We need a recession

So says Charles Morris, who points out that the current palliatives are trying to get us back to what caused the problem in the first place; namely, too much lending and borrowing:

All these frenzied attempts at staving off recession seem to be aimed merely at jump-starting the consumer borrowing-spending binge that underpinned the ersatz growth of the 2000s. But the real need is to shift to a more balanced system that’s less addicted to high-leverage finance.

Pouring money from the Fed into the banks just delays the day when banks — and now we taxpayers — will have to tally up our losses. The Fed is exchanging Treasury bonds for bundles of subprime mortgages at 98 cents on the dollar. But in the real world, those bundles could barely fetch 30 to 50 cents on the dollar. Does the Fed seriously believe that subprime mortgages are going to recover their value? The Japanese tried papering over bad assets during their 1990s credit crunch, and their economy has barely budged in 20 years.

At the same time, Congress and Treasury Secretary Henry M. Paulson Jr. are insisting that banks increase lending. To whom? House prices are still falling at double-digit rates. Credit-card defaults are spiraling upward. Companies are weak. Banks know how fast their loans books are deteriorating, and they desperately need cash to build up their reserves against all the bad loans they’ve made. Forcing them to ratchet up lending now is just pushing them back into the quicksand they’re struggling to climb out of. It’s financial folly. It would also be political folly for the new Obama administration.

Morris says getting the economy back into shape will mean some version of what Paul Volcker did when he dealt with the Carter recession by jacking up interest rates, which wrung out inflation and set up the Reagan revolution.

Command economy & the auto industry bailout

As Charles Krauthammer explains, we really are talking about socialist, as opposed to free market, economics, a command economy run from the top by government dictate:

Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism.

Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is “retool” Detroit to make cars for the coming green economy.

Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.

In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer. Will hybrids? One of the reasons Detroit is in such difficulty is that consumers have been resisting the smaller, less powerful, less safe cars forced on the industry by fuel-efficiency mandates. Now Detroit would be forced to make even more of them.

If you think we have economic troubles today, consider the effects of nationalizing an industry of this size, but now run by bureaucrats issuing production quotas to fit five-year plans to meet politically mandated fuel-efficiency standards — to lift us to the sunny uplands of the coming green utopia.

If the Democrats try to push the economy in this direction, it can only mean ruin. Republicans need only wait.

Bailout bait & switch

You know the $700 billion bailout that was passed to create a “Troubled Asset Recovery Program”? Well, Secretary of the Treasury Henry Paulson has decided not to buy troubled assets. Instead, he is buying bank stock. According to ABC,
“Paulson said today, he knew when the bill was signed the purchase of trouble assets wasn’t the right solution to the problem.” But. . .but. . .that’s not what he told Congress or the American people. Did we just give him a blank check with a $700 billion line of credit to do anything he wants to with it? We are also going to bail out the auto industry, people behind on their mortgages, and who knows where it will stop? If YOU want a bailout, here is a link to the proper form. (HT: ABC)

It seems to me that you can’t get out of an economic problem by just printing money and giving it away. Can you?

UPDATE: See this account of the bailout fiasco.

Why sell stocks now?

The stock market keeps dropping. I am far from an expert and no investor beyond my retirement accounts, but why sell stocks now? On paper, everyone’s holdings look bad, but that is only if you cash them out. You don’t lose money until you take the loss.

Hadn’t people might as well hold onto them, rather than sell them so cheaply? Then if and when the market recovers, the value will go up and they might be worth something. If people who are dumping stocks now try to get back into the stock market later, they will only spend more to do so. I realize that some people and institutions have to sell, needing the cash, but isn’t this a time to hunker down? Or, as Warren Buffet is doing, buy more stocks, seeing as how nearly all of America’s businesses are now on sale?

HT: The stock market

Bailing out the U.S. auto industry

Now the government is getting ready to bail out General Motors and the rest of the American auto industry. William Katz contemplates the prospect:

Let’s see if I have this right. I, and millions of my fellow citizens, in addition to our other burdens, will now be asked to bail out the American automobile industry, which has fallen on hard times. No less a pair of automotive authorities than Nancy Hot Rod Pelosi and Harry “High Octane” Reid have said so.

Now wait. Did I miss something? I don’t see where Honda, Toyota or Nissan are begging for salvation. Mercedes seems to be in business. BMW is still moving cars. Even Rolls continues to transport the Saudi royals. This seems to involve the American companies only – GM, Ford, and what’s left of Chrysler.

Ah, the comedown. It’s been 55 years since the president of GM, Charles E. Wilson, famously said that what’s good for General Motors is good for the country. In fairness, he also added that what’s good for the country is good for General Motors, but it’s the first part that got the headlines. In the two or three decades following Wilson’s remark, America’s passion for its auto makers continued, rather blindly, with heavy celebrity involvement. . . .

So what happened?

Arrogance is what happened. Mediocrity is what happened. Junk is what happened.

In the 1970s a survey was taken of German and American auto executives. They were asked, “What do you do?” The Americans replied, “We sell cars.” The Germans answered, “We build cars.” It was a difference in corporate culture. The Japanese noticed. They decided to build cars, and they succeeded. Many Americans today, brought up on Pontiacs and Fords, won’t own an American car, unless it’s a car made in Ohio by a foreign company. What a stunning change.

This country was custom-made for the Japanese auto invasion of the late seventies and early eighties. For decades, even as we loved our Detroit-made autos, we knew that many of them weren’t very good. The Mustang might have stolen our hearts, but our wallets were bleeding. (One Olds that I had required two engine changes.)

A University of Chicago professor, who had a background in the labor movement, told me this: When an auto worker ordered a car, that car was tagged, at the start of the production line, “For one of the boys.” The workers made sure the car was made right. Wonderful story. But it makes you think about the thousands of other cars that were coming off that same line. You might have owned a few. . . .

Auto executives then, like many today, came from the finance side of their companies, not the auto side. Alfred P. Sloan, GM’s legendary chairman, once famously said that GM didn’t make cars, it made money. He turned GM into the largest and most profitable industrial company in the world.

But no longer. Now the companies of our dreams, the companies that made Dinah Shore sing and Groucho joke, the firms that turned out the bombers and tanks of World War II, are begging for help. After decades of failing to produce cars with the quality and features Americans want, they ask largesse from the public they often ignored. They will get that help – because there are millions of jobs involved, because Democrats will not let the United Auto Workers down, because the bankruptcy of our auto industry would be a national humiliation, and because…because in a way we still love them.

Notice what this suggests about VOCATION and what can go wrong.

Has capitalism collapsed like communism did?

That’s what a Marxist historian is saying. From The London Telegraph:

For those who missed it, I recommend Edward Stourton’s BBC interview with Eric Hobsbawm, the doyen of Marxist history.

“This is the dramatic equivalent of the collapse of the Soviet Union: we now know that an era has ended,” said Mr Hobsbawm, still lucid at 91.

“It is certainly greatest crisis of capitalism since the 1930s. As Marx and Schumpeter foresaw, globalization not only destroys heritage, but is incredibly unstable. It operates through a series of crises.

“There’ll be a much greater role for the state, one way or another. We’ve already got the state as lender of last resort, we might well return to idea of the state as employer of last resort, which is what it was under FDR. It’ll be something which orients, and even directs the private economy,” he said.

Meanwhile, Mikhail Gorbachev, who presided over the dissolution of the Soviet Union, called on Barack Obama to implement a policy of perestroika, or restructuring of the economy, just like he did.