Justifications

With all of the reasons tossed out for why a stimulus bill needs to be conservative, at least in comparison to the amounts many said would be necessary for an effective stimulus, what's the future of the bank bailout? I may not be thrilled about taking a huge money gamble to fix an economic mess largely created by the idiots who run our nation's banks, but I'm even less thrilled by spending hundreds of billions more to help save their jobs and prop up their bankrupt companies.

And in terms of that bailout....

Summers suggested the bank rescue plan may offer incentives for private investors to buy mortgage-related assets that have lost value because of the collapsed U.S. housing market.

"It can't all be private capital," Summers said on "Fox News Sunday."

It only takes enough private capital for securities not already guaranteed by the government to establish their market price; then the government can buy the rest at market value? Yeah, right.

"But with the right kinds of government guarantees, with the right kinds of financing ... with the right strategic approaches, Secretary Geithner believes that we can bring in substantial private capital," Summers said.

Why do I suspect that with Summers' version of "the right kinds of government guarantees", whether it's public money or private that "buys" the security, the taxpayer bears all the risk.

Falling Down on the Job

Although nothing's set in stone yet, I'm not particularly impressed with the lack of progress on a stimulus bill, or with what looks like a pretty atrocious approach to bailing out the nation's financial institutions.

Meanwhile in England

Because the domestic auto industry's situation is unique.

"You Give Me... Money?"

Many years ago when I was in Paris, a young man approached me. He launched into an extensive narrative, in rapid-fire French. When he finished, I indicated to him in my very limited French that I didn't understand him. He paused for a moment then, you guessed it, asked, "You Give Me... Money?"

Some things just don't sound as good in translation.

Executives from the Big Three and the President of the UAW testified before the Senate today. The short version seems to be, "You give us money, and everything will work out." There seems to be a general unwillingness to even admit to some of the structural problems that will continue to cause problems with profitability and complicate the streamlining of their businesses. They were able to identify a lot of problems that could or would result from Chapter 11 bankruptcy, but skipped over the benefits of that process (or a "bankruptcy lite" conducted under the auspices of federal bailout legislation). And while I don't want to understate the amount of progress the Big Three have made in recent years, to overcome years of poor management decisions and business planning, I am left with the question of, "What happens if the economy doesn't pick up (big time) before the money runs out?" And the answer seems to be, a call for bailout, round two.

"Vous me donnez... l'argent?"

I don't want to dwell on the negative, and maybe (as Annie says) the sun will come out tomorrow, but I would have liked to have heard some more candid statements about the state of the industry and those factors that are unlikely to improve without some form of bankruptcy or "bankruptcy lite". Admittedly, it would be very difficult for these executives to discuss those issues in public. How could you discuss the need to eliminate brands or close hundreds of dealerships without creating anger and fear among your dealers, or making customers wary of any brand you mention is on the chopping block (or all of your brands if you are circumspect)?

Yet dealerships aren't going to close without a very expensive buyout and inevitable litigation (as happened with Oldsmobile), unless the closure is part of a bankruptcy process or a federal bill that preempts state laws on manufacturer-dealer relations. How do you admit that a huge factor in your not wanting your company to go through bankruptcy is that the people you work for - be they the shareholders or a private equity fund - and both you and the people you work with (who hold a lot of stock options, and probably also a whole lot of stock), really fear being wiped out? Chrysler CEO Robert Nardelli is apparently willing to work for $1/year, but tell me that will hold true if his equity stake is wiped out.

And tell me it's not about the share values and equity stakes when you have Cerberus "generously" offering to give up its profit in a future sale of Chrysler if it gets bailed out. Here's an idea - go to a Chrysler dealer, buy a car, drive it around the block, then ask them to loan you almost the entire value of the car on the promise that if you later sell it you'll waive your profit. Seriously - they paid $7.4 billion for Chrysler, and now they propose borrowing $7 billion.

My answer to Cerberus, really, is "I would be happier if you paid off your loan and still made a profit". Why? Because that would mean they turned the business around. I understand not wanting to tell your investors, "We lost your entire investment inside of two years," but the bailout should be about helping these companies succeed in the long-term, not just to let them scrabble through a year until they can find a way to dump their stake somewhere near break-even.

This is really tough - I'm not trying to kill off the UAW, and I care about the U.S. economy and industrial base, so I'm not among those who are happy to dig the Big Three a grave. But if we're putting this much (and probably more) taxpayer money on the line, I think we deserve something better than the status quo and the promise, "Even though we haven't changed our business models as a consequence of this unexpected crisis, what we're already doing is working. Trust us." And I suspect that the Big Three need a dose of tough love, something that both enables and compels their making serious structural reforms if they want billions of federal dollars, even if it causes their owners and shareholders to lose some equity, or the unfortunate closure of some plants and dealerships.

Is It "Unfair" To Let Detroit Collapse

Leave it to a conservative. In comments, CWD raises the question of whether it's fair to allow domestic auto makers to fail given the gargantuan financial industry bailout. Oh, I kid CWD. He actually argues, quite correctly, "I've pretty much always been opposed to the idea that we have to do something stupid and wasteful again just because it wouldn't be 'fair' not to do so".

Certain ideologues who favored the financial industry bail-out, while opposing an auto industry bailout, are engaged in some interesting contortions to avoid admitting their hypocrisy. Charles Krauthammer tells us that one's okay but not the other, because the financial industry is a "utility" - directly analogous to the electrical company. Except the government is not regulating the financial industry in the manner that it regulates utilities - is that something Krauthammer wants? Nor was it ever likely that the entire economy would shut down absent a bailout of the financial industry. It's not clear what would have happened, and fear has played a big role in the size of the bailout and the inadequacy of oversight. And I don't recall the federal government rushing in to save California from brownouts and rolling blackouts back in the glory days of Enron, or rushing in to update the electrical grid after the 2003 blackout.

David Brooks is more poetic in his explanation of the difference,

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Well, no. In the same sense that Brooks contends that keeping the big three from collapsing would retard "creative destruction", so does the choice to prop up large financial institutions instead of letting them fail, or letting them be carved up and sold off in smaller pieces. There's no sense in arguing the glory of "creative destruction" if you're going to simultaneously exempt from its forces the institutions that supposedly drive it. Also, isn't "creative destruction" about more than destruction - what does Brooks propose will be created in the place of the destroyed automobile industry? (One wonders, also, why Brooks isn't spending any time describing how his employer might avoid "creative destruction", beyond suggesting that it should get a bailout if Detroit is rescued.)

In an interesting series of posts at the Atlantic, Megan McArdle takes on the question of fairness, asking in some earnestness if an auto industry bailout means that the government should also bail out companies like Kodak. But that's a slippery slope argument, already implicated by the financial industry bailout. If we can draw a line before bailing out the auto industry, we can draw a line afterward. McArdle correctly argues that the bailout is unlikely to change "business as usual" at a domestic auto company or the UAW. True, but that's not a distinction from the bailout of the financial industry, which is now preparing to shower its workers with generous bonuses and pay dividends to shareholders courtesy of the U.S. taxpayer.

There are also fundamental differences between allowing a company like Kodak to fail because it didn't sufficiently anticipate and respond to the rise of digital technologies and its effect on the sales of photo chemicals, and allowing the auto industry to fail. Sorry, Kodak, but you represent a much smaller, less vital part of our economy. And unlike a context where a dinosaur is allowed to dwindle or die because it didn't respond to the market calling for a different product, this is a failure in competition between companies offering similar products. Suggestions to the contrary aside, assuming for example that GM fails, a post-collapse consumer is going to buy a roughly equivalent car from one of the remaining auto makers.

Hype green technologies all you want, but the consumer's choice is more likely to be driven by gas prices than by the availability of hybrid or flex fuel technologies, and the Japanese auto companies sell trucks and SUV's with gas engines in order to meet that demand. If the big three fail, cars will continue to be made, but the profits from those sales will flow to foreign companies and the instinct of those companies, faced with economies like the one we're in, will likely be to shutter U.S. plants ahead of those situated in the countries where they are based. High tech jobs in the auto fields will filter out of the U.S., so we need to ask ourselves whether those are the jobs we want to lose? (And that's before considering the jobs and businesses that would collapse across the country in the event of an auto industry collapse. No matter how much you hate unions, it's insane to be hoping for the death of the Big Three.)

I'm less concerned about an unlikely future where this leads to our bailing out Kodak, than I am of GM coming back in thee years, or maybe three months, begging for more cash - can we offer this bail-out without doing exactly what Henry Paulson and GW are doing with the metastatic financial industry bailout?

McArdle is correct in suggesting that any bailout should return a net gain to society, and that it is not clear that the current proposal would do so. Would bankruptcy? The fallout from bankruptcy for GM itself may be worse, but what if you instead used that bailout money to soften those consequences, or held it in reserve to potentially help a stripped-down, post-bankruptcy GM? I'm not big on the Thomas Friedman model of trying to force the Big Three to reinvent their vehicle line-up in his preferred image. The priority needs to be on creating viable companies, not on forcing them to incorporate technologies into their fleets that will either require massive government subsidies or price their vehicles far above competing models.

The WSJ proposal that if we're bailing out the auto industry to the tune of $25 billion or more, existing shareholders should be wiped out, seems to be on the mark. If we prefer a bail-out to bankruptcy, make it "bankruptcy lite" - a more efficient, industry focused version of bankruptcy, but with pretty much the same goals in mind. Not long-term stewardship, micromanagement, or redesigning vehicle fleets by committee. If you want to impose green reforms, do them legislatively and impose them on all new vehicles, so that the "new GM" can compete on equal ground. Perhaps more importantly, it isn't clear that an auto manufacture could survive bankruptcy - that they could maintain the cash flow necessary to stay in operation if they're unable to obtain and maintain enormous lines of credit. A specially legislated "bankruptcy lite" might bring about the benefits of bankruptcy without killing the company or impairing its ability to sell cars.

Something that seems to get lost in the noise, particularly the anti-union, "those workers get paid too much" noise, is that it's not only the labor cost differential that makes it hard for the Big Three to profitably sell smaller, cheaper cars. Take a look at vehicle sales in recent years. If domestic auto makers could avoid the discounting they have to offer to make their "comparable" cars competitive with cars from companies like Toyota or Honda, this would be much less of an issue. Instead, the labor cost differential is magnified by the need to offer discounts and incentives to people who are prepared to pay close to MSRP for a "comparable" quality vehicle.

Some painful truths. It isn't clear at this point that a financial industry-style bailout (no strings attached, here are billions to spend on whatever you think is best) would do more for the auto industry than forestall their collapse by a period of months or maybe years. It does not appear that, left to their own devices, the domestic auto manufacturers will get it together to manufacture vehicles that compete in terms of quality, design, or economy (in what I personally regard as an inevitable return to high gas prices) before they again hit a financial wall. But it isn't clear that any bailout, bankruptcy, or "bankruptcy lite" will turn them into viable companies - the context is created for that possibility, but these are sick giants with a corporate culture that has largely fought, tooth and nail, against the type of evolution that is required. Their progress over the past few years gives some hope, but it's only a modest beginning.

But doing nothing, if it leads to the collapse of one or more of these companies, will almost certainly deepen and prolong our recession while effectively ceding a big money, high tech manufacturing industry to foreign companies. So all said, at this point I would argue for "bankruptcy lite", for any of the Big Three that feels it cannot otherwise survive, and otherwise let market forces prevail.

Meanwhile, In Japan

Because the domestic auto industry's situation is unique, and car manufacturers wouldn't be in this situation if they only built more cars like the Prius, right?

Plans to make the Toyota Prius at the carmaker's new U.S. plant in Mississippi are being reviewed by a new emergency task force charged with propping up the company's profits.

U.S. production of the Prius, originally scheduled to begin in 2010, could now be pushed back to 2011 or later, Japan's Nikkei newspaper reported November 14, without citing sources.

Okay, but if had the domestic auto manufacturers focused on quality, smaller, more fuel efficient vehicles, or didn't have so many UAW plants, they would still be rolling in dough, right?

The task force, chaired by President Katsuaki Watanabe, was formed after Toyota booked an operating loss in North America for the first half and slashed its full-year earnings forecast.

What this illustrates is not that the Big Three have been unduly criticized for their bad management and poor strategies. It highlights how, in an economic downturn, even the best run companies can lose money. And how nothing the critics of an auto industry bailout are advocating is likely to quickly, and perhaps not even slowly, turn around the plight of domestic auto makers. Not even if Toyota handed them its hybrid technology and the keys to its Mississippi manufacturing plant.

Meanwhile, let's keep in mind that the Big Three have a point, in that a lot of domestic auto buyers really do want a huge, overpriced, gas guzzling SUV sitting in their driveway. Gas prices are down this month? Do I even need to tell you what that means, or have you guessed - SUV sales are up. If not for the economic downturn, burst housing bubble and credit crunch, the Big Three would probably be seeing SUV sales figures as high as last year's, as if the summer's record gas prices never happened.

Although the Big Three have improved their quality over the past few decades, they still lag behind major foreign auto manufacturers. I don't want to understate the importance of their ceding short- and (moreso) long-term quality to companies like Honda and Toyota. But there's something else to keep in mind: One of the reasons that auto manufacturers coming out of Europe or Japan build compact, fuel efficient vehicles is that's what their domestic consumers want. It's what we want when gas hits $4/gallon - prices comparable to those long seen in Europe or Japan? Is that supposed to surprise us - we truly believed Europeans and Japanese to be alien creatures who love packing themselves into tiny cars? Are we supposed to be surprised that gas prices hit the $4 mark and, despite the current drop, are going to hit and exceed that mark in the future?

The myopia here is not just out of Detroit - far from it. Congress worked hand-in-hand with domestic auto makers to create the context for this crisis. You know what might have forced the Big Three to develop a business model that is more realistic in a world of $4/gallon gas? Not carving out dishonest exceptions from CAFE standards to avoid classifying SUV's as passenger vehicles.

The very same members of Congress who are presently blocking a bail-out are the ones who happily went along with that deceit, concurred with Dick Cheney's notion that doing otherwise would somehow destroy an American way of life in which consumption is king and conservation is for wusses is a "personal virtue", and gleefully chanted "drill, baby, drill" during the presidential race. They're they types who giggled along with caricatures of "Prius-driving liberals". They were backed up by pundits like George Will, who would happily regurgitate any anti-hybrid propaganda, no matter how absurd, such as the fabrication that a Prius costs $3.25 per mile over its lifetime, while a Hummer costs only $1.95. And now they're lecturing the auto industry that they should have been leading the hybrid race? Or that the Big Three exemplify a failure of leadership? Or that they know more about these issues than, say, heads of cabbage? (Not that those who favor the bailout are necessarily any better.)

I know, I know. Building an economy propped up by debt-driven consumer spending and low energy prices was "the free market at work", and preparing for an inevitable future of higher energy costs or reduced credit would have... somehow... been wrong, even if it might have diminished or prevented the present collapse of the economy.

Waiting for the Second Coming... of Reagan?

Michael Gerson laments the collapse of John McCain's campaign, in a piece that is 80% of the way to reading like a parody.

For all their talk about respecting the constraints of reality, conservatives generally hold to the great man theory of history. It is leftists who embrace economic determinism. Conservatives read biographies of Winston Churchill and wait in constant expectation for the second coming of Ronald Reagan. Charisma and truth, in this view, can always overwhelm material conditions.

And this often leads to the small man theory of electoral setbacks. A losing Republican is not merely unfortunate; he must be incompetent, politically blind, and betrayed by his bumbling underlings. If he is not a winner, he is a fool.

This reminds me a bit of the evolution I've seen in a lot of idealistic people who become fascinated with politics at too young an age. The first time he votes, he's backing the great leader of the best party - the man who is going to save the country. A few elections later he's voting for "the lesser of two evils" and hoping that a great man emerges for the next election. A few elections after that, and he's realized that you have only two choices - picking "the lesser of two evils" or not voting. The candidates are human, and humans are flawed. The parties are flawed. The system is flawed. And you gotta live with it.

I think both parties try to present their presidential candidates as a "great man", and many voters happily oblige them by buying into a mindset that their candidate is going to fix the world, while the opposing candidate is going to destroy it (metaphorically, and sometimes perhaps literally, speaking). More sophisticated voters are apt to recognize that while great leaders can transform a nation, no matter what the political parties say, it's unlikely that they're voting for a great leader. They're also apt to note, perhaps particularly if they're conservative, that a great leader out to transform a country can take things in the wrong direction. The opposing party is often happy to emphasize that point - vote for Barry Goldwater and... boom!

Meanwhile, how many attacks have been launched on Obama's supporters for being a "cult of personality", entranced by the man but ignorant of his policies? For goodness sake, McCain even had a "second coming" ad about Obama's rise. Now we're to believe that this conduct, attributed to Obama's supporters, represents their acting like conservatives?

As for "leftists" embracing "economic determinism", it's almost as if Gerson is trying to pick marxist terms out of Wikipedia to create... I'm not sure what. Which "leftists" believe that economics are at the root of all political issues or problems? You point out, "It's the economy, stupid", and suddenly you're a marxist? Then what of Gerson's own argument:

The diverging political fortunes of Barack Obama and McCain can be traced to a single moment. In the middle of September, the net favorable rating for each candidate was about the same. By Oct. 7, Obama was ahead on this measure by about 16 points. Did McCain suddenly become a stumbling failure? No, the world suddenly went into an economic slide.

Clearly, then, you can be something other than a "leftist" and recognize the role - at times the central role - of economic factors in political events and world history. You might even enjoy talking about this - for example, crediting Reagan with winning the cold war by bankrupting the USSR. And what does Gerson believe that "Club for Growth"-type tax policies are about, but the idea that you can create an economic circumstance that forces a political outcome. What of the cult of privatization, ignoring the contexts that markets create efficiencies in favor of a delusional mantra that private entities will always perform better than public entities?

No, really, not all conservatives believe in "the great man theory of history", let alone see it as desirable. There are almost no actual marxists in the United States, and none that I'm aware of with any political influence. And both parties correctly see that economics play a role, often a significant role, in politics - while simultaneously avoiding any endorsement of Marxist theory. Go figure.

Why did Gerson attempt to frame the election as a competition between hero-worshiping "conservatives" and marxist "leftists"? Because:

While America remains a center-right country, this may well be a Marxist election in which economic realities are determining the political superstructure.

Earth to Gerson: Marxists don't play any discernible role in American politics, and neither they nor their theories win elections in center-right countries.

I was amused by Gerson's reaction to other pundits, as he complains about their advice to McCain:

If only the candidate would fire his entire campaign staff and travel the country in a used Yugo, speaking in the parking lots of 7-11s, the gap would be closed. If only the candidate would buy three hours in prime time and give a bold, historic speech (which has been helpfully sent under separate cover), the entire election would be turned around. If only the candidate would finally highlight his opponent's ties to Colombian drug cartels, the illuminati and the British royal family -- or perhaps abandon all this suicidal negativity -- the election could certainly be won. And yes, above all, the candidate must be himself.

I'm not sure who the first target is, but the "buy airtime" comment seems to be about Kristol, and the "smear, baby smear" comment seems to be about Krauthammer. (When even Michael Gerson recognizes your advice as bad....)

Gerson is also much to quick to blame the economy for McCain's problems at the poll. It's been very important, certainly, but there's a lot more to McCain's problem.

In the middle of September, the net favorable rating for each candidate was about the same. By Oct. 7, Obama was ahead on this measure by about 16 points.

I think McCain's problems started with his leading campaign tactic - one Gerson continues to endorse:

But the McCain campaign also proved itself capable of constructing an effective narrative: Obama as lightweight celebrity, McCain as maverick reformer. Until history intervened.

Political junkies forget that, although political buzz and ads can have a significant impression on the voting public, for many people the election doesn't begin until after the political conventions. McCain ran a pre-debate campaign that was largely premised on the notion that, "I'm so much better than him, all I should have to do to win is list my name on the ballot." Then he picked Gov. Palin as his running mate and enjoyed a brief surge in the polls. Then she was interviewed by Charlie Gibson, and independent voters started to shift in large numbers from McCain to Obama. By September 17, he had lost his lead. A couple of days later, we met Henry Paulson's $750 billion bailout plan. McCain was down in the polls, but only by a couple of points - within the margin of error.

Following the onset of the crisis, McCain was left with flawed options. He reasonably chose to work for a responsible bailout while hoping the markets would stabilize quickly.

McCain's slide in the polls was continuing. As the nation was introduced to the financial crisis, McCain engaged in some obvious grandstanding, noisily "suspending" his campaign to feign taking leadership of negotiations for a bail-out package. Except he didn't really suspend his campaign, didn't really contribute to the debate over the first bail-out proposal, and came across as trying to grab headlines to obscure his diminishing poll numbers.

Then, on September 26, Obama stood on the same stage as McCain and managed to not only hold his own, but in many ways to appear more presidential than McCain. McCain's "lightweight celebrity" theme crashed and burned and his campaign seemed to lose focus. Recall at this moment that Gerson's complaint is not that McCain's standing in the polls slipped, but that his favorables slipped. The performance of the markets played a part in the erosion of his support, but I suspect that the slide in his favorables had much more to do with his grandstanding on the fiscal crisis, his debate performance as contrasted with Obama's, and the fact that attacks that may well have been fair if raised at a different time or in a different manner seemed small, mean-spirited and misplaced within the context of a major financial crisis - they seemed timed and constructed to try to overcome a slide in the polls. How much of that is perception and how much is reality? It doesn't matter - that perception caused McCain's favorables to slide.

(Can anyone doubt that the past political association of McCain with a right-wing terrorist would attract some attention?)

Letterman had fun with that one.

Gerson's column seems to have three goals: Reinvigorate the failed "Obama's a lightweight celebrity" theme;¹ reinvent McCain as something "close enough" to a great man and second coming of Reagan; and to try to remove the economy and the financial crisis as bona fide election issues. Is it just me, or did he fail on all counts?
________________
1. Gerson attacks Obama, claiming,

His only recent accomplishment has been to say questionable things in the debates - attacking Republicans and capitalism for a credit meltdown congressional Democrats helped to cause, blaming America for Iran's nuclear ambitions, talking piously about genocide prevention when his own early Iraq policies might have resulted in genocide - all while sounding supremely reassuring and presidential.

The first? That's what passes, in this nation, as "good politics". As Gerson concedes, the government's contribution to the meltdown was bipartisan in nature, but this is the season for finger-pointing. The second, a silly exaggeration by Gerson. The third? What's Gerson smoking?

It Was A Typo?

Perhaps Hassett meant, "Dow 3,600".

How Venture Capitalists See The Economic Meltdown

Sequoia Capital on startups and the economic downturn.

As The Economy Worsens....

I suspect that online advertising may continue to flourish. Why? Because you can measure the return on your ad campaigns, and with proper monitoring can quickly terminate ads and campaigns that aren't performing. I expect "pay per click" and "pay for performance" ads to continue to perform both for businesses and for publishers who use them properly.