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I really like the “Rachel Maddow Show.” It’s kind of a guilty pleasure for me. After all, Rachel does for liberals what the people at Fox News do for conservatives – except Rachel doesn’t lie.
One of my favorite parts of the show is “Talk Me Down,” when Rachel brings up a topic she doesn’t understand (or that outrages her) and a guest tries to explain it to her. It’s rare that the guest actually manages to get her talked down.
Well, I need to be talked down about interest rates. Earlier this week, the Federal Reserve lowered one of its most important interest rates to 0.25%. This is supposed to get banks lending money again. I guess the theory is that if banks can borrow money cheaply from the Fed, they will borrow that money and lend it out at a higher rate, also low, so that the economy can get going again.
My problem here? If I were a loan officer in a bank right now, I would be terrified to lend money out to anyone. The news has been full of one well-known corporation after another going into bankruptcy or getting bailed out by the Federal government. Who can I trust to be in good enough financial shape to pay me back any money I lend?
People trusted Lehman Brothers – it had been around for more than a century. People trusted Bernard Madoff – he once ran the Nasdaq and he made money every quarter. People have always trusted Ford Motor Company and General Motors to be blue chip stocks – they were the bedrock of the American economy.
So how does our mythical loan officer trust the real estate developer down the street? How does he trust the local retailer? How does he even trust another bank?
So, in my opinion, giving him cheap money to lend is not going to get him to lend money. In his opinion, the risks far outweigh the rewards.
So how DO we get him to lend money? Simple. We increase the rewards until they are so alluring that he can’t resist.
If I were the local manufacturer, desperate for $20,000 to buy materials, I’d be offering that banker a percentage point higher than anybody else. If I were the car dealer trying to help people buy that fuel-efficient auto, I’d be telling my clients that they’ll have to pay two points higher to get that loan. If I were Ford or GM, I’d be asking the bankers how high I’d have to go to make their mouths water.
Now, if I were the banker and I was getting that money cheap, I’d find those offers even more tempting. But I’d have to hear the offers first, or I wouldn’t borrow the money to lend.
Now talk me down.
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4 comments:
People also trusted Mike Milken. And Studebaker (it had been in business over 100 years when it went belly up in the mid-1960s). And the W.G. Grant Company.
Nobody could believe it when the Pennsylvania Railroad and the New York Central had to merge--and then filed for bankruptcy two years later.
People just seem to lack any kind of perspective on what's going on right now. That's what's causing bankers not to lend. That's what's causing Congress to even consider this bailout (somehow, we forgot that Chrysler got a bailout under Jimmy Carter, too).
In a capitalist system, change is a constant. Yes, some people get hurt when a company goes bankrupt, and an enlightened government can alleviate that pain with job retraining, unemployment benefits, and other programs.
I saw a clip of Michael Moore on YouTube recently where he was ranting about how terrible it was that the automakers were being scrutinized for wanting "only" $34 billion, while money had been given out to the bankers with little oversight. The whole thing showed that Moore has no understanding of economics whatsoever. The automakers' going under may cause some temporary pain, but the destruction of our credit system will cause total financial collapse.
What is different about the examples you give are that they are just one company in an industry that was otherwise fairly sound. (OK, maybe not the railroads.)
Letting an industry fail when so many people and so much other industry depends on it seems a little short-sighted to me. The auto industry's failure would be every bit as devastating to the country as the failure of the financial institutions.
And I agree with Moore that it's unfair that the banks didn't get scrutinized in the way the auto makers have been. But that doesn't mean that I think there should have been no scrutiny of the auto industry.
What do you think of Bush's plan?
As for Chrysler's "bailout" under Jimmy Carter. It consisted of a loan guarantee. Carter persuaded the banks and the Congress to take a chance. Iacoca not only used the loan wisely, he paid it back early. So auto companies can rebound.
But not in three months.
What you're describing of both the Chrysler bailout and the current one for the auto industry is blatant anti-capitalism. It is not the government's role to pick winners and losers in any industry. If the Japanese and the European car makers are building better products--products that people here and abroad want to buy--then American automakers deserve to fail. Failure is part of the capitalist system.
A bailout of the auto industry didn't work in Britain. It won't work here, either, and in my view shouldn't be attempted. If we want to spent $17.4 billion to help the economy, there are better ways of doing it than giving it to firms in an industry that have proven again and again that they cannot compete.
Nobody is asking the government to pick winners and losers. We want ALL the automakers to succeed, at least for a while, so that 3 million people won't be thrown onto the unemployment lines all at once when we're already in a bad recession.
And the Japanese and European car companies are no longer making superior products.
People WERE buying American cars, even after the price of gas went haywire, because there ARE American cars that get good gas milege. (For example, my Dodge Magnum got between 20 and 25 mpg, hardly a "gas guzzler.") Those higher-mpg models just weren't getting the advertizing dollars. As for quality, American cars have been beating foreign cars in the quality sweepstakes for some time. Everyone is out-of-date on those two arguments.
What has put the car companies in jeopardy is the financial meltdown. Banks are afraid to lend money, not only to big companies like Ford and GM, but also to individual people who want to buy cars. There was a recent convention of car dealers in Detroit, where the company (I don't remember which one it was, but I think GM) was told that the dealers had people lined up wanting to buy but they couldn't get financing. How is that the automakers' fault?
The bailout of the auto industry in Britain involved mostly high-end models like Jaguar and Rolls Royce. Furthermore, the bailout there DID involve nationalizing the industry. The Brits learned their lesson and have de-nationalized those companies. Some are doing well; some have been sold to foreign automakers, including, you guessed it, American car companies.
The biggest problem American automakers have is the cost of providing pensions and health insurance for both their current workers and their retirees. If the government would take over those costs, the companies could reduce their prices while still increasing profits. If we let them go bankrupt, their pensions will fall 100% onto the backs of the American taxpayer through a fund set up specially for that. The government can't afford that right now, either.
So take a deep breath and look into the facts of the case a little harder. There are just as many Michael Moores on the right on this issue as there are on the left.
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