“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Thursday, December 4, 2008

The Politics of The Auto Maker Bailout

The politics of the multi-billion dollar bailout that US auto maker CEOs Wagoner, Mulally and Nardelli are requesting on their return visit to Capitol Hill today are getting quite interesting.

This morning's festivities began with doddering Chris Dodd's (D-CT) inaccurate, myopic and generally stupid opening remarks. I know that Dodd is a grafter and totally corrupt, since he took special favors in the form of sweetheart loans from now-defunct Countrywide Finance. He was a 'friend of Angelo,' calling each day to shepherd his and his wife's special loan through processing, then claiming to never have known about the special deal he received.

Mind you, he chaired the panel that regulated this failed institution.

It remains to be seen what kind of graft Comrade Chris expects from the US auto makers. Maybe a free Volt from GM, or hybrid Eclipse from Ford? How about a special share of Cerebrus' profits if he directs a fire hose of cash toward Chrysler?

But until this morning, I don't think I fully realized how dumb Dodd is. He actually began his remarks by attempting to portray Bernanke's and Paulson's rescue of the US banking system as favoritism. Announcing that he had invited both financial mavens to testify this morning, Dodd actually thinks everyone else is as stupid as he is about what Paulson and Bernanke would have to say about the auto maker case.

The answer is, nothing. Ah, that would be Commerce Secretary Carlos M. Gutierrez, Chris. Do you have his phone number? I thought not.

In any case, Dodd went on to excoriate the Fed and Treasury over saving the nation's banking system, which is a hybrid of the Federal government and various chartered, heavily regulated national banks, while not jumping in to rescue a totally different type of company- industrial firms engaged in the manufacture of cars and trucks.

It's almost comical to see Dodd struggle to force his completely incorrect views on a sceptical nation. If he really can't understand why the nation's banking system is a qualitatively different case than a few already-failed vehicle producers, he needs to find another line of 'work.'

Immediately after doddering Dodd's remarks, Republican Senator Richard Shelby of Alabama provided a stunning contrast with his introductory comments. Shelby noted that the auto makers had already been failing prior to the financial crisis of this year, and, even now, are touting excessively optimistic sales and profit targets. Shelby observed that they have no Plan B if those plans are wrong, other than to return to Washington for more money.

However, this isn't the entire story on the auto maker's desired bailout. I've alluded to this in these posts here and here. In the former linked post, written in mid-November, within a day of the last visit of the auto makers' CEOs to the Hill, I noted,

""It's official. The Democratic Congress and its new partner, the inexperienced President-elect from Illinois, are going to ram a GM rescue bill through Congress ASAP.

This may be a record for the shortest time period in which a newly-elected President ran away from his most prominent campaign promises and morphed into someone else entirely.

"Trouble is, current President, George W. Bush, and the Congressional GOP members, aren't playing ball.

Boo Hoo!

Looks like GM is going to actually have to try to run its business until January 21st, 2009, without Federal aid. How shocking!Treasury Secretary Paulson has announced, long and loud, that the TARP will not be used to lend to GM for ordinary operations. President Bush isn't budging on the issue, either. No executive orders or special spending actions will be coming from him.

It seems, too, that most business press and a groundswell of ordinary American opinion is against selective aid to GM without a bankruptcy filing and, probably, the head of Rick Wagoner as the price for any Federal help."

Yes, that's the rub. Anything that Frisco Nan and Harry Reid pass can, and likely will be vetoed by the President....that is, the current, sitting President. The one who currently sits in the Oval Office. Not the one doing all the photo ops from Chicago.

And today's Congressional Republicans are already smarter and more positively disposed than their brethren of just a few months ago.

Look for Eric Cantor and Paul Ryan to brace House Minority Leader John Boehner, forcing him to withhold support for any Democratic bailout of the Detroit auto makers which does not first require their filing Chapter 11. Look for Senate Minority Leader Mitch McConnell to do the same, while President Bush cites Republican Congressional preference for a bill that includes that requirement.

Bush, Boehner and McConnell, standing in front of the White House, will make an effective team as the President gives his full support to the Republican leaders' version of a bill to help auto workers, via a DIP loan to those auto makers which file for bankruptcy, while steadfastly refusing to engage in corporate welfare and government picking winners and losers in the free market.

Citing the banking system as a vital national interest which had to be protected, Bush will draw a distinction between prior aid to the financial sector, and the Democrats' attempt to ladle out billions to failed US companies.

That veto is key. The Illinois rookie, regardless of what he has the press believing, is powerless until 12:01PM on January 20, 2009. Until that moment, anything Congress passes must be signed by President Bush.

GM's Wagoner has shot himself in the foot by insisting that, without Federal aid, his company will go bankrupt by the end of this month.

If that is not an invitation for the Republicans to push him into Chapter 11 to get access to a DIP loan, what is?

Moreover, public sentiment is broadly against a straight bailout of Detroit, sans bankruptcy filings.

This is one case in which American-style government comes to our rescue. Between 47 and 48 states don't rely on unionized labor working in GM, Ford or Chrysler factories to sustain their economies. This mass of American voters and workers realize that they are being asked to pay tax dollars to fund UAW benefits for current and retired workers which far exceed what they, themselves, enjoy.

That's why Frisco Nan, Harry Reid and even the New Messiah from Illinois have seriously miscalculated this issue. Americans are against a non-bankruptcy bailout of GM, Ford or Chrysler.

I believe that, if somehow, a bailout is effected without the bankruptcy requirement, you could see the President-elect's honeymoon cut to only a few months, and the Democrats lose either or both the House and Senate in 2010.

This is becoming a highly visible issue. And one on which most Americans' gut instincts are correct- that UAW members do not deserve a bailout, via GM, Ford and Chrysler, in order to preserve benefits that few others in the country enjoy.

Wednesday, December 3, 2008

Frisco Nan Backs Her Union Pals

It's official. I saw a brief appearance by House Speaker Frisco Nan yesterday in which she stated that bankruptcy for the Detroit auto makers 'is not an option.'

Gee, does she share Rick Wagoner's speech writer?

Seriously, what else would you expect? First, Nan is hardly someone who would have any idea of how business is really managed in America. She's a pol.

Second, to entertain the notion that an American industrial failure should naturally consider bankruptcy is to cheat her union backers out of their lush benefits.

Isn't it ironic that the normally business-hating, antagonistic Nan has finally found a private corporation she can love?

But only one from whom her union pals at the UAW have a huge outstanding tab for promised pensions, benefits and 'job bank' payments. She can't afford to let those be unilaterally reduced in a Chapter 11 filing by Ford, GM or Chrysler, now, can she?

My, what it takes to make bedfellows of an ultra-liberal Democratic Speaker and the CEO of the nation's formerly 'first company,' GM.

Sad and disgusting, really.

Too bad these two knuckleheads can't just let natural forces play out and put GM into a Chapter 11 filing, ending this ridiculous, nightmarish spectacle.

Tuesday, December 2, 2008

The Coming Democratic Spending Orgy

I wrote this post yesterday on my business blog to highlight liberal Democratic economist and recent Nobel Laureate Paul Krugman's nasty attacks on the current administration, as well as his attempt to deny Amity Schlaes' fact-based revelations on the failure of FDR's New Deal to lift America out of the Great Depression.

On this blog, I want to highlight the post because it is so relevant to the coming Democratic spending orgy.

On a similar note, here's a UCLA article concerning research done there which found FDR to be, not the cure for, but the source of the Great Depression.

"FDR's policies prolonged Depression by 7 years, UCLA economists calculate
By Meg Sullivan
8/10/2004 12:23:12 PM

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.
"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."

Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.
The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened." "

This is chilling reading, considering the bone-headed President-elect's insistence that he must spend hundreds of billions to 'create green jobs' and other nonsense.

When has the US Federal government ever created long term jobs which the private sector hadn't already determined were worthwhile?

Who says 'green jobs' are needed, or profitable? Why should anyone believe the Illinois rookie knows the first thing about how to, and which, jobs to create? With your money?

I guess there's a silver lining. If, and as, the rookie does this, he's simply going to grease his own way out of office, since his and his party's Congressional majority's grandiose spending plans won't work.

And, as they rack up huge deficits to no effect, Republican Congressmen Eric Cantor and Paul Ryan will be chortling and commenting from the sidelines.

2010 and 2012 may well yet be GOP years for making Congressional and, then, Presidential hay.

The Camera-Happy New President-Elect

Watching CNBC this afternoon, I learned that the Illinois rookie has made five televised appearances in the past week.

As the liberal-leaning on-air-heads jumped all over our actual, sitting President, one of them finally noted why George Bush has not been appearing frequently.

Simply put, Bush has made it clear that his conservative principles dictate that the Federal government not serve as everybody's- and I mean everybody's- personal printing press/bailout machine.

Take today's overwrought Obama appearance. Speaking to a gathering of the nation's governors, the Illinois freshman actually had the unmitigated gall to recall, misty-eyed, his start in politics in the Illinois legislature. Mind you, he didn't waste much time there. Just enough to prepare to run for the US Senate.

But, never the less, we now know that his heart remains in state government.

Thus, the newly-elected rookie was in Philadelphia to promise Federal handouts to profligate states that didn't properly save and manage their budgets in lush times.

No worries. The Messiah will merely turn on the printing presses and vanquish all budget deficits.

As usual, the Great One is pandering to whomever happens to be sitting in front of him.

No wonder George Bush is remaining silent. At this late date in his administration, his position is moot anyway. And with a Democratic-controlled Congress about to bailout the Detroit-based US auto makers, and who knows who else lines up at the Capitol, why should Bush waste his breath counseling prudence, self-reliance and a need for the states to just tighten belts and do a better job managing their own finances in the future?

It's not a failure of Bush to communicate to the nation during this time of economic recession and financial crisis. Rather, he knows his limits, and won't demean himself by offering counsel that voters apparently don't want to hear.