The next shoes to drop

Well, we are about ready for the government to start realizing that bankruptcy for GM (and I guess Chrysler and eventually Ford) is a better alternative after all. Had they thought it through in the first place, they would have come to this. But the threat of losing millions of jobs clouded their judgment. Didn't they realize that sending the auto makers away to figure out a way out of the mess would have them come back either having failed to answer that question, or deciding to shed millions of jobs anyway? So, here we are, well, not yet, but we're closer to where I get to say "I told you so." And the cascade will begin...

Once they allow GM to go into bankruptcy with federal debtor-in-possession financing and, not only does the sky not fall, but they actually create a brief but measurable burst of GM auto sales, they'll start feeling good about themselves. Then that will give them a little confidence that wiping out preferred and common shareholders can be good for many although bad for a few. Did I say "nationalize" the auto industry? Of course not, but that's what it will be. That's ok, it's better than shutting it down and letting all that manufacturing capacity go away, and permitting the rest of the world to take it up.

Once they've had a taste of wiping out shareholders, then they can start coming up with a word for nationalizing the banks that isn't "nationalize." Whatever this word is, the operation is what matters - let the preferred and common shareholders that decided to risk their capital on the banks take the hit, not every person in the country (and our children, etc.). Maybe this gives them the framework to begin. I'm skeptical, but that is only because of the penchant for being unable to do the "right" thing. In this case, nationalize and get it over with. They may have taken a political stance against nationalizing the banks that would seem duplicitous, thus preventing themselves from being able to do the right thing.

They get to say that "nationalizing the banks isn't the American way" because that sounds good, but it (a) isn't true and (b) isn't their real reason. Who did Obama have surrounding him when he had his little economic summits? Big business [with whom I have no issues]. But if we nationalize the banks, then Mr. Obama has to deal with his friend, Mr. Buffett. Buffett gets wiped out by that move (and the ensuing moves).

In order for this president to succeed, he is going to have to turn his back on everything he's learned and a lot of people that he calls friends. In the end, the only real answer to this mess is to recognize that the deflationary spiral cannot be avoided, leaving two choices - slow it down or let it go basically at its own pace. What he's doing now is only going to slow it down, which is only going to cause it to lengthen dramatically, perhaps by a decade. Honestly, since his main edict is to get the credit markets "working," he's actually pushing up a string. Debt contraction is underway and it can't be stopped, and until he realizes that, we'll just be creating smaller and smaller bubbles until all the assets are wasted.

By the way, when no one can afford to pay back a loan, when the collateral under which a loan is given loses value faster than the loan can be paid off, or when no one wants to borrow money because they see the value of savings as the best way to build their assets, and no one issues credit in that situation, the credit markets are working. They're working just fine. They just don't like the fact that the effects are not desirable for the country (GDP shrinks). However, they are very desirable for the country long term.

Where was I? Oh, and once GM files bankruptcy, maybe they'll see the answer to the foreclosure mess is to let people file bankrupty rather than try to prop them up. It's (a) fair to the people who didn't overextend themselves (b) very quick in terms of getting on to the next phase of our economic history and (c) very very painful for the banks, since the credit card debt will also be wiped out. But, that's ok, because we'll nationalize the banks and then really nobody gets charged for those bankruptcies except the debtors that are not owned by the federal government. If the government owns all the debt and they forgive it all, they don't have to raise taxes to fill the gap. They just liberate people from their debts so they can start keeping more of their paychecks and consuming with their disposable income.

But we have to get very far from here in terms of removing credit from the system before we get to that point, and they have chosen the slowest path there.

Perhaps the next leg down in the market will move the needle on their perspective a little. More likely, it will solidify their resolve, encouraging them to make more of the same mistakes, only bigger. However, that resolve will give people a new sense of hope, and that will lift the markets like nobody's business. Eventually, when the air pops out of that balloon, and the markets show everyone how low they can really go, only then will folks wake up and start to say, "I understand now that we can't make things better for my generation, so let's do what we can to make things better for our children's." And, since these politics are not the politics of our generation, we'll need a whole new cast of characters in Washington. I can't wait.

I noticed nobody pointed out that it was OK for the White House to send a private plane to Ohio to have a Senator come back for a vote. Too bad the Auto Industry doesn't have a panel where they can bring Senators in and berate them like selfish, arrogant children. Seems to me most of those in the Senate would make excellent auto executives and bankers, at least as far as the current standards have been established.

Joe