Forget the intro; I’ll just cut right to the chase. Businesses that cannot survive without government aid should not survive. It’s really that easy. People that cannot afford to live in a house should not live in that house. Again, it’s really that simple. Forget the $800 billion pork-barreled-up-the-whazoo ‘stimulus’ bill. Taking the tax dollars of those businesses that make prudent decisions and operate with sustainability in mind, and using them to give as a hand out to the irresponsible businesses who either knowingly or ignorantly took blatant risks in the name of short term results is the epitome of inequity. Taking the tax dollars of those homeowners who break their backs and sacrifice everything discretionary in order to pay their mortgage on time every month to spend them on keeping the irresponsible people who bought houses they knew they couldn’t afford, or who would rather spend their income on a new BMW lease, in their houses is unfathomably sickening. Businesses: if you take risks, assume the responsibility for the result. American citizens: if you bought more than you can afford; assume the responsibility for your decisions. The government is not some generous bad parent who rewards blatantly irresponsible behavior by eating the loss so you don’t have to. Unfortunately, that’s exactly what this ‘stimulus plan’ garbage is. It’s also what all these ‘our top priority is keeping people in their houses’ programs are. This is atrocious. Seriously, what kind of message does this send to the youth of our nation? “Do whatever the hell you want son, live far above your means, max out your credit, bet on the long shots, because in the end you will reap the rewards and someone else will cover all the losses.”
Before you start posting enraged comments, obviously there are those businesses that made prudent decisions and are still facing bankruptcy. There are obviously homeowners that didn’t buy above their means, but rather lost their jobs or something similar and are now facing foreclosure. Well, unfortunately there will always be these outlier cases, no matter what the economic environment. What about everyone losing their jobs? We are in a contraction period in the business cycle. No one thinks anything out of tune with the labor market when it’s easier to find a job than your car keys. During times of major economic growth when firms all balloon up their employee base getting a job is quite easy; competition for those positions is not too bad. But when growth turns into contraction, and these same firms proportionately reduce their labor costs everyone is so shocked at the heartlessness of ‘Corporate America’. Only the best candidates get the jobs, all those non-top performers who got hired during the growth phase are no longer sustainable. This is what happens in a downturn. It is exactly the opposite of what happens in an upturn; but no one is paying attention when times are good. I’m going to need to supplement this with a subsequent post outlining the serious problems with the American labor market.
So what about those businesses that didn’t take any risks but are still getting beat down and out? When John Doe opened up his (whatever) business, how would he have known that the economy was about to tank and demand for his (whatever) would seriously decrease or disappear? It is this type of mentality that’s the problem. There is risk involved with starting a business. There is risk involved with operating a business. There is a business cycle; it is well documented. Just because someone is ignorant of history and economics does not mean that they should be excused from the consequences of their actions. Telling the judge, “But how was I supposed to know that in China pedestrians always have the right of way?” will not get you out of Chinese prison for vehicular manslaughter. In economics, just the same as in the judicial system, ignorance of the law is no excuse.
Opening or running a business does not guarantee success. Seeking or getting a job does not guarantee you indefinite employment. Investing your retirement money in a mutual or index fund does not guarantee you positive returns. This is how the world works. If you do not have the foresight to see the downturn coming, and/or have not adequately prepared for the lean years, your business will and should fail. If you are living near, at, or above your means and have not adequately prepared for the lean years, you will and should lose your house and assets. If you are not the most qualified for your job position, and/or are being paid more than the equilibrium wage for that position, you will and should lose your job. I’m not some heartless bourgeois; this is simply the real world, this is reality.
It is only after this reality is realized and accepted that we will stop trying to ‘fix’ the inevitable, with more misappropriated tax dollars which in turn only delay and exaggerate it, and embrace this correction as a much needed consolidation period from which increased efficiency, growth, and prosperity will emerge.
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4 comments:
Mr Louis,
My question to you is in regards to the companies who actually recieve these bailouts. The auto industry for example. American cars have been consistently ranked lower in the fields of fuel efficiency. Why not simply eliminate certain companies, or at least certain brands? Is it merely to protect jobs, which they are eliminating anyway, or is there a greater underlying cause? I apologize if I am not being clear in my question, but as was argued in your post it does not seem justified for these companies to recieve these bailouts simply on the grounds that they were irresponsible. On that note, does the auto industry have a significant role in our current economic standing? Would the country take a turn for the worse without them?
Thank you.
I know there are many repulsive events and situations that do not only offend many citizens including myself, i.e. the infamous Stimulus Package, but how can one simply be so pessimistic in terms of the our securities markets? I know there is speculation that the Stimulus Plan will not help and that adds to this bearish attitude, I partially agree. …And I know the Fed is near 0 with their target rates, yet on the contrary, when pessimists seem to just complain that we are in such a debacle, well, such repercussions that come with what Washington is doing (excluding nationalization and bailing out those who should not be) do take some time. So why can’t people realize that? Can someone please explain without giving me the typical, “Well banks simply do not want to lend,” response? That is absurd too! There is just a more rigorous role of adverse selection! Of course banks want to lend, but over the last decade, the majority of borrowers have been unqualified people, or what I like to think of as the outliers. Therefore, when the appropriate amount of people can borrow, which is far less than what has been established as our norm, again, pessimists say “…But nobody can borrow, this is a credit crisis.” Why isn’t this simply considered a correction in the credit markets? Please, someone criticize.
Back to this Stimulus Plan, of all things it extends unemployment benefits? The entire purpose of the plan is to create growth! Via Jobs! What incentive do people have to get a job when their “being lazy” benefits just got extended? I look very forward to somebody justifying this for me. Or am I right? Is the Obama Administration really anti growth and pro irresponsible fiscal policy? I’ll just leave it at that. However, I would like to merely discuss a situation (albeit there are many situations) in which can create a window that one can see through and find optimism… politics aside, and resume trust in our economy and markets: the Yield Curve.
I have noticed that a 1 year US Treasury Note has, in fact, been increasing. Its yield was near 40 basis points several weeks prior to the Dow Jones Industrial Average’s new six year low. As of February 20, 2009, the 1 year T-Note is yielding roughly 63 basis points. What this fact implies is simply confidence being restored in the markets.
Recently, investors were accepting a near 0% for their capital being tied up in these 1 year T-Notes. I believe this low yield emanated from the fact that there was uncertainty present in the market place, uncertainty that seemed to exist because the most historical Presidential elections were proceeding. With that said, domestic equities have been discounted since the beginning of the Presidential campaigns in case the worse was to come, and arguably, it has come thus continuing the downward momentum in the securities markets. However, what I am arguing is confidence being restored in the marketplace. Everyone now knows that Barrack Obama is President of the United States of America and it is that fact that now creates more clarity in terms of where America is going. That is what investors need. Regardless of new fiscal and economic policies, and again, this Stimulus Plan, America will prosper and the fact that substantial upside is poised can be evident in the 1 year US Treasury Note.
Taking this more in depth, when the yield on the 1 year Treasury Note increases, this happens because the demand for the government security has fallen. Now when demand falls, prices in this case will increase to make again the flight to quality perhaps a bit more attractive. But with the 1 year note increasing, investors are now willing to allocate more funds to equities and not the safer investment. Investors are now more confident because the elections are over… and dozens of other reasons in which I look forward to the Enlightened Economist tackling.
Mr. Taibleson,
Good observation, and excellent question. At this point, I would argue that the only realistic option for the American automakers is to declare bankruptcy and hang up the apron. The reason that these utterly inefficient slugs of under performing companies are being perpetuated is strictly political. "So many jobs!!!" I suggest reading H.W. Daniel's response to The Truth of the Labor Market :
http://enlightenedeconomist.blogspot.com/2009/02/truth-of-labor-market.html
The long term goal of economic prosperity and the short term goal of getting into and retaining political positions are disgustingly incompatible . These companies should absolutely be allowed to fail, and the resultant 'unemployed' people should have to decide whether to cry about it or to use ingenuity and innovation to create jobs for themselves and those around them by creating businesses with actual comparative advantage . The problem is, these people vote . Guess what earns these people's votes the easiest:
"Vote for me and I will encourage you to, and work hard to provide you with the resources to, create prosperity for yourself and your community through hard work and innovation!"
or
"Vote for me and I will not allow your employer to fire you!!! " (Even though this is not in the best interest of the firm or the nation.)
This is the tear-wrenching reality of our current political system. Somehow I think that this is not what our founding fathers had in mind.
Mr. Taibleson, in response to your recent skepticism towards the American auto industry, I wanted to outline a main issue that is playing a dominant role in this auto industry debacle. First, this was your question: “Why not simply eliminate certain companies, or at least certain brands? Is it merely to protect jobs, which they are eliminating anyway, or is there a greater underlying cause?”
…And my answer to you is yes, I believe there is a greater underlying cause. Based on what media sources you periodically listen to, some might refer to the unions as the reason why American automakers are going under or horrible marketing strategies, or even better, some might argue that the wave of the future in terms of the automobile is based out of Japan, or certain European countries and not America. All of those which are arguably true, but with those thoughts aside, how about considering a weak minded Securities and Exchange Commission?
I say that because I believe the SEC, although they do have their purpose, does not promote transparency that is needed for investors to make astute investment decisions. You see, you can find the price to earnings ratio of a company right next to its stock price or even its market cap, yet when it comes to the Projected Benefit Obligations (how much the company pays to its old-timers) or the Fair Value of Plan Assets as of Year End which are key items in determining whether or not a company’s pension plan is over or underfunded, plan on spending a good amount of time in the footnotes of the 10K annual reports, oh… and don’t forget your reading glasses… And when doing the research, when such pension plans are underfunded, that can really start to eat away at a firm’s profits…
That’s the problem with the auto industry, my friend. I believe the pension obligations American automakers owe to their retirees is what’s deteriorating the financials of these companies (Ford and GM more so than Toyota, Honda…). Unfortunately, many investors I believe did not want to take that issue into consideration. Retail and institutional investors could be familiarized, yet such due diligence is not truly embedded in every stock one selects. And when unthinkable surprises surface, the result of that is selling… selling the shares of these American auto companies in an open market thus artificially decreasing share value of the automakers. Add the fact that they produce more supply than there is demand for their cars and trucks, regardless of how cool a Ford pick-up might be, the most pleasant ending is not likely.
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