Obama and the Bottomless Bailout…

If ‘bailout’ was the word of 2008 then word of 2009 is shaping up to be ‘mistake’. Or perhaps ‘regret’ depending on your political affiliation. As the world economy begins remains on shaky ground the billions of dollars thrown at GM and other auto companies to help stave off complete collapse is looking less and less like a good investment.

GM Canada's latest should be millionaires

Andrew Coyne wrote a very interesting article in Maclean’s the week of June 15th, We’ll Pay For This Bailout for Years. I’d like to share with you some of his thoughts:

  • The governments of Canada and Ontario payed about $9 billion for an 11.7% equity stake in GM, a company that was worth a total of $494US million. Our 11.7% percent of that is worth about about $58US million.
  • This year, GM and Chrysler expect to sell about 400,000 cars in Canada. Given that the average price of a new car in Canada is about $32,000, the governments could have simply purchased 400,000 cars at retail value and had some money left over.
  • After GM comes out of Chapter 11, it is expected to employ 5,500 Canadian workers (almost all in Ontario). If the governments had not bailed GM out they would have closed their Canadian plants and moved south. Hence, each job saved costs Canadians roughly $2 million dollars.

And you thought textbooks were a bad investment.

Is it wise for Canadian (and US) taxpayers to be buying up these failed companies under the guise of saving jobs? The truth is, the recession is hitting every industry not just the automakers. The reason Ford and GM appear to be the hardest hit is because they were horrendously run companies that had a bad business model or sell a product that consumers actually wanted.

So what other scary stuff is happening in regards to the US bailout? Where to begin.

Most significantly, there has been a dramatic shift in the US towards greater support for unions. More specifically, unions who dropped a significant amount of coin into Obama’s coffers during the election. In the buildup to GM and Chrysler’s bankruptcy the demi-god President overruled financial law that has been documented in the US prior to the constitution and British common-law hundreds of years before it. Historically, when a company declares bankruptcy or liquidates its assets, bondholders are seen as the most secure investors and are ‘paid back’ first, followed by shareholders and other parties.

Not in Obama’s America. Bondholders have been bullied into accepting either pennies on their invested dollars or dividing up 10% of GM equity. Meanwhile the UAW (and its unsecured benefactors) was offered a 55% share of Chysler. You can tell that there’s another election to be won when Obama appears on TV and openly states “I stand with the workers,” garnering even more union support. Lenin would have been proud.

Couple this with the fiercely protectionist ‘Buy American’ clause that seeps throughout the $871US billion stimulus package (its actually much, much bigger than that) and we have what may be the beginnings of the end for international capitalism. But surely there must be someone out there who is resisting the pull towards a more state-run economy. There is, but your never going to believe who.

Chinese Premier, Wen Jiabao, suggested in Davos that OCED countries re-read Adam Smith’s Theory of Moral Sentiments take a few lessons from it. Apparently that’s what the rulers in Beijing are doing.

And they told me quantum mechanics was unorthodox. In an interview with Lionel Barber from the Financial Times, Wen states that:

Without the successful political restructuring, one can’t ensure success in our economic restructuring. The goal in our political restructuring endeavor is to promote socialist democracy, and better ensure people’s rights to democratic election, democratic decision making, democratic management, and democratic supervision.
The society that we desire is one of equity and justice, is one in which people can achieve all round development in a free and equal environment. That is also why I like Adam Smith’s Theory of Moral Sentiments very much.

Full interview here (excellent read).
The father of Western capitalism influencing the economic powers to be in Asia? The influence is immediate and significant.

At China’s annual National People’s Congress the booming nation took a dramatically different approach to their bailout than Americans. Although their bailout package was slightly proportionally higher than the American’s (18% of GDP vs. 15% of GDP) the Chinese plan focuses on the immediate stabilization of the economy, not preventing further mistakes through increased nationalization. The Chinese government is happy to sit back and see how successful their plan is before they commit to more funds. The former Communists seem to have more faith in the power of the free market than the Americans do. The result: China’s growth is expected to shrink to only 7% growth while other economies are in decline (below 0% growth).

And that’s what we should really take away from all of this: despite the strongly positive correlation over the last 20 years between market freedom and economic success, the government is now seen as the friend of the economy instead of the enemy. Obama and Harper’s economics of a more strongly regulated financial sector is juxtaposed by China’s vision of an interventionist, state supported free market.

We should be wary of feelings to run to the government in these hard times. It will only slow the economic recovery bring China closer to global economic dominance. Government takeovers of private business has never worked out and will result in less competitive products and increased waste. The time is now to remember the philosophy that made the US and Western economies strong in the first place.

Obama frequently speaks about rescuing the American dream. In reality it is the American dream that will do the rescuing, if only he allows it the freedom to do so.

References:

A amazing way to look at the monstrous US bailout – here.

Maclean’s – June 15th. Andrew Coyne, We’ll Pay For This Bailout For Years. Link.

Don Coxe – Basic Point Summer Issue: Who Will Really Lead the Global Rescue.

Another take on the Chinese stimulus – here – I disagree with it but there it is.

Related Topics

terryman

Geoff is a 5th year student who studying a double major in Integrated Science (Evolutionary ecology, virology) and Political Science. He was the 'Wish' speaker at the 2008 Terry Talks and is passionate about university education, especially when it comes to interdisciplinary experiences. After graduation Geoff wants to find a job that allows him to meet people from all sorts of backgrounds and share stories. If your savvy enough you can follow Geoff on Twitter - user: gcosteloe.

4 Responses to “Obama and the Bottomless Bailout…”

  1. Nicholas FitzGerald

    While I tend to agree that the bailout of failed auto companies is probably a bad idea, and while I am certainly no economist, I think we should keep things in perspective; Even after the bailout the US government owns a mere 0.21% of corporate and business assets. Calling this “the end of international capitalism” and comparisons to Leninism strike me as a bit of an over-reaction.

  2. Nigel

    I agree with the sentiments of the articles. The 1960’s in Europe saw over nationalization of dieing industries which didn’t ultimately work.

    Firstly CCAA/Chapter 11 are good things. They are designed to give a company breathing room to reorganize. The management, creditors, suppliers workers all get to sit down and, hopefully come up with a deal that allows the company to get up and running again. If the managememt is useless (yea in GM’s case), fire them; if the unions are fat and happy (yes to GM) renegotiate, if the bankers are squeesing them renegotiate. It sort of worked for Air Canada a couple of years ago, why not the auto industry.

    Second what makes the auto industry sacrosanct. The forestry industry has been suffering for years with no help from government. Propping up th eauto industry in 2009 is like propping up the wagon making industry in 1910; it’s over move on and spend money on the next generation industry.

    Thirdly once government gets involved whendo they stop. My bar, restrauant, trucking company etc are going under, I am a tax payer too why not me? Also how do you think the successful auto company’s feel, (and there are severl in Norht America, although usually Japanese). Pretty hard to beat government back failing competitors. Two way to go get beaten at the sales floor or join in the free for all and grab some cash. When the govenment starts picking losers the winners lose heart.

    Fourth although Stevie boy will be held accountable, don’t think that slippery Jack and I just got to town Mike are any better they are cheering him on and threatening a costly election if he doesn’t throw everything the govenment has at those redundent companies. I hope Barack can charm his way through this. George was bad, really bad; but the training wheels aren’t off the new boy yet and I question his driving skills.

  3. Geoff Costeloe

    Nick,
    I agree that those terms might have been hyperboles but I disagree about using the % of capital owned by the government as a measure of government control. I would rather used a measure that was something like ‘capital owed’ that placed money you are borrowing under the lender’s possession. Measuring the cashflow and assets of banks and lending companies isn’t enough, you also need to look a the money they have loaned. If you look at it that way then the government only needs to control a large part of the finance industry to exert massive control.
    Luckily that hasn’t happened yet – oh wait!

  4. Nick Zarzycki

    From the ‘Comments’ section of the Coyne article:

    ” ‘Keeping GM and Chrysler in business means keeping capital invested in those two companies that might otherwise have been invested in other firms and other industries.’

    Read the news recently, Andrew? Nobody’s investing in other firms and other industries right now. There’s a credit crunch. But that’s not the main point: what’s truly startling is that you seem to think that capital is finite. That is not how capitalism works! Capitalism is based on borrowing.”

    On buying up failed companies:

    “Is it wise for Canadian (and US) taxpayers to be buying up these failed companies under the guise of saving jobs?”

    Don’t know whether I’d call “saving jobs” a “guise” — as contestable a goal it is, it is nevertheless a goal. Calling it a “guise” implies some sort of secret, conspiratorial agenda.

    On China (and everything else):

    “their bailout package was slightly proportionally higher than the American’s (18% of GDP vs. 15% of GDP)”

    This, I think, makes your argument suspect from the get-go.

    “the Chinese plan focuses on the immediate stabilization of the economy, not preventing further mistakes through increased nationalization.”

    Firstly, I don’t see how preventing chain-reactionary economic collapse by providing wholesale bailouts to large [failing] financial institutions and large companies that employ middle-class Americans doesn’t qualify as an attempt at ‘immediate stabilization’. The Canadian and American (and Chinese) governments’ stated goal in providing bailouts (however ineffectual they may be) is the introduction of short-term stability and liquidity.

    Second, this point seems to ignore the fact that enormous swathes of the Chinese economy are already state-owned. Nationalization is not being undertaken in China precisely because there are few companies left to (reasonably) nationalize.

    Third, you seem to be missing the crucial point that the American government’s goal is not “increased nationalization”, but increased stability. The government is buying GM stock because no-one else will — to claim that the Obama Administration is planning for a long-term takeover of the American auto industry is to tread the already economically and logically tenuous line of the intellectually bankrupt (do the republicans really have any better ideas?) GOP.

    Governments are creating capital that no-one else has, injecting it (ala bailouts) into the economy, and hoping for a subsequent recovery (wherein the ‘injections’, which are really mass ‘borrowings’ of capital, are expected to be paid back). As weak as this plan sounds, opponents have failed to produce alternative proposals.

    “The Chinese government is happy to sit back and see how successful their plan is before they commit to more funds.”

    As they should be, since they’ve already committed more funds than most other states.

    “The former Communists seem to have more faith in the power of the free market than the Americans do.”

    China, despite aggressive moves towards state-capitalism in recent years (and becoming, effectively, more laissez-faire), is still openly Communist. And, again, China’s economy is still largely state-controlled.

    “China’s growth is expected to shrink to only 7% growth while other economies are in decline (below 0% growth).”

    China’s GDP growth rate in 2007 was 13%. America and Canada’s growth rates in 2007 were 3.2% and 2.7%, respectively. All three rates seem to have fallen by about the same amount during the crisis.

    “despite the strongly positive correlation over the last 20 years between market freedom and economic success, the government is now seen as the friend of the economy instead of the enemy.”

    The difference between the last 20 years and now seem to be that we are currently in an economic crisis.

    “Obama and Harper’s economics of a more strongly regulated financial sector is juxtaposed by China’s vision of an interventionist, state supported free market.”

    Firstly, I noticed you implied Obama might have been acting a bit ‘Leninist’ before. Comparing his actions to those of a state that is openly “Marxist-Leninist” (despite recent reforms) strikes me as being a bit ignorant.

    Second, I’ll remind you that China’s two stock exchanges (excluding HK) have been open only since 1990, and that regulation there is incomparable to the kind found in US/Canadian stock markets.

    Third, financial sector regulation (or, rather, the reversal of recently harmful de-regulation) seems to be pretty much the only issue (unlike bailouts, et al.) that everyone seems to be in agreement about.

    Fourth, regardless of what pundits/pseudo-economists/uninformed columnists say, it is undeniable that the United States of America is still the most laissez-faire economic power on earth.

    “We should be wary of feelings to run to the government in these hard times.”

    It might be helpful to remember what started these ‘hard times’ in the first place.

    As much as I’m all for fresh, innovation solutions to America, Canada and the world’s financial/economic problems (namely, solutions that don’t involve bailouts), calling people communists (and then calling communists capitalists) isn’t helpful.

    This article seems full of Obama administration (and government)-phobia and short on alternative policy suggestions (as seems to be the Republic party’s agenda at the moment).

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