Bail Out Detroit? – Now??

An obviously delusional and disturbingly confused Ben Stein once again contributes to dumbing down the masses by writing what appears to be an attempt to an article: Bailout Detroit – Now:

Usually this column is about finance. It usually is an attempt to help the reader make money and have a more comfortable life. I am well aware that I have made a lot of mistakes and that in the short run many of my suggestions have turned out badly. Believe me, I am sorry. I still believe that in the long run the investment ideas will do well, but I am terribly sad that people’s hopes have been disappointed in the short run.

That’s fine Ben. If people are stupid enough to listen to you they deserve to lose money. Another lesson learned means smarter decisions in the future. He who wants to understand finance and economics should seek advice with someone who does understand finance and economics, not with someone who has absolutely no idea what he is talking about.

My best guess is that we are in a panic of sellers and market manipulators and that we will recover within a few years, but I base this on history. We may have moved into a new phase where history is irrelevant. I would be surprised if that were so, since it’s never been true before, but one never knows.

I highly recommend you end the guessing and try some specific thinking. Otherwise, how are we to believe you actually switched the brain on as you continued writing. For beginners like you: We have seen an excessive credit expansion from 1990-2007 which has diverted goods from occupations where the majority of the consumers demanded them and are now in the inevitable and soothing correction which our government is turning into a depression by not allowing it to happen. Those who are in panic mode are you and all the bailout fanatics and government officials. Had we let it occur cleanly it could have been over by now and we’d be ready to get back to useful work. Now we’re in for a decade of agony.

However, today, let’s talk about the American auto companies. They need a bailout from us taxpayers, and they have to get it yesterday. Here’s why

First, we are on thin ice economically. To allow our largest heavy industrial component to fail at this delicate moment is suicidal. To put a couple of million more Americans into unemployment is just not sensible. Mr. Barack Obama is talking about public works projects to employ hundreds of thousands of Americans -bridge building, school building, airport building. These projects take time to start, disrupt local community life, and are famously wasteful.

And that’s why we should do neither of the two. Bailing out Detroit will, from the consumers’ point of view, continue to keep resources from being employed in more useful lines of production, and force the taxpayer, the common man, to cut down on his consumption in order to be able to keep the failed operation going. Our car industry will continue its miserable decline into inefficiency and irrelevance and be back quickly for new bailouts once the money is squandered. How I know that? Oh right, maybe it’s because Chrysler got a bailout years ago and is now back asking for another one!!! You claim to be a financial adviser. Did you ever take a look at GM’s financials? The company is worth minus $60 billion. In a time like this you are asking taxpayers to sacrifice their hard earned dollars and throw them at a business that is worth LESS THAN NOTHING. Shame on you, Mr. Stein! You are one lousy adviser.

I will not again go into details as to why public works projects are going to accomplish nothing but the same. All I needed to say on this I already wrote in detail in The Trouble with Bureaucracy.

Why not be smart about it and NOT LET AMERICANS GET UNEMPLOYED IN THE FIRST PLACE? (Please pardon the shouting.) There are millions of Americans already hard at work making great American made cars and trucks. Why not keep them on the job? Wouldn’t that be smarter than allowing the whole upper Midwest to fall into oblivion and then rescue it over a fifty year period?

BECAUSE OTHER AMERICANS ARE ASKING THAT THEY BE EMPLOYED IN USEFUL OPERATIONS AND NOT IN THEIR CURRENT ONES. (Please pardon my shouting back.) You should really familiarize yourself with the simple economics 101 on entrepreneurial profit and loss. That should help you understand why factors of production should not be kept in operations that generate a loss. You are not the only person in the world, Mr. Stein. There are other Americans who, in their purchasing decisions, express their willingness for a change in Detroit.

Second, I get sick when I hear about how this or that professor says we cannot have bailouts in a free market. Really? How about the bailouts the professors get because gifts to colleges are tax free? How about the bailout they get because if they have to teach six hours a week they feel overwhelmed, while the guy on the line in Dearborn works a grueling forty and doesn’t whine about it?

Ben, if you want to make gifts to the auto companies, please, go ahead and do it. No one is holding you back. And take a lot of people with you when you go. Nothing wrong with that. And if you would like to lobby for a law that makes voluntary gifts for auto companies tax free, go ahead, you’d have my support. Until then, please spare your readers pathetic and irrelevant comparisons.

Somehow, we can give bailouts to investment banks where the top dogs make hundreds of millions a year for running the company into the ditch and wrecking the whole credit picture in America. Somehow we can have bailouts for Fannie Mae and Freddie Mac, whose bosses were trading on the credit of the taxpayers to make themselves rich while pumping up a serious housing bubble.

Exactly right, we shouldn’t have done that either. And I have consistently argued against it. You have not. Now you do. Yet, in the same article you support bailouts to car companies where the top dogs make tens of millions a year for running the company into the ditch and wrecking the whole auto picture in America. Somehow we can have bailouts for GM, Ford and Chrysler, whose bosses were making and reselling auto loans on the credit of the taxpayers to make themselves rich while pumping up a serious consumer credit bubble. It is in the realm of possibilities that you are being a hypocrite?

Amazingly, we can have whole fleets of C-130’s fly to remote areas of Iraq and Afghanistan with pallets of hundred dollar bills piled from floor to ceiling. Then we can pass them out to warlords who make tea for our soldiers one hour and blow their guts out the next. We can send CIA operatives into Somalia and give millions, maybe hundreds of millions, to warlords to fight other killers.

Ben, if you want to argue in favor of the auto bailout, it might make sense to actually talk about the auto bailout. The US foreign policy you describe above it indeed a bad one. But this does not in the slightest make the auto bailouts a good one.

But we cannot find it in our hearts to save our fellow Americans in Ohio and Michigan and Indiana who make the cars and trucks that about half of us buy? We can send billions to Germany and Japan to bail them out after they bombed us and killed our POWs and killed six million Jews. But we cannot help the children and grandchildren of the men and women who fought our war and made us the arsenal of democracy?

Something is very wrong here.

Sure we can help them. We can release them from their current inefficient occupations and enable them to be integrated into a productive modern economy. We need to do this sooner rather than later. The auto companies will fail either way. We can either prolong the agony and then leave the workers without any viable experience in modern, profitable operations, or we can let the companies restructure quickly and efficiently. The longer you want to keep them where they currently are, the worse will the situation be for the very people you are trying to help.

And please don’t tell me how GM and Ford and Chrysler have made bad cars that people don’t want. I drive only American cars, only GM cars actually, and they are the best, coolest cars I have ever driven: my 1962 Red Corvette, my mighty Cadillacs whose potent engines and super brakes have saved my life many times on the freeway. Yes, the cool people in DC and New York don’t drive American cars. But a lot of other good people do and we love them. And my Cadillac dealer down here in the desert, Jessup Motors, gives me a lot better service than my Mercedes, Porsche, BMW, Jaguar, or Acura dealers ever did. I would trust my life to Detroit iron any time.

That is good for you. I have no problem with your desire to buy GM cars. Nor do I have a problem with other people having the same desire. I do have a problem when you want to send IRS agents after me to take my money to subsidize your car. I don’t ask you to give me money to pay for my next ski trip either. A simple solution: Why don’t you and all other GM lovers, out of patriotism, simply pay 4 times the price you currently pay for your car. This way GM might actually break even next year.

And why are we so angry at the car companies’ executives? They get miserable pay by Wall Street standards and have much harder jobs.

I’m not sure what your high and mighty standards are that you call $14,000,000 a miserable pay. Still, I’m not angry at them. In fact, I don’t care about them. They’ll do just fine. I’m not asking more of them than a bakery owner asks of his manager: Be profitable so we can pay our bills and have some money left at the end of the day.

Why are we so angry at the unions? They negotiated their deals in good faith. It’s not their fault that roller coaster gasoline prices messed up their world.

What makes you think that bailout opponents are angry at the unions. I’m not. If they want to close deals that bankrupt their business, it’s their free decision. Just don’t come knocking on my door afterwards to help you continue make bad decisions. Make better ones next time.

They are our brothers and sisters. They fight our wars. They maintain our middle class lives. Maybe they get paid a lot, but they have been giving back for years. When will it ever be enough?

Ben, are you suggesting that GM workers are the only ones who are our brothers and sisters and fight our wars? I hope not. What do you mean by “they maintain out middle class lives”. You mean their middle class lives? Did you know that there are a lot of people who earn less than the average UAW worker? Did it ever cross your mind that there are people who are suffering quite a bit more than the GM auto worker who makes $150,000 a year? Why do you want to milk these people for tax money when they are already struggling? Have you no compassion for them?

And what about the retirees? They get the benefits they were promised. If those can be taken away, then whose benefits are safe? And do you think it will be cheaper if the government takes on those costs directly?

And what about the retirees whose pension money will be worth close to nothing once the inevitable result of this bailout mania unleashes the inevitable hyperinflation upon us? What about the taxpayers whose money can apparently be taken away without a qualm from your end.

Let’s stop the Depression before it starts. Let’s show some fairness and good faith to our own. Let’s bail out the Big Three, help them slim down, shape up, and keep making great cars and trucks. The Big Three are us and if we cannot help ourselves, who can we help?

Correct, let’s not cause another Great Depression. Let’s not again prolong the agony of a necessary correction by trying to keep prices up and failing businesses going, like we did in 1929 and 1930. Let’s help the big 3 become efficient by allowing the consumers to decide what is to happen. Let their owners go through Chapter 11 if necessary. Let the good pieces be turned into efficient and successful businesses and the useless parts be released for more useful occupations so the American car industry can once again be a force in the world rather than a caboose. The Big Three are NOT us. They are GM, Ford, and Chrysler. If they can’t help themselves, then who should?

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Bailouts for Everyone

The US faces the most severe crisis in history. Everyone is facing the threat of bankruptcy. If everyone were to go out of business, everyone would lose their jobs. Everyone is too big to fail. It is not just those who are directly employed by everyone, millions of people are contractors and vendors who supply everyone. They, too, would be affected.

Unfortunately the bailout for everyone faces strong opposition in Congress. Only a few brilliant public figures have realized how severe the situation is:

Financial Services Committee Chairman Barney Frank had the following to say:

“If we don’t help everyone, we will see a disastrous ripple effect that will affect everyone. In a crisis like the current one we cannot afford this.”

House Speaker Nancy Pelosi:

“Bankruptcy is simply not an option for everyone. It takes way too long to go through the Chapter 11 proceedings for everyone. There is too much at stake here. We’re not just looking at anyone here, we’re talking about everyone!”

President Elect Barack Obama:

“If Congress doesn’t act during the lame duck session, my first act, when in office, will be a bailout for everyone. Everyone employs roughly 100% of the American workforce. We can’t afford unemployment to jump up to 100%.”

President Bush:

“I’m a market kinda’ guy, you know that. But after consulting with my experts Hank Paulson and Ben Bernanke I suddenly realized that a failure of everyone would be disastrous for everyone. The risk of not bailing out out everyone by far outweighs the cost of the package.”

A businessman from Detroit who sells stuff and is directly affected by everyone’s financial problems:

“Imagine you buy something from everyone and then it breaks. Who’s going to fix it when everyone goes out of business?”

It is time to end the partisan debate. It is imperative that the government step up to the plate and bail out everyone, whether Congress likes it or not. The money for this historic bailout would of course have to be raised through taxes, levied upon everyone. Now is really the time for everyone to set aside their selfish greediness and do what is right for everyone.

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The Economics of Corporate Bailouts

The objectives of economic policy are to continuously improve the well-being of the largest possible number of people in society by making sure that the scarce resources available on earth are utilized so that every one’s most urgent needs are satisfied before less urgent ones are addressed.

When a business squanders factors of production which, from the consumers‘ point of view, would satisfy more urgent and/or ample needs in other lines of production, it operates at a loss. This sends a signal to the entrepreneur running the business to do one of the following, lest his operation contribute to a deterioration of the welfare of society:

– find a better use for the factors of production employed (produce different, more demanded goods)
– find more effective ways to employ them (increase the output of the factors employed)
– abort the operation, make the factors available to entrepreneurs who plan to employ them in more urgent lines of production, thus releasing them from their current occupation (declare bankruptcy)

Those are the choices he has under a capitalistic system on a market where the consumer, the common man, is supreme, a market based upon voluntary action. Any of these steps would swiftly remedy the misallocation of the resources and align them to the benefit of the common people, the consumers.

(Whether the workers employed in the business are paid market or union wages, they will easily be able to find a new, profitable, occupation at wages that are equal to or below the ones they are currently being paid. Overall, the consumers that the new employer sells to will benefit to the extent that the new workers contribute to a larger supply of valued and demanded goods. True, the individual worker may not be happy about the fact that he has to adjust and/or start off at a level that is slightly below his previous one. However, the people he produces for are workers, too. For the majority of the products produced in a capitalist society are produced for the common man. Everyone is now consumer, now producer, and would like to be favored in both roles. But there can be no other means of reconciling these conflicting interests than making sure that at any given point in time as many workers and other resources as possible are, from the consumers’ point of view, employed in the most urgent lines of production. The greatest harm is inflicted upon society as a whole if resources are withdrawn from these most urgent uses and occupied in less urgent, wasteful, operations.)

In an interventionist system, however, the entrepreneur who operates at a loss has another choice: He can petition with the government for a bailout. Under this arrangement, the government obtains additional tax money from the people under its governance territory and uses it in order to cover the losses generated by the business. It hence forces the people to restrict their consumption in order to keep up an operation that, from the their own point of view contributes to a lowering of their standard of living. It relieves the entrepreneur from the responsibility for this damage and lets the taxpayer, the consumers, shoulder it.

Alternatively the government can obtain the money by having the central bank produce it and make it available to it in a credit transaction. This would of course result in inflation and credit expansion, which again the consumer pays for in the form of prices that are higher than they would have been without the intervention (this could be rising prices, but it could also just mean prices that are dropping more slowly).

The government could also borrow the money in a credit transaction on the market, along with the implicit commitment to tax people in the future, meaning to forcefully take their money, in order to repay this debt. All this does is to shift the burden of restricted consumption into the future, while in the present withdrawing resources that capitalists may have employed for factors of production in profitable, and thus urgently demanded, operations, instead of loaning it to an entity that can simply repay by stealing it from others, and thus has no incentive to address consumer demands. This can be vividly witnessed in the fact that the money is made available to largely unprofitable businesses in a corporate bailout.

If unprofitable, in other words wasteful and less-urgently needed operations are subsidized while proper conduct is taxed and thus punished, it is only to be expected that more undesired behavior will be encouraged. Irresponsibility, short-sightedness, and imprudent conduct in business will the the inevitable outcomes over time.

Either way, such a policy of course necessitates a well planned and thought out propaganda and fear campaign before public approval will be granted.

The management style of the business will then in no way be a profit oriented one. If not already bureaucratic, it will become an inherently bureaucratic operation. But the bureaucratic style is precisely the opposite of what it needs. It needs to stop withdrawing resources from occupations where they could fulfill more urgent and ample needs from the consumers’ point of view.

But even from the business’s point of view there is no long term help for its employees and managers if its failed operation is bailed out. The bureaucracy and inherent lack of innovation will ultimately maneuver the business toward a devastating collapse which can no longer be justifiably funded out of tax money. All employees will lose their occupation. But since the failed operation went on for much longer than necessary, the bulk of the employees will be trained in ineffective, outdated, and unprofitable procedures. Now it will be even harder for them to adjust to the conditions on the market.

This holds true for any type of business, no matter what products and services it provides. Whether it builds cars or brokers credit transactions, the consumers’ judgment tells the entrepreneur whether they are supplied with the most urgently demanded goods or not.

The more resources the business employs, the more suppliers it purchases from, and the larger the loss, the more will the standard of living of the common people, the consumers, deteriorate, if the bailout intervention continues. Every single dollar appropriated would be better employed by the consumer it is forcefully taken from. Every dollar used to obliterate the loss is misspent. The larger the business that is being bailed out, the more immediate harm is inflicted upon the common man.

Thus, there is nothing that could be farther from the truth than the argument that some corporations are too big to fail. It is hard to find a more sinister and callous consumer scam perpetrated upon the populace than the corporate bailout. It adversely affects the standard of living of the common man, who is consumer, taxpayer and worker at the same time, and on top of that leaves the employees of the business poorly trained and inflexible once the inevitable collapse occurs.

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