisable if they are to remain well-adapted to the the proximate, dynamic techo-scientific environment within which we currently live.

  • avatar

    I have always had a philosophical issue with the bail outs (of auto companies as well as banks). Capitalism works and works very well. In a capitalist system, failure is important. Money and other resources flow from failed businesses to other businesses that might be more successful. This is one of the many ways that capitalism allocates scarce resources that have alternative uses.
    The details of this are almost not relevant, capitalism works and this is not capitalism.
    I am afraid that if this works very well, our friends in Washington will get cocky (cockier?) and think that they can do this again and again and again.
    However, if my non-union small business gets in trouble, I doubt that anyone will offer me a bail out.

    • 0 avatar

      Capitalism works great in theory.  On it’s own, with no regulation, it will self-destruct (ie: America).

    • 0 avatar

      America has a mixed economy. A mix of capitalism and government control. It has never been a purely capitalist country and has not even been largely capitalist since the 1800’s. Our economy is massively regulated. Our banks are regulated by six different government agencies. Our government has its hands in nearly every aspect of the economy.
      Like much of Europe, it is excessive government intervention that has caused the implosion.

    • 0 avatar

      It would seem the economy imploded because of some unfettered activity by newly unregulated financial types, ie lack of government intervention.
      We had 40 years of a healthily regulated economy that spread prosperity across most income levels.  That began to unravel in the 80’s when deregulation and privatization fever spread primarily in the US and UK.  Both country’s now paying the price.

    • 0 avatar

      It’ll be fascinating to watch the Chinese economy develop (including car companies). It appears they are compressing 100 years into about 20. We should all be so lucky to watch the outcome as a super-regulated economy comes to grips with its internally generated heat. Perhaps we’ll meet in the middle.

    • 0 avatar

      calnj: It would seem the economy imploded because of some unfettered activity by newly unregulated financial types, ie lack of government intervention.

      It was government intervention that planted the seeds that led to the current crisis, first by interfering with lending standards, then by eliminating the capital gains tax on the sale of houses (which encouraged speculation in real estate, which fueled price increases, which increased demand for more exotic mortgages to allow average people to afford houses).

      calnj: We had 40 years of a healthily regulated economy that spread prosperity across most income levels.

      From 1945-1970, we had 25 years of no real competition for our heavy industries, because the other major industrial centers – Europe, Japan and the Soviet Union – were either bombed to rubble or governed with too much centralized control. Unions used this lack of real competition to extract wage gains from companies, and management agreed, given that it could simply pass the increased cost along to consumers. Why? Because companies in each sector basically enjoyed an oligopoly over their respective markets. The Big Three are the perfect example of this. By 1965 they had over 90 percent of the new-vehicle market. The UAW had a monopoly on the labor used to produce those vehicles.

      This was good for the workers, but, over the long haul, bad for the people who really mattered – the customer. It resulted in a general stagnation in both production techology (for example, our old-line steel companies didn’t adopt more modern steel producing processes, because it was easier to hand out increased wages and high dividends than rework the plant) and product technology (especially tires and automobiles).

      Unions also resisted productivity improvements that would have reduced their ranks (we’ve seen this with the Jobs Bank, which was basically only ended after the government forced the issue as a condition of the bailout of GM and Chrysler).

      Product quality also deteriorated greatly. If you doubt that, compare a 1975 Chevrolet Impala to a 1966 Chevrolet Impala for build quality and reliability. Then compare it to a 1975 Toyota or Honda. It’s obvious that the Honda and Toyota enjoyed superior build quality, and their engine technology was ahead of the Chevrolet’s.

      calnj: That began to unravel in the 80′s when deregulation and privatization fever spread primarily in the US and UK.  Both country’s now paying the price.

      This is a red herring argument. The changing industries that people use as evidence of a national decline and the folly of deregulation – steel, tires, heavy equipment and automobiles – were never “deregulated.” They went through serious structural changes because of increased foreign competition, which was back in full force by 1980, as those countries had fully recovered from the devastation of World War II.

      We still are a top producer of steel, just not from the old, unionized “dinosaur” mills. Newer, more efficient “minimills” turn out higher quality steel products at lower cost.

      We are still a major automobile producer. The domestic automobile industry, however, is no longer dominated by GM, Ford, Chrysler and the UAW.

      The industries we deregulated – telecommunications, trucking and airlines – were stagnant and featured high prices for mediocre products. Deregulation benefited customers by offering them more choices and lower prices. Prior to deregulation, for example, only the wealthy could regularly fly. An airline ticket represented a huge expense for a middle class person or family. Now, only the poorest people haven’t flown.

      The workers in those industries, who enjoyed a cushy existence at the expense of everyone else didn’t like it, but those companies exist to serve customers, not pay high wages and benefits.

  • avatar

    Well, most of this is ‘way too deep for my shallow mind, but, not knowing a great deal about financial comings and goings, it sounds like they implemented Plan A. Plan B is: Plan A had better work!

  • avatar

    That being said, capitalism is not anarchy. I am not suggesting that people be allowed to rip other people off.
    Laws to protect individual rights, contract laws, appropriate pollution laws are all part of a capitalist economy.
    Don’t mean to get preachy here, I am just kind of passionate about this subject.

  • avatar

    Wow. As an outsider (Canadian), hearing any American claim, today, that “excessive government intervention” in the financial sector is *the problem*…well, wow.  Maybe I missed something.  The way it looked from here, inadequate regulation of the boys on Wall Street pretty much blew up the whole bloody world.  Shouldn’t the anti-regulation zealots just be sitting quietly in a corner somewhere at this point?   Me not get.

    • 0 avatar

      It’s called “The Big Lie”.  Every member of every political stripe uses it.  Basically, you repeat the same mistruth often enough, loud enough and in terms that simplify the lie to make it sound plausible and eventually it takes hold.
      Another tactic is “Teach the Controversy”: never, ever argue facts head on.  Never engage, never cite sources, only teach that there is another point of view and attack the character of the other side.
      You see this is Canada, too—witness the silliness and outright falsehoods around the long-form census—but it’s far more extreme in the US because, quite frankly, there’s no significant ideological difference between the two parties and they have to be quite vitriolic in order to differentiate themselves.

    • 0 avatar

      No, it’s not the “Big Lie.” It was government actions that planted the seed for the current crisis. The idea that this crisis had its roots in strict adherence to laissez-faire is as false as the assertion that Herbert Hoover stood by and did nothing as the Great Depression worsened.

    • 0 avatar

      If by “government action” you mean “a slackening of regulation and oversight”, then yes.

    • 0 avatar

      The government actions were changing the tax code to favor real estate and pressuring lenders to modify lending criteria. Those actions do not constitute “deregulation.”

    • 0 avatar

      And government actions changed the tax code to favor the wealthiest, ostensibly for them to create jobs.  Right. With GWB’s irresponsible giveaway to the “have mores” we should be swimming in jobs and a humming economy. Reality, zero net job growth in the 2000’s.  Has a tax cut ever created a job?  Meanwhile, the middle class whose spending drives the economy has seen their incomes stagnate for 30 years.
      As someone said earlier, if you repeat a lie often enough people will believe as truth.
      Tax cuts create jobs, trickle down, welfare queens, global warming scepticism, immigrants are the cause of our problems, right of center Presidents are socialists etc and so on. 

    • 0 avatar

      calnj: And government actions changed the tax code to favor the wealthiest, ostensibly for them to create jobs.  Right.

      Actually, the George W. Bush tax cuts made the tax code MORE progressive, as it increased the amount of taxes the rich paid over the long term. Our tax code is more progressive than that of France and Sweden. Meanwhile, the bottom 47 percent of all wage eaners pay NO federal income tax.

      calnj: Has a tax cut ever created a job?

      Well, considering that bona fide liberals ranging from Govenor Ed Rendell (Pennsylvania’s outgoing governor) to actor Alec Baldwin (who recently complained that New York’s threat to end tax incentives for the film industry would result in his show, 30 Rock, shedding jobs) have supported or actually implemented tax cuts over the years, perhaps you should ask them?

      calnj: Meanwhile, the middle class whose spending drives the economy has seen their incomes stagnate for 30 years.

      I was around 30 years ago. Everyone has a higher standard of living now than they did at that time. Your assertion is the Big Lie, along with the incorrect claim that “deregulation of corporations” led to our present problems. See my response to your misreading of history above.

      calnj: Tax cuts create jobs, trickle down, welfare queens, global warming scepticism, immigrants are the cause of our problems, right of center Presidents are socialists etc and so on. 

      Actually, tax cuts do create jobs (this has been proven with research), many liberals have been happy to embrace tax cuts to spur jobs (which is what the trickle-down theory is all about), no one who understands how science really works believes that manmade global warming is a proven fact and illegal immigrants do depress wages at the bottom of the scale while inflating the cost of social services.

    • 0 avatar

      You can characterize GWB’s failed tax policy however you like. The bottom line is no net job increase during his 8 year run. (after being handed a surplus and a humming economy)

      Incredibly thin anecdotal support from Gov. Rendell and Alec Baldwin,(?) provides little support to your argument. Again, facts are no new jobs in GWB’s 8 years following tax cuts.

      I was around 30 years ago as well and my Father supported a wife who didn’t work and 4 sons, purchased a house and new cars every few years on a salary as an automotive manager at Sears.  Try doing that today.
      Name a Liberal who embraces tax cuts to create jobs. Ironically Liberals are now the party of fiscal responsibility. 
      Free trade agreements suppress wages far more than immigrant labor…in fact with record profits and a recession driving down labor costs further, business is quite happy with the status quo. They are in no hurry for recovery.

      And your credibility is now in question with your denial of the scientific fact of global warming. 

    • 0 avatar

      calnj: You can characterize GWB’s failed tax policy however you like. The bottom line is no net job increase during his 8 year run. (after being handed a surplus and a humming economy)

      The economy was slipping into a recession when he took office. It was not booming by any stretch of imagination.

      The budget surplus was because of the tech boom, which was done by early 2000. We were already slipping into the red before Bush took office. And that was before the economy got hammered by the 9/11 attacks. His tax cuts are credited with alleviating recession.

      I guess we could raise taxes like Herbert Hoover did in 1932. Unemployment hit 25 percent by 1933…

      I also note that you (fortunately) didn’t bother to dispute the facts that the bottom 47 percent of wage earners pay no federal income tax, that his tax cuts increased the amount of taxes paid by the wealthiest taxpayers, and that our tax code is now more progressive than that of France and Sweden.
      calnj: Incredibly thin anecdotal support from Gov. Rendell and Alec Baldwin,(?) provides little support to your argument. Again, facts are no new jobs in GWB’s 8 years following tax cuts.

      Wrong. It proves that liberals have supported tax cuts in the past. Primarily, of course, when it benefits themselves or their favored companies.

      calnj: I was around 30 years ago as well and my Father supported a wife who didn’t work and 4 sons, purchased a house and new cars every few years on a salary as an automotive manager at Sears.  Try doing that today.

      That’s largely a reflection of higher housing prices, which have more to do with local ordinances and regulations, not free trade or the deregulation of certain industries.
      calnj: Name a Liberal who embraces tax cuts to create jobs. Ironically Liberals are now the party of fiscal responsibility. 

      I already did – Governor Ed Rendell and Alec Baldwin. The difference is that they don’t favor across-the-board cuts for everyone, just for themselves (Alec Baldwin’s support of film tax credits, which are tax cuts, that benefit his show) or favored industries (as Governor Rendell did when he supported tax breaks to entice Comcast to keep its headquarters in Philadelphia).

      You can dance around the issue all that you want, but the bottom line is that many liberals have been happy to support tax breaks and cuts over the years. For that matter, I seem to recall a certain president agreeing to keep the Bush tax cuts in place, and Senator Charles Schumer of New York (a Democrat) arguing that any proposed tax increase should only hit those making more than $1 million a year, not $250,000 a year.

      Unless we are going to categorize President Obama and Senator Schumer as conservatives, which will certainly be a source of surprise and amusement to both of them, as well as most of the posters on this board.

      calnj: Free trade agreements suppress wages far more than immigrant labor…in fact with record profits and a recession driving down labor costs further, business is quite happy with the status quo. They are in no hurry for recovery.

      Wrong. After NAFTA was enacted, blue-collar wages rose 11.4 percent, and unemployment for the nation as a whole dropped from 6.7 percent to 4.9 percent.

      Free trade has benefitted customers. Just ask yourself why GM, Ford and Chrysler have improved their cars over the past decade. It’s because they were getting hammered by foreign competition. This benefitted customers, as they received better-built, better-performing, safer, longer lasting cars.

      Unless you really believe that a 1986 Chevrolet Celebrity was better than a 1986 Honda Accord, and that GM, Ford and Chrysler did not need to do anything to improve their cars, and customers should have been happy with was rolling out of their factories. If so, you can post that belief, but please remember that we are posting on, not the Comedy Central network.

      calnj: And your credibility is now in question with your denial of the scientific fact of global warming. 

      You need to learn the difference between a theory and a fact. Global warming has occurred reguarly throughout the centuries – long before we began using fossil fuels on a regular basis. That is a fact. It’s still a theory as to whether it is caused by manmade factors.

    • 0 avatar

      Last post on this subject:

      The mildest of recessions began in 2000 and the 9/11 attacks caused a 2 month set back that we quickly bounced back from.
      Regardless of the source, there was indeed a budget surplus that was squandered.
      Who beside Faux credited his tax cuts for alleving a recession? 
      I am not interested in discussing “the bottom 47 %”. The salient point would be why do we have so many people making so little money that they don’t pay taxes! I’m more concerned with the Robber barons at the top with their tax cuts that they are probably hiding in Switzerland.  They aren’t creating jobs.
      I didn’t get the memo that Rendell and Baldwin speak for all Liberals.
      Yes, lower housing prices were the only reason people had more disposable income in the 50’s thru Reagan.  Nothing to do with their income growing consistently thru the period.
      The lowering of tariffs and trade barriers have indeed lowered wages around the world. Your correlation to ’86 Chevy’s vs Accords is a non-sequiter.
      The average temperature of the planet has gone up over the last 3 decades. Fact.

      I’m done. Have a good weekend.

  • avatar

    “the bailout could have funded four Nimitz-vclass carriers or 25 years of NIH breast cancer research” I am split on this statement. More bird farms? NOT. Cancer research? YES.

  • avatar

    Excellent article and comments–TTAC at it’s best here.
    Being economically conservative personally, I agree in theory with TTAC’s stance that the bailouts rewarded incompetence and likely will perpetuate it’s repetition.
    On the other hand, it’s hard to ignore the results–especially on the financial side.
    On an interesting note, I am watching the excellent Ken Burns WWII series now.  Prior to WWII, US auto production was 3 million+ units.  During 1942, (I believe that was the right year), US auto production was 100 some odd units.  Instead, at one Ford plant, 63 B-17 bombers were built every single day. We didn’t win WWII because of superior fighters as much as we did because of endless, massive production–the like of which China has today.
    Is it worth propping up incompetence to salvage some domestic ownership of heavy industrial production?  That’s a whole ‘nother mess of a debate, I presume.

  • avatar
    DC Bruce

    For our Canadian friends and B&Bs: when we talk about “excessive government intervention” we are talking about government risk-sharing that facilitates private profit.  It is generally agreed that the catalyst for the near-collapse of the US financial sector was a massive bubble in residential real estate.  The engine that drove that bubble were the federally-chartered “private” companies Fannie Mae and Freddie Mac.  They created and supported a secondary market for home mortgages.  Ostensibly private companies (you could buy their stock and their debt), everyone knew that their debt was effectively guaranteed by the government, even though, nominally it wasn’t.  This allowed their shareholders and executives to make money in a way that any stumble-drunk could figure out: borrow money at (low) government rates, then lend it out and (higher) private rates . . . and pocket the difference.  Of course, the people who said all along that the government would not allow Fannie and Freddie to fail, or to default, were right.  While it doesn’t get much ink, the public cost of the bailout of those companies is huge.
    And the still unanswered question is: How are we going to get the government out of the home mortgage business?  Until we do, the public is still assume what is supposed to be a private risk.
    The same is true for the car business.  A reasonable person would have to conclude that there is still some sort of implicit guarantee of the domestic auto companies — even Ford, which wasn’t bailed out.  That means the public (taxpayer) is still carrying the risk, while the private owners of those companies are reaping the rewards.
    That’s why I think it would have been better to have let one of them — Chrysler — just fail and go into a straight bankruptcy, which, no doubt, would have resulted in liquidation and sale of the few valuable parts of Chrysler’s business.
    A Chrysler liquidation would have had two good benefits:
    1.  It would have reduced the moral hazard problem, since even auto companies could not be certain that the government would bail them out.  (That’s the significant benefit of the government’s having allowed Lehman Brothers to fail: not every financial “master of the universe” can assume that the government is going to bail him out, if he gets caught with too much risk.)
    2.  It would have reduced North American production capacity, which everyone agrees is too high.  That would have made it easier for the surviving companies — a restructured GM and Ford — to succeed.

    • 0 avatar

      If you want a counter example… take a look at the Canadian banking system… It is HUGELY regulated WAY more then the American system ever was and ever will be… How many Canadian banks went broke in 2008?  How many were taken over by the Canadian Federal Government?  In spite of the fact that most of the Canadian banks are as big, in some cases bigger then the American banks, the Canadian bank bailout was less then 1/10 of the US bail out… and almost ALL of the Canadian problem was triggered by unregulated American subsidiary banks

      Canadians have higher taxes, more regulation, evil socialized medicine, I ask… what percentage of their homes are upside down or under water?   How much has the Real Estate markets of Toronto, Montreal or Vancouver “Crashed or Corrected?”

      Why did the Canadian Economy with its hire taxes, more regulation, “jobs killing health care” seem to have a much better time with the recession then America?  Oh and Canadians have less government debt per capita then Americans too…

      How is it that they do everything that Americans say will KILL an economy and yet relatively speaking their Real Estate, Economy, Banks, Jobs, Deficit ALL seem to be doing quite nicely thank you very much…  

    • 0 avatar

      I’m with you CamaroKid. I live in LA but do business in Calgary and Vancouver.  Throughout our awful recession, business in Canada was utterly and thankfully predictably consistent.

      And Canadians, like Europeans, seem calmer in general and enjoy there lives more than  Americans, who seem to be forever on a treadmill waiting for the other shoe to drop.
      They may lack entrepreneurial opportunities that exist in the US, you know, the American dream that were sold on from birth.
      But the reality is only a handful “make it” in the US.  The rest of us live like Canadians!  But with 10x the stress. 

    • 0 avatar

      +10 guys. The better lifestyle you mention is why I have remarked several times here that I think the Italians are doing things better than we are on many topics. Yeah their gov’t is a mess and the their economy is shaky but the average citizen seemed to do a better job of enjoying his day when I lived there.

  • avatar

    If this is the worst that can be said about the US domestic auto bailout, then it was a huge success.
    At the time, I (and most other commentators) thought this was simply money down the drain.  I favored it simply as a a relatively quick jobs program.  I think it was likely that it would have paid off on those terms (but of course, could never be proven).
    The fact that the final net cost is going to be a few billion, one way or another, isn’t good news only for someone that lives on a different planet.  There is global auto over capacity.  The US industry could have bought the farm and we would still drive cars — only they would be controlled by European and Asian multi nationals.
    Note also that ‘bailouts’ are ALWAYS sub optimal.  However, we tried to let the economy work itself out of a deflationary spiral in the 1930’s with known bad results.  There are still people arguing that the government did TOO MUCH in the 1930’s.
    So, this will never go away as a theoretical controversy.
    However, the final government cost of bailouts is going to be 1% of GDP or less.  Not bad.
    No one ever said bailouts are or were optimal.  And the fact that the most important decisions were made in a 3 or 4 week period (or less) means that they can be totally picked apart over details — again sub optimal.
    So you have a theoretical objection — Moral Hazard and counterfactual speculation (how it would have all worked out if the government had stayed out of it) Vs. a real bailout under extreme financial stress that either will break even or cost 1% of GDP.
    Note that I am leaving out the costs of the GSE’s — which were managed by congress and were the most heavily regulated financial institutions in history — with hundreds of dedicated regulators.  That may cost some money, but also provided liquidity in single family homes that was and remains critical.
    As far as the future, no one will vote another bailout in our lifetimes, so that aspect of the argument is weak.

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