We have two items of good news. First, the administration has finally addressed what I consider one of the most important issues regarding the economic meltdown… Housing! I am happy that the issue is being addressed, but not how it is being addressed because of the possibility of a moral hazard – individuals that will be insulated from risk may behave differently after receiving the stimulus than they would if they were fully exposed to the risk. Second, irrespective of where you stand on the issue politically or socially, I feel that it was a good move to lift the ban on stem cell research as it will further strengthen the (thus far) ‘recession proof’ bio tech industry.
Politics, The Economy
What was the goal of TARP 1.0? Some say it was a failure because the goal was to generate credit (which it failed to do). Thus, these people feel that the second installment will also be a failure. The opposing school of thought is that the program was successful because the goal was to stabilize the financial sector and build confidence (which it did do to an extent). Thus, the second installment will aim to alleviate credit (build capital). Just to play devils advocate, it can be assumed that TARP 2.0 is either a failure or will be able to alleviate credit. However, wasn’t the high availability of credit the main instigator of the economic crisis as it gave rise to problems such as easy loans to unqualified customers in the first place?
If the banks collapse they face the same question as the auto makers: where does the TARP money stand relative to other debt? In case a ‘big bank’ is forced to file for bankruptcy, where does the government money rank (in terms of seniority). Though they initially bought preferred stock where will the second round of financing stand relative to other debt? Is the government looking for all-out nationalization? Will the government continue to manage the banks’ exposure to leverage, bonuses etc? These are some important questions that need to be addressed when the treasury comes out with its ‘detailed plan’ in a few weeks.
The problem is that this seems to be a recurring theme with the government. Though they are doing what they can to make the economy better, the lack of both details and clarity are making the situation a lot harder to understand and thus a lot harder to deal with. Help me out here, Timmy-G!
Politics, The Economy
The UAW has announced that they have made a tentative agreement to renegotiate their national contracts with the Big Three in order to make the domestic giants more competitive with their international rivals. As it stands today the difference between hourly wages of domestic and international manufacturer’s is between $4 – $7 an hour (not counting retirement and other benefits). The renegotiation of the contracts is expected to level the playing field and make for a more competitive economic landscape. Just as a reminder GM expects to repay the loan by 2012 and to be profitable by 2017. GM also envisions industry wide U.S. sales of 11 million units in 2009. This estimate is the latest revision from the initial projection of 12.5 to 13 million units that was released in December 2008. Of course, none of this will be possible without more of the tax payer’s money: on Tuesday, GM asked for a further $16.6 billion, while Chrysler asked for $5 billion dollars (a combined total of $21.6 billion)!
Just a thought: what happens if GM does not make its numbers due to the condition of the global economy?
In case you do not know what I am talking about, let me give you a recap of the events that took place on Tuesday, February the 17th 2009. The Japanese index (Nikkei) closed extremely close to its 26 year low. Russia had to close its market (again), the Euro was at a 3 month low, the Dow neared its low from five and a half years ago (29 of the 30 stocks going south) and the S&P was down 4%. It is no surprise that with so much uncertainty surrounding the economy people are turning to safer havens such as Gold and Treasury bills. The increase in demand for Gold has caused it to hit a 7 month high (flirting with $1000) up 9% in 0’9. Furthermore, investors continued to seek safe investments by investing in extremely low yielding T-bills (in some cases investors are losing money with the brokerage fees but taking solace in the fact that the money they invest will still be there in the next few months.) In short, car buying is not really high up on the average Americans ‘to do’ list. If that was not enough to convince you of the condition of the global economy, Adi Ignatius (editor in chief of HBR) gives a wonderful synopsis of the sentiment surrounding the recently concluded World Economic Forum, discussing how the experts feel about the condition of the global economy.
Now that we have gotten that out of the way you can see why I feel that the auto makers will not be able to meet their sales targets. I now come to more pressing issues. Where does the government money that has already been granted go if one or all of the Big Three file for bankruptcy? Seeing how the companies are continuing to ask for more money and repeatedly revising projections, why is the government throwing more money at the problem? What happens if the Big Three cannot achieve their projected sales? Will the tax payer get any money back?
Politics, The Economy
