The Obama administration's "pay czar," Ken Feinberg, has cut executive pay at some companies that received financial help from the government. The Federal Reserve has taken a similar action with some of the banks that it regulates.
Conservatives will argue that the government should not intervene in the free market to this extent. They're absolutely right - the government should not be setting the pay rates of top executives of American companies.
But top executives of American companies should not be asking the government for billions of dollars to save them.
One detail that seems to have been missed in the discussion of these decisions is that of the seven companies on which the Obama administration brought down the hammer, only 3 - Citigroup, Bank of America, and AIG - are straight financial companies. The other four are General Motors, Chrysler, and their respective financial companies.
The fact that four of these seven companies are really automotive, rather than financial companies, changes the picture somewhat. First, I would have no problem with many of the current top management of GM and Chrysler leaving. I think those companies could use some fresh blood. Second, Most of the best people have already left - they now work for Toyota, Honda, Nissan, BMW, and the one American car company that didn't get bailout money, Ford.
The Fe's move is target at banks, not just bankrupt icons of America's industrial history. There are technical questions about how the Fed's regulations will (hopefully) rein in excessive risk-taking. I don't quite get how that will work - that starts to get rather technical.
In political terms, with which I am more comfortable, I think this was a very good move by both the administration and the Fed. Cutting paychecks is something everyone can understand, even if there are arguments about the legitimacy or efficacy thereof. It's also a great use of political capital. No one will feel sorry for people forced to live on $200,000 a year. At least no one who votes in a Democratic primary. Democrats can now point to something Obama has done in connection with the bailout and recovery that no Republican - particularly not George W. Bush - would ever even contemplate. It puts the financial industry on notice that Obama is willing to make tough decisions that are in the best interests of the American public, rather than Wall Street.
What Wall Street apparently fails to realize is that while the massive difference between the pay of CEOs and other fat cats and the regular folks on Main Street may be the result of legitimate business activity, it is inefficient for society as a whole. Someone making $100 million a year is going to spend a fair chunk of that money inefficiently. Some of it they will donate to charitable organizations, some of it they will use to buy normal things, like cars and clothes. But a fair amount of it they will spend on luxury items that do nothing to promote economic growth. A $500,000 boat is a nice thing to have that a family can use for fishing and traveling. That's a perfectly legitimate use of wealth, and it generates other jobs. But a $50 million yacht is ridiculous. Even if it generates millions of dollars in jobs and economic activity, it still represents a great deal of waste.
This is something that conservatives have never understood: capitalism generates efficiencies for individual companies, but it creates inefficiencies for society at large. That is what we have seen with this horrible recession. Absurd pay for executives at bankrupt companies, or companies that required massive infusions of capital from the government, are a great example of capitalism generating inefficiencies in society at large. The Obama administration is just redressing these inefficiencies.
FDR, it is said, saved capitalism from itself. Obama is doing the same thing.
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
Friday, October 23, 2009
Saturday, May 16, 2009
GM, Chrysler closing dealerships
GM and Chrysler are closing lots and lots of dealerships, roughly 2,000, all told.
No one is surprised by this. Many people have known for years that GM and Chrysler have too many dealerships. GM has several thousand more dealers than Toyota, but sells roughly the same number of cars.
From a political perspective, what's bizarre about this is that this failure is actually an argument for the conservative principle that excessive government regulation is bad for the economy. In this case, dealers across the country were protected by state and local laws that made it difficult for them to be closed. Dealers obviously wanted to be protected from the vagaries of the market. The free market. So they relied on government regulation to protect them. And yet I somehow don't think that many of them were Democrats.
My guess is that many of these dealerships were profitable for themselves, but not profitable for GM and Chrysler. Let's say you have a dealership that has been around in rural Kentucky for 50 years. The dealership probably owns the land and the building, so there is no mortgage or rent. That saves a large chunk of overhead right there. They probably have a great credit history, so their cost of capital is low. They pay taxes, sponsor Little League teams, and are generally good citizens in the local community. The police department buys their cars from this dealer. The wife of the dealer is on the board of the local hospital. So that dealership has no incentive to close, even if they are not profitable from the perspective of the manufacturers. But they and the local politicians have every incentive to make it difficult for any car manufacturer to close them.
When a parent does too much to protect their child from the unpleasantness of the real world by, for example, buying them expensive toys or paying their rent after they have graduated from college, we say that the child is spoiled.
It's a very harsh thing to say, but these dealers were basically spoiled children. Their parents, GM and Chrysler, were protecting them from the unpleasantness of the real by absorbing their costs, by, for example, taking their unsold cars back.
The great irony is that if everyone involved had let the free market work properly, many of these dealers probably would have gone out of business a long time ago, and others would have either taken up their business or bought them out. The process of winnowing out the unprofitable dealers would have been much slower, but also much less painful. Instead of taking place over years, however, the process is now taking place over months. If dealers had gone out of business when GM and Chrysler were financially healthy, they could have individually negotiated good buyouts from them. GM and Chrysler could have easily handled 50 to 100 or 200 dealers closing over the last 10 or 15 years. At $1million a pop, 200 dealers would be $200 million a year. That's probably what GM spends on laptops in a given year. Or, rather, spent.
But now that Chrysler is in bankruptcy, with GM likely to follow, the dealers may get nothing or very little. Bankruptcy changes the game. Imagine a spoiled child whose parent is suddenly unemployed. The kid's support is cut off, but she is totally unprepared for it, having never had to worry about it before. So she whines and complains and slams her fists. Guess what the Chrysler and GM dealers are doing.
I don't have a lot of sympathy. Yes, it sucks that many people who were responsible, hardworking people will lose their jobs. I have sympathy for them. They've done everything right, and now they are victims of forces beyond their control. But so are all of us.
But I don't have much sympathy for the dealers. They knew the rules of the game: if you open a business, you agree to play by the rules of capitalism. One of those rules is that the better competitor will win.
If this is an example of the conservative idea that excessive regulation is bad for markets, it is also an example of one of the core failings of conservatism. Conservatives argue that the free markets work because individuals are allowed to act according to their own best interests, and they understand what those best interests are better than the government.
What this argument ignores is that in every capitalist transactions, there is both competition and cooperation; the parties both have an interest in common, and an interest in conflict. If I buy a car, the car dealer and I both have an interest in me buying a car. But the dealer has an interest in charging me the highest price possible, while I have an interest in paying the lowest price possible. So each of us has an interest in distorting the rules governing the transaction to fit our needs. The dealer has an interest in blocking competition; this is why we have antitrust laws. I may have an interest in hiding the fact that I have, for example, a bad credit score, or the fact that I just lost my job (speaking hypothetically here).
That's what happened here: the dealers distorted the free market. They acted according to their own best self-interest. But what was in their best self-interest was contrary to the best self-interest of the car manufacturers. The manufacturers didn't object, because they had no reason to suspect that they would have to close down several hundred dealers all at once. They assumed this because they assumed that the free market would work as it is supposed to. Which, ironically, it did. Just not the way conservative theorists think it does.
The final irony is that this is one of the basic organizing principles of liberalism. Markets encourage efficiency, but, left to their own devices, capitalists will distort just about any market. One essential purpose of government is to regulate competition so that the distortions do not ultimately cause the markets to cease functioning properly. In this sense, the government is taking a capitalist role: the government represents the people in the country as a whole acting in the best interests of the country as a whole. There is no other mechanism for all of the people in a particular area, or affected by a particular industry, to act according to their own best interests, except through government.
So conservatives are right: if free markets had been allowed to work perfectly, this would not have happened. But conservatives are the starry-eyed idealists here, who live in their own fantasy land. Liberals are the grounded realists, and, essentially, the better capitalists.
I've said it once, I'll say it again: Irony is 9/10th of the law.
No one is surprised by this. Many people have known for years that GM and Chrysler have too many dealerships. GM has several thousand more dealers than Toyota, but sells roughly the same number of cars.
From a political perspective, what's bizarre about this is that this failure is actually an argument for the conservative principle that excessive government regulation is bad for the economy. In this case, dealers across the country were protected by state and local laws that made it difficult for them to be closed. Dealers obviously wanted to be protected from the vagaries of the market. The free market. So they relied on government regulation to protect them. And yet I somehow don't think that many of them were Democrats.
My guess is that many of these dealerships were profitable for themselves, but not profitable for GM and Chrysler. Let's say you have a dealership that has been around in rural Kentucky for 50 years. The dealership probably owns the land and the building, so there is no mortgage or rent. That saves a large chunk of overhead right there. They probably have a great credit history, so their cost of capital is low. They pay taxes, sponsor Little League teams, and are generally good citizens in the local community. The police department buys their cars from this dealer. The wife of the dealer is on the board of the local hospital. So that dealership has no incentive to close, even if they are not profitable from the perspective of the manufacturers. But they and the local politicians have every incentive to make it difficult for any car manufacturer to close them.
When a parent does too much to protect their child from the unpleasantness of the real world by, for example, buying them expensive toys or paying their rent after they have graduated from college, we say that the child is spoiled.
It's a very harsh thing to say, but these dealers were basically spoiled children. Their parents, GM and Chrysler, were protecting them from the unpleasantness of the real by absorbing their costs, by, for example, taking their unsold cars back.
The great irony is that if everyone involved had let the free market work properly, many of these dealers probably would have gone out of business a long time ago, and others would have either taken up their business or bought them out. The process of winnowing out the unprofitable dealers would have been much slower, but also much less painful. Instead of taking place over years, however, the process is now taking place over months. If dealers had gone out of business when GM and Chrysler were financially healthy, they could have individually negotiated good buyouts from them. GM and Chrysler could have easily handled 50 to 100 or 200 dealers closing over the last 10 or 15 years. At $1million a pop, 200 dealers would be $200 million a year. That's probably what GM spends on laptops in a given year. Or, rather, spent.
But now that Chrysler is in bankruptcy, with GM likely to follow, the dealers may get nothing or very little. Bankruptcy changes the game. Imagine a spoiled child whose parent is suddenly unemployed. The kid's support is cut off, but she is totally unprepared for it, having never had to worry about it before. So she whines and complains and slams her fists. Guess what the Chrysler and GM dealers are doing.
I don't have a lot of sympathy. Yes, it sucks that many people who were responsible, hardworking people will lose their jobs. I have sympathy for them. They've done everything right, and now they are victims of forces beyond their control. But so are all of us.
But I don't have much sympathy for the dealers. They knew the rules of the game: if you open a business, you agree to play by the rules of capitalism. One of those rules is that the better competitor will win.
If this is an example of the conservative idea that excessive regulation is bad for markets, it is also an example of one of the core failings of conservatism. Conservatives argue that the free markets work because individuals are allowed to act according to their own best interests, and they understand what those best interests are better than the government.
What this argument ignores is that in every capitalist transactions, there is both competition and cooperation; the parties both have an interest in common, and an interest in conflict. If I buy a car, the car dealer and I both have an interest in me buying a car. But the dealer has an interest in charging me the highest price possible, while I have an interest in paying the lowest price possible. So each of us has an interest in distorting the rules governing the transaction to fit our needs. The dealer has an interest in blocking competition; this is why we have antitrust laws. I may have an interest in hiding the fact that I have, for example, a bad credit score, or the fact that I just lost my job (speaking hypothetically here).
That's what happened here: the dealers distorted the free market. They acted according to their own best self-interest. But what was in their best self-interest was contrary to the best self-interest of the car manufacturers. The manufacturers didn't object, because they had no reason to suspect that they would have to close down several hundred dealers all at once. They assumed this because they assumed that the free market would work as it is supposed to. Which, ironically, it did. Just not the way conservative theorists think it does.
The final irony is that this is one of the basic organizing principles of liberalism. Markets encourage efficiency, but, left to their own devices, capitalists will distort just about any market. One essential purpose of government is to regulate competition so that the distortions do not ultimately cause the markets to cease functioning properly. In this sense, the government is taking a capitalist role: the government represents the people in the country as a whole acting in the best interests of the country as a whole. There is no other mechanism for all of the people in a particular area, or affected by a particular industry, to act according to their own best interests, except through government.
So conservatives are right: if free markets had been allowed to work perfectly, this would not have happened. But conservatives are the starry-eyed idealists here, who live in their own fantasy land. Liberals are the grounded realists, and, essentially, the better capitalists.
I've said it once, I'll say it again: Irony is 9/10th of the law.
Sunday, December 14, 2008
UAW vs. GOP
So the Senate Republicans killed the bailout of the Big Three. It's not quite mind-boggling, for a couple of reason. First, I can understand free-market ideologues being opposed to the government helping out companies in trouble - it's a direct challenge to their beliefs. Second, I can understand that the Big Three are about the least sympathetic basket cases out there. They have known that the Japanese were serious competitors for decades. They haven't done enough to build better cars or repair their reputation. At this point, some people think a rescue of Detroit would be a waste of money - what guarantee is there that they will actually return to profitability. And a number of the Senate Republicans are from Southern states with foreign car plants, but not American car company plants. They aren't hearing from American car company employees among their constituents.
But from a political perspective, this strikes me as incredibly stupid on the part of the Senate Republicans. The UAW folks are the original Reagan Democrats - blue collar workers who are culturally conservative. Does the GOP have any idea how many UAW guys are also hunters? For the last two or three or decades, a lot of heartland working class people voted Republican because of cultural issues. Democrats usually found this frustrating, because this meant that these blue-collar workers were also usually voting against their own economic self-interest. Bill Clinton got that and managed to connect with them, in part because his background was working poor. But many blue collar workers were also comfortably middle class, so the economic issues weren't as important. The UAW had done its job of fighting for its members extremely well.
In this case, however, the GOP is voting against the economic best interests of blue collar people in the heartland in about the strongest way imaginable. This isn't an esoteric debate about economic theories or future debt obligations. If GM goes down, there will be massive trauma across the Midwest. Even if Bush provides assistance, as he just about has to do, the political damage has been done. There are many people who oppose the bailout for legitimate reasons. They'll be happy that it went down.
But they will also forget. My guess is that most of the people opposed to the bailout of the Big Three also don't have a lot invested in it; they don't drive American cars, they don't know anyone who works for an American car company in any capacity. They've heard the reports about billions, and they don't want to see their tax dollars going to companies that have failed. Give them a couple of months, and something else will grab their attention. Vote on this issue? I doubt it.
People who are staring into the abyss of seeing themselves and many of the people they know lose their jobs are not, however, going to forget. For the UAW, this will be a defining issue for years. Of course, the UAW itself has been very much a stalwart of the Democratic party. Now, more than a few members who have strayed from the fold are going to return. This is a "you are with us or you are against us" moment.
It won't just be the UAW. The LA Times reported that, as anyone would expect, the Big Three gave a lot more campaign contributions to Republicans than to Democrats. And how did that $100 million investment in free market ideology/cocktail party invitations work out for you guys? Not so well. Ooops. So much for money buying influence.
I know car company executives. I know of some who are good liberals, but there are far more who are conservative Republicans. The same is true, of course, of the executives at their suppliers. They've seen a Republican administration trash the economy, run up massive debt, get us into a horrible war, and ignore the rule of law. For many people, the rejection of the bailout will be a tipping point. They will not forget. Nor will they forgive.
But from a political perspective, this strikes me as incredibly stupid on the part of the Senate Republicans. The UAW folks are the original Reagan Democrats - blue collar workers who are culturally conservative. Does the GOP have any idea how many UAW guys are also hunters? For the last two or three or decades, a lot of heartland working class people voted Republican because of cultural issues. Democrats usually found this frustrating, because this meant that these blue-collar workers were also usually voting against their own economic self-interest. Bill Clinton got that and managed to connect with them, in part because his background was working poor. But many blue collar workers were also comfortably middle class, so the economic issues weren't as important. The UAW had done its job of fighting for its members extremely well.
In this case, however, the GOP is voting against the economic best interests of blue collar people in the heartland in about the strongest way imaginable. This isn't an esoteric debate about economic theories or future debt obligations. If GM goes down, there will be massive trauma across the Midwest. Even if Bush provides assistance, as he just about has to do, the political damage has been done. There are many people who oppose the bailout for legitimate reasons. They'll be happy that it went down.
But they will also forget. My guess is that most of the people opposed to the bailout of the Big Three also don't have a lot invested in it; they don't drive American cars, they don't know anyone who works for an American car company in any capacity. They've heard the reports about billions, and they don't want to see their tax dollars going to companies that have failed. Give them a couple of months, and something else will grab their attention. Vote on this issue? I doubt it.
People who are staring into the abyss of seeing themselves and many of the people they know lose their jobs are not, however, going to forget. For the UAW, this will be a defining issue for years. Of course, the UAW itself has been very much a stalwart of the Democratic party. Now, more than a few members who have strayed from the fold are going to return. This is a "you are with us or you are against us" moment.
It won't just be the UAW. The LA Times reported that, as anyone would expect, the Big Three gave a lot more campaign contributions to Republicans than to Democrats. And how did that $100 million investment in free market ideology/cocktail party invitations work out for you guys? Not so well. Ooops. So much for money buying influence.
I know car company executives. I know of some who are good liberals, but there are far more who are conservative Republicans. The same is true, of course, of the executives at their suppliers. They've seen a Republican administration trash the economy, run up massive debt, get us into a horrible war, and ignore the rule of law. For many people, the rejection of the bailout will be a tipping point. They will not forget. Nor will they forgive.
Wednesday, October 1, 2008
Bailout passes Senate
The bailout plan passed the Senate. Not much of a surprise, and mostly a good thing. There are $150 billion in new tax breaks. That sounds like a huge amount, but two are expected: extending tax breaks for renewable energy, and changing the alternative minimum tax. Both of those are longstanding issues that had to be resolved soon. I'm in favor of both of them. I'm not impressed that the costs aren't accounted for in this budget, but I'll take what I can get. Let's worry about balancing the budget with the next administration.
For now, get the thing passed.
For now, get the thing passed.
Thursday, September 25, 2008
Government seizes WaMu
The federal government has seized Washington Mutual. This is the largest bank failure in history.
I'm finding this out late at night, so my thots are brief. I don't bank there, so it doesn't affect me directly.
My first thot is that this makes the bailout picture more interesting, and hopefully brightens the picture a bit, because it takes a large degree of uncertainty out of it. JPMorgan Chase is taking over WaMu's retail operations, and writing down $31 billion in the process. That's a large chunk of change that the government won't have to worry about. So this is one example of the free market actually working. The strong and smart survivor, i.e. JPMorgan Chase, is taking over the weak failure. With the government's help.
It's not good news for WaMu, but it might be slightly good news for the rest of us.
I'm finding this out late at night, so my thots are brief. I don't bank there, so it doesn't affect me directly.
My first thot is that this makes the bailout picture more interesting, and hopefully brightens the picture a bit, because it takes a large degree of uncertainty out of it. JPMorgan Chase is taking over WaMu's retail operations, and writing down $31 billion in the process. That's a large chunk of change that the government won't have to worry about. So this is one example of the free market actually working. The strong and smart survivor, i.e. JPMorgan Chase, is taking over the weak failure. With the government's help.
It's not good news for WaMu, but it might be slightly good news for the rest of us.
Tuesday, September 23, 2008
Urgent email about the bailout
This is a great commentary on the bailout. I think we've all gotten emails that read like this one:
Hat tip: Andrew Sullivan.
Dear American:I just want to know who: is going to play Henry Paulson on SNL?
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
Hat tip: Andrew Sullivan.
Live-blogging the Senate hearing on the bailout
The NY Times is live-blogging the Senate hearing on the bailout. Thank God there is pushback from both Democrats and Republicans on the Bush Administration's need for speed.
What's interesting is the reaction of Republicans from largely rural states. Richard Shelby is from Alabama. I don't know this specifically, but my guess is that there isn't a lot of investment banking going on in Alabama.
What we are witnessing is a breakdown of the Reagan coalition. Reagan brought together religious and cultural conservatives, and Main Street and Wall Street business types. Those groups don't necessarily have much in common beyond an interest in lower taxes and the free markets; Wall Street and Main Street people might be socially liberal.
It is becoming clearer by the day that the fiscal interests of religious and cultural conservatives, particularly in the South, are diverging from the interests of Wall Street. Richard Shelby's constituents do not want to bail out the East Coast elitists on Wall Street. Chris Dodd has a fair number of investment bankers among his constituents, but he's also a Democrat, and there are a lot of people in Connecticut who ARE NOT rich investment bankers.
So if Richard Shelby wants to keep the non-investment bankers in his state voting Republican, he has to stoke the populist fires.
This is going to be interesting to watch. Republicans against corporate greed? Conservatives against the excesses of the markets created by too much deregulation? Hopefully this will be too much hypocrisy even for Republicans.
– Senator Dodd, the Democratic chairman of the panel: “I understand speed is important. But I am far more interested in whether or not we get this right. There is no second act to this.”
– Senator Richard C. Shelby, Republican and ranking member of the panel: “Before I sign off on something of this magnitude, I want to make sure we’ve exhausted the alternatives”
What's interesting is the reaction of Republicans from largely rural states. Richard Shelby is from Alabama. I don't know this specifically, but my guess is that there isn't a lot of investment banking going on in Alabama.
What we are witnessing is a breakdown of the Reagan coalition. Reagan brought together religious and cultural conservatives, and Main Street and Wall Street business types. Those groups don't necessarily have much in common beyond an interest in lower taxes and the free markets; Wall Street and Main Street people might be socially liberal.
It is becoming clearer by the day that the fiscal interests of religious and cultural conservatives, particularly in the South, are diverging from the interests of Wall Street. Richard Shelby's constituents do not want to bail out the East Coast elitists on Wall Street. Chris Dodd has a fair number of investment bankers among his constituents, but he's also a Democrat, and there are a lot of people in Connecticut who ARE NOT rich investment bankers.
So if Richard Shelby wants to keep the non-investment bankers in his state voting Republican, he has to stoke the populist fires.
This is going to be interesting to watch. Republicans against corporate greed? Conservatives against the excesses of the markets created by too much deregulation? Hopefully this will be too much hypocrisy even for Republicans.
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