“Politics, like religion, hold up the torches of martyrdom to the reformers of error.”
Thomas Jefferson (1811)
News of the recent conclave of world leaders, few of whom ever ran a business or created a job, suggest there is unanimity on how to solve the economic quagmire into which the world has plummeted. However, the devil is always in the details, conveniently omitted from those optimistic reports. Thus, any near-term implementations with realistic chances of success are highly unlikely.
Concurrently, it’s repugnant to see senior members of Congress, Administration spokespeople and Washington bureaucrats, whose prior advocacy for polices that helped create today’s economic crisis, pontificate daily about he abuses of Wall Street and others, albeit there is ample blame for those individuals and corporations. When do these politicians and bureaucrats ever accept responsibility for their failures and misjudgments? “Oops” simply won’t cut it!
While the $700 billion we-can’t-delay bailout package sailed through Congress, a $25 billion auto industry loan guaranty was quietly passed almost unnoticed. Typical of such emergency bills, the details of how the funds were to be used were non-existent. The fact banks might use such monies to acquire other institutions, pay executive bonuses, fund expensive off-site meetings and/or invest in T-bills as opposed to making new credit available to individuals and businesses apparently never crossed the minds of the bill’s supporters.
One is reminded of the old adage that for every complex problem there is a simple answer … and it is wrong!
Meanwhile, Beltway insiders have been making up the rules on the fly. While Secretary Paulson’s rationale for his weekly in changes in how to use the bailout funds may be sound, are such changes are legal and are stringent controls on recipient institutions now required.
Sensing Congress committed to giving away taxpayer money, the auto industry, Toll Brothers, credit card and insurance companies and a host of other corporations and industries with political clout, not to mention a growing cadre of state and municipal governments, have been queuing up for similar rescue monies to compensate for prior mismanagement, executive extravagances and an irresponsible lack of foresight when negotiating long-term contractual obligations. Can retailers be far behind?
This week, a lame duck Congress will debate a second, possibly $50 billion emergency assistance package for a failing automotive industry. While it may assuage key Democratic contingencies, simply rewarding an industry and its unions for their prior failures will not address the underlying, systemic problems which have and will continue to make them increasingly less competitive in a global economy.
An auto industry bailout will only defer the inevitable downsizing of the domestic automobile industry which will continue to be crushed by $73.00/hour labor rates and an inability to plan for the future. Even GM’s much-hyped Volt has a 2010 introductory price of $30,000; 36% higher than Toyota’s Prius.
Auto industry executives, the UAW and their minions continue the drumbeat that a bankruptcy by Ford, Chrysler or General Motors would be tantamount to throwing some 2.5 million people out of work. However, bankruptcy does not work that way.
Rather, Chapter 11 provides companies immediate relief from existing creditors, often encourages lenders to become more willing to make new loans, ensures post-filing creditors will be paid in a prompt and efficient manner, enables the restructuring of prior debt and even permits the cancellation of certain onerous obligations which would hinder the future survivability of the company. Meanwhile, their business can continue in an uninterrupted fashion.
Most of the major US airlines are still in business today because of the protections and benefits provided by bankruptcy when they faced similar crises.
Whether for financial institutions, automobile manufacturers, insurance companies or other industries, Congress should insist that no executives of companies receiving federal bailout assistance should receive annual compensation in excess of the base salary of the President of the United States ($400,000).
Corporate officers and directors who were complicit in creating the financial morasses or other material problems leading to the requirement for federal monies should be summarily fired.
Going forward, corporate officers and directors should be granted significant financial and stock incentives based on the long-term (several years in duration) successes of their companies, specifically including the repayment of all loans or other bail out financing. Golden parachutes should be eliminated!
If Congress and the existing or incoming Administrations continue to commit taxpayer monies for huge bailout or stimulus packages, they will have two options, print more money or finance the new debt. The former is hugely inflationary while selling government backed securities will eventually push interest rates higher. The effect will be to increase the costs of borrowing for state, county and municipal governments as well as private sector corporations, if not drying up such capital altogether.
However enticing federal largess may seem, it’s prudent to remember that a government that is big enough to give you everything you want is big enough to take everything you have.
