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Posts Tagged ‘auto industry’

I would guess that, prior to the recent World Economic Meltdown (WEM), most of us never gave much thought to which industries were “too big to fail”.  Who knew we couldn’t live without AIG or Bank of America?  Insurance companies and banks come and go, right?  It turns out that this rule only applies to the smaller banks and insurance companies.  It seems that the big banks and insurance companies, taken collectively – even individually as with AIG – are indispensable and critical to the very existence of the United States. Therefore, the U.S. government had to step in and rescue these companies – for the good of the country.

So, I’ve been thinking that it might be nice to know in advance which other companies or industries are also too big to fail, just so I can be prepared. Apparently the U.S. automobile industry is also too big to fail – at least the Ford and GM parts of the industry – maybe not Chrysler. It seems that the economic impact of losing GM (Ford is doing OK) would be detrimental to the U.S. so we just aren’t going to let them fail (a structured bankruptcy is not really failing).  My question then is this: is there some way I can identify other sectors or companies that are also too big to fail?  What other companies can expect a guaranteed government lifeline if they also get into financial trouble?

I took a look at the 2008 Fortune 500 list of America’s biggest companies, which, incidentally,  is called the Fortune 1000, to see if I could see some sort of pattern or trend that would help me identify the other “too big to fail” candidates.  I found that, of the top 25 revenue earning companies in the U.S., they could all be placed into one of the following six groups:

1. Oil/Energy

2. Finance/Insurance

3. Retail

4. Communications/Technology

5. Automobile

6. Health/Medical

The sectors above are listed in order of total revenues for 2008. The number one spot goes to the oil industry with total revenues of about $1.2 trillion. The financial sector came in second with revenues of about $810 billion.  I have to assume that the reason we have to save the banking/insurance industry is because they play such an important role in our economy. However, our government decided that the auto industry is also to big to fail and they came in at only fifth place with revenues of about $360 billion.  Given the recent measures taken by our government to save both the financial and auto sectors of our economy, I think it is only reasonable to expect that the other members of the top five would be saved if they imploded too.

My conclusion is this: if the time comes when disaster strikes any of these other sectors of our economy, namely oil/energy, retail, or communications/technology we can expect our government to immediately step in and declare that these are “too big to fail” also.  This must be especially true for Big Oil because they are the largest sector of our economy.  It’s probably comforting for Big Oil to know that if they ever do get in trouble, we, the American taxpayer, will be there to bail them out.

As far as the health/medical sector goes – I don’t know.  You guys didn’t make it into the top five, you know.  And what about the aviation sector: the airlines, airplane manufacturers, and so forth?  Sorry, you didn’t even make the top ten – you’re actually not even on my chart! I guess we can do without the U.S. aviation industry, right? Maybe we could outsource and insource all our aviation needs from other countries!  After all this is a global economy, right?

Come to think of it, we could probably outsource and insource our medical needs too, couldn’t we?  I mean if it really comes down to it, couldn’t we just buy all of our pharmaceuticals from China or India? Couldn’t we just use our electronic technology to outsource diagnostic testing to Canadian or British or even Chinese doctors?  Maybe so… Sorry, health/medical, but you’re only number 6.  You’re out too.  Sorry.

So that’s it then.  There’s my top five list of U.S. industries too big to die.  We are saving two of them right now, and with only three more to go.  I wonder who’ll be next?

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It is fashionable in economic and government circles to condemn the tactics of tricksters like Charles Ponzi, a man who made a fortune by using new investors’ money to pay old investors their expected returns on their investments.  The most recent person to become famous in this way is Bernie Madoff, who is thought to have cost his investors somewhere around $50 billion. These newly destitute investors are rather unhappy these days. It seems they have quickly forgotten all those fabulous investment returns they made over the years, while the rest of us  struggled just to keep up with inflation. It sure liked Bernie was a genius in the old days, and a lot of people liked him too.  They just didn’t realize that the amazing earnings he was paying out depended upon more and more people investing more and more money with him, because, after all, he wasn’t really making any money in the market.

While we all can sit back and condemn poor Bernie, we might want to consider that Ponzi schemes seems to be more the rule than the exception these days.  For example, consider our 401k plans.  I already wrote about that in a previous blog a few days ago.  If you look at the history of the Dow Jones Average you will see that the Dow really took off after the whole 401k thing was created.  Without our 401k money piling into the economy it is likely that we never would have had the growth that we did have over the past thirty years.  Sure the 401k thing is sort a Ponzi deal – the more money we put in the more market went up, and so we put in even more money!  We all benefited right? Well, except for recent history anyway – if you want to count that.

But look at the real estate bubble.  Wasn’t that a grand Ponzi scheme too?  Everybody buying and selling houses to each other and every time houses were bought and fixed up and sold everyone making money.  It was great. You couldn’t lose – even the banks knew that.  And the government.  Thank God for the government and how they changed the tax laws so that you could flip a house every two years and not pay tax on the profit.  If that wouldn’t create a beautiful Ponzi scheme what would?  And didn’t we all benefit from that? Didn’t America, and a lot of the rest of the world too, just sprout up with gorgeous McMansions?  They’re everywhere now – not all of them inhabited, mind you – but beautiful nonetheless.  And all thanks to the brilliance of Charles Ponzi.

But wait.  There’s more.  Remember the Tech bubble?  Remember how the stock market just skyrocketed when Tech was born and there was a new IPO every day and everyone could make a fortune just by buying IPO stock one day and selling it the next? I know some people who made fortunes doing that.  Those were the days, I’ll tell you.  The Nasdaq going up and up and Greenspan saying we were guilty of irrational exuberance.  I wish I had sold my stock then.

Just think back: the 401k bubble, the tech bubble, the housing bubble…wait there’s another bubble I forgot to mention. The Social Security Ponzi scheme bubble.  That’s the one where you take money out of your paycheck for your entire life and the government uses that money to pay other people who are older than you their retirement income.  It works great as long as the population keeps on increasing, but when you have a population bubble, like the Baby Boomers, well, someone is probably going to wind up holding the short end of the stick.  But you have to admit it has worked really well for a long time and lots of people have had very nice retirements from this government sponsored Ponzi scheme.  We’ll just have to tell the boomers that you can’t win them all – I’m sure they’ll understand.

So, if you look back, it’s pretty clear that we’ve been running our economy on bubbles and Ponzi economics for a long time now – and we’ve had a good time doing it!  Do we really want to change horses in mid-stream and try to find some sort of drab, responsible sort of economic plan that is based upon creating real products and people actually working and making stuff?  What kind of growth rate could we possibly get from that? 2%? 3%? Doesn’t our government realize that, like all of Bernie Madoff’s clients, we have become used to 10% or more growth?  We can’t get that from just having an economy that makes stuff that people buy because they want the stuff!

No, we need an economy that works because people buy stuff because they think they can flip it to someone else and a make a ton of money in the process. We are a Ponzi people who really like Ponzi economics: make your money fast, get out, and stick it to the last guy in line.  Isn’t that how our businesses work?  Isn’t that how Wall Street works? Isn’t that the system our government created with 401k, and 529 plans, and Social Security too? Sure it is.  And that’s what we need now to get us out of this economic mess we’re in.  We just need a new Ponzi Plan – preferably one endorsed by the government, of course.

Hmmm…now what sort of plan could that be? Let’s see we’ve done Ponzi housing, Ponzi tech, Ponzi retirement stuff…what else is there?  How about Ponzi banks?  What if we give the banks a lot of money so we become part owners? OK… So how about then the banks loan the money to whoever wants it? That’d be good!  Then…then we use the money we borrow from the banks to buy more stock in the banks! I bet that would drive up the stock price! Then we just keep doing that over and over again! We can’t lose!

Oh, wait…I have another idea. How about we buy the U.S. automobile companies! And then we all get stock in them and then we buy our cars from them and then….

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OK, so George Bush has ensured that the U.S. auto industry won’t evaporate on his watch.  Thanks, George. You won’t be forgotten.  So, it’s over to you Barack. You’ve got a month to figure out how to save a multi-billion dollar industry that has been in self-destruct mode for the past forty or fifty years.  Good luck with that.  Clearly George Bush has absolutely no idea how to save an industry that for decades has embraced a policy of planned obsolescence. Like a modern day Icarus or a Sorcerer’s Apprentice, the Detroit executives thought they had it all figured out.  Half a century ago they decided that they could make more money by building  cars that would disintegrate on schedule, pretty much when the odometer reached 100,000 miles.  That way people would have to buy cars every five years or so and they would be assured of a stable market for their little time bombs forever.

So what does Detroit do now?  Everyone knows the Japanese, Koreans, and Germans build better cars for about the same price. And what about the Chinese? They have the ability to build cars every bit as good as the Japanese and Koreans at a lower price.  What happens when we start importing really good Chinese cars that sell for $10,000? George Bush clearly has no idea, so instead of creating a comprehensive restructuring plan and long term loan for the dunderheads in Detroit, he just boots the ball to Obama. Let him be the one to get the blame for the destruction of the auto industry after fifty years of greed and poor business practices in Detroit. The final implosion won’t happen on George’s watch.  Another brilliant stroke by the master of brilliant strokes.

The real question for Barack is this: how does Detroit dig itself out of the mile deep hole it has dug for itself these past fifty years?  First of all the economy is in freefall and credit for car loans is hard or impossible to get anyway. People are out of work. The overall outlook for the automobile industry, whether it is Japanese, Korean, Chinese, or German is very bleak. And now Barack and the geniuses in Detroit have to come up with a plan that will result in people buying even more American cars than they have in the past!  Are you kidding? Is that even possible? Who in their right mind is going to buy a car from these people?  First of all, Detroit already has a huge inventory of cars that no one wants. They can hardly give them away in their 2 for the price of 1 sales.  It looks like Obama’s task of saving the U.S. auto industry will be no less difficult than that of Hercules when he had to clean out the Augean Stables.

Perhaps the greatest problem of all facing the U.S. auto industry is a lack of trust.  Many people who buy Japanese cars fully expect to drive them for 200,000 or 300,000 miles. People who buy American cars pray that their rust buckets will reach 100,000 miles before they disintegrate.  So, even if Detroit started building quality cars tomorrow, who is going to believe them?  In these very difficult economic times who can afford to take a chance on a proven loser?  The answer is no one.  Detroit has to redeem itself and that will take time – years, lots and lots of years. So, if Detroit really does mean it this time, if they really do promise to be good and stop building cars that are deliberately engineered to fail, let them put their money where their mouth is.  It’s the only way, Detroit – you need to offer bumper to bumper 200,000 mile warranties.  You could do it if your new stuff is going to be so good.  If it isn’t – well then, you belong in the scrap heap.  The question then becomes what to do with the present crop of pre-engineered disasters.  There’s only one thing to do: give them the 200,000 mile warranty too.  I know they won’t make it – they’ll fall apart long before they reach 200,000 miles.  So set aside some money from Barack’s impending bailout for repairing these cars.  You need to establish trust immediately with the American car buyer – Detroit, you can’t wait a couple of years.

If the U.S. auto industry wants to survive in these times it has to compete effectively against the entire world. We’re in a global, multi-national economy now, remember?  Sure hybrids and electrics are nice, but with gas at about a buck fifty a gallon that isn’t a big issue today.  And forget about spending all the bailout money on designing really cool looking bumpers and grilles. Nobody really cares – after all they buy Japanese cars don’t they?

Detroit, if you are serious about surviving, start offering  200,000 mile warranties right away. Today.  Right now.  Otherwise, why don’t you just save all of us taxpayers a bunch of money and just call it a day.

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Detriot is drowning in red ink. General Motors says they need four billion dollars immediately or they will go out of business at the end of the month. The heads of the Big Three automakers are begging the government for help, but so far, nothing has been forthcoming – even though the government could use the idle TARP money for a bailout.  Does this have a familiar ring to it? Remember New Orleans? Remember how the people were begging and screaming for help from this government? Remember how people drowned in the streets and in their homes while President Bush was congratulating the head of FEMA for “doing a heck’uva job”?

Goldman Sachs is safe. Morgan Stanley is safe. JP Morgan is safe.  Bear Stearns is safe. AIG is safe. Wall Street is safe. What about Main Street? When the banks needed rescuing from the financial snares that they themselves had created, Secretary Paulson (the former CEO of Goldman Sachs)  immediately came to their rescue. Where is he now? Why is he silent? Why is George Bush silent as we watch Detroit drown? Do they have some sort of deeper understanding that we lack?  Is there something they know that we don’t know? Is it that they just don’t care? Is the U.S. auto industry simply irrelevant?

What, if anything, do Detroit and New Orleans have in common, and how are they different from Wall Street?  The answer is obvious: they are cities made up of common American people.  You won’t find the elite of New York or Washington wasting their time in these places.  In the world of George Bush and his fellow elitists there is little or no reason to save these people or their jobs. After all, if you ask George Bush he’ll tell you the economic meltdown is not his fault. It is the fault of those who were in power before him. What about Katrina and New Orleans? Was that George’s fault? Of course not; it was entirely an act of God.

There is a flinty coldness about George Bush, a disdain for the ordinary man.  There is also a disdain for the rule of law –  it can be seen at Guantanamo, Iraq, and at secret interrogation sites all over the world.  What is it that allows George Bush and his cronies to have such a deep disdain for the ordinary man?  What allows them to stand back, aloof, while so many suffer? What is it that allows them to amass personal fortunes and yet turn a blind eye to human suffering?  Make no mistake, it isn’t stupidity.  It is a deep, if terribly wrong and misguided philosophy, that informs their lives.  It is an outlook on the world that has been passed down for generations that must finally be called to account.  Neither the U.S. nor any other nation should have to suffer tyrants such as these any more, and the first step in stopping any future tyranny in America is to recognize it for what it is, because it infects our economy, our government, and our society.  I will be writing a series of articles about this problem showing the roots of this line of thinking and how it has long gone unrecognized.

Meanwhile, what will George Bush do for the people of Detroit if the auto industries fail? Where will they find food to eat? Will he send FEMA to their rescue? Let’s be serious.  Of course not. The best that George Bush will do for them is to offer the same advice that Marie-Antoinette, the Queen Consort of Louis XVI, once gave to the starving people of France: “Let them eat cake.”

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