Daily Archives: November 21, 2008

How The US Auto Companies Got Into This Mess 2

This entry was posted in SteveG's Posts and tagged Greenbergonomics on by

The following story is my own conjecture based on observations made during the time this all was happening. Call this part of Greenbergonomics.

I believe that the big three auto companies agreed to the retirement benefits that the UAW wanted because times were good. There was really no economic excuse that seemed plausible enough to deny these benefits in order to head off a prolonged strike.

Any fiscally responsible Chief Financial Officer would look at this future retirement obligation and manage it by building up the proper funding for it. A CFO knows that there will be economic slowdowns in the future, so cash needs to be set aside and invested so that the company won’t have to use current earnings to pay then current retiree benefits.

Well there was one problem that crept up with this scenario at the advent of unregulated Reagonomics. (Maybe it even started with Carteronomics or Nixinomics.)  If there was a lot of money set aside to fund future retirement obligations, a corporate raider could make a hostile takeover of the company and use the retirement money that had been set aside to instead pay off the debt the raider incurred to take over the company.

There were enough examples of these hostile takeovers that no sane CEO would dare to fully fund the company’s future retirement obligations. All they could manage was to fund the obligation to the government mandated minimum that no raider would be able to use to fund a takeover.

Given this unregulated, free market environment, you end up with a company that must continually grow in order to fund its growing current retirement obligations on a pay-as-you-go basis. (Sort of like what people think Social Security is now. Bush has even tried a hostile takeover of Social Security because it has not yet fallen to the pay-as-you-go basis.)

When competition starts to eat into your market share, perhaps the only strategy that you can think of is to move upscale to large, gas guzzling SUVs. These vehicles are very profitable on a per unit basis if you can sell enough of them. For many years this strategy worked.

If Detroit had based its fleet on small, fuel efficient cars, it could not have made enough money to pay for its growing current retirement obligations. It would have had to sell many more units of these than it had to sell of trucks and SUVs. The foreign competition did not have the magnitude of future retirement obligations and did not live under the hostile takeover threat.

If the government had changed the rules on funding retirement obligations, Detroit would not have found itself in this situation. Maybe they would not have fought more stringent fuel efficiency requirements if they could have thought of a business model where they didn’t have to grow or die. As we can see downsizing only leads to the inability to pay for current and future retirement benefits. Downsizing a Detroit auto company does not help to weather an economic storm anymore.

With a slight change in rules, we could have avoided the energy crisis, international terrorism, the war in Iraq, and this economic mess. It’s amazing what a little foresight could have accomplished.

Senator Shelby Opposes GM Bailout on Principle

This entry was posted in SteveG's Posts on by

The principle being, “I’ve got mine. You can go pound sand.”

Read the real reason in the article Sen. Shelby: How Sweet Is the Auto Business in Alabama? Not Very

In case you have missed the news, Senator Shelby is one of the most vocal opponents of a federal bailout of the big three American auto companies.

Maybe the other principle is that the (federal) government should not bail out the American auto companies, let Alabama bail out only foreign auto companies.

This must be how the Republican’s put country first.  Maybe this is the second round of the Civil war where the South fights the industrial North again. We forgot to ask, which country are they putting first.

Maybe this just proves the point about Obama’s call to sit down and talk to your adversaries without preconditions.  If you know where your adversary is coming from, maybe you can work out a mutually agreeable solution.  If the Southern congress people felt that the bailout had been going too lopsidedly to northern industrial and financial concerns, it would have been nice if we had had an atmosphere in Washington where they could have just come out and honestly said what their concerns were.  Then all the congress people might have been able to get together to work out a deal that saved the entire country.

We could then leave behind the phony idea that government should not interfere with business and pick winners and losers.  The article shows how much Alabama has been doing just that while they protest other people doing that. Maybe Shelby is just using his seat in the Senate to try to kill the competition to the winner that he has chosen.

How I wish Charlie Rose had been armed with all this iinformation when he did the piece about the auto bailout.

Japan economists call for ‘Obama bonds’

This entry was posted in SteveG's Posts on by

One way to lessen the impact of borrowing from foreign countries is to foster a weak dollar.  In essence we borrow today with a strong dollar and pay back in the future with a weak dollar.

The first queston that comes to mind is why any sane foreign country would put up with a plan like this?

The answer appears in the above named article in the Asia Times.

Ok, the butler did it.

Faced with the unprecedented growth of the US budget deficit and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of president-elect Barack Obama to issue US Treasuries denominated in yen and other currencies. The issuance of foreign currency-denominated US Treasures would reduce the perceived risk of holding the debt.