Friday, December 12, 2008

Economic Lynchpins


There are some economists and a lot of Republican senators who will argue that allowing a whole industry to fail is okay. It will be replaced by something else... or somewhere else.

From Cafe Hayek:
Bankruptcy doesn't make assets -- such as factories, machines, contractual options to buy raw materials, workers' skills -- disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout's cheerleaders.

But what if refusal to bail out these firms results in their complete failure? Even then -- especially then -- the case for a bailout crashes. Really big firms such as GM, Ford and Chrysler are really big users of productive inputs, like rubber and steel. Almost all of these inputs have alternative uses and could be used by other firms or in other industries. [comment: in what countries and after how long?]

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can't use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.
Industries that are failing in one country can be replaced by those same industries in other countries or replaced by something else in the same country... that's the theory.
  • Steel here replaced by steel there;
  • textiles here replaced by textiles there;
  • electronics here replaced by electronics there;
  • automobiles here replaced by automobiles there;
  • wealth here replaced by wealth there....
Our economists don't see a connection between government-industry cooperation in other countries and government-industry antagonism here. Those foreign industries are just better run... yah, sure.

As with any system, the parts can be replaced. If you have an inefficient heart, get it replaced. If you have an inefficient kidney, get it replaced. If you have an inefficient brain, get an unemployment check.
In economic theory, there are no lynchpins to any system or economy. What fails gets replaced... and the greater good is served.
Okay, but what happens when the "body" is okay, but there is no food because the agricultural system collapsed worldwide? Go into caloric bankruptcy? That's pretty much what is happening to the automobile industry. Normal credit channels have dried up because of the financial problems worldwide.
Other governments have recognized the need for emergency "food" for their industrial "bodies." Our theorists here insist that the body should starve... maybe the organs can be sold off later.
Maybe there are no "critical" or "lynchpin" business endeavors ... industries... in our economy... or any economy.
If, for example, poppy production fails in Afghanistan, it will be replaced by poppies imported from someplace else... and the Afghanistan economy hummmmmmms along. What do you mean that the other grower might just take over the processed poppy market and leave the Afghans out in the cold?
Likewise, we can simply ask for foreign credit on everything we use. Or perhaps like the wagon wheel and horsewhips, we can replace the auto industry with a new form of transportation... yet to be invented... progress, you know. After awhile, we can replace U.S. money with something else, too.
I'm sure there will soon be more efficient currencies than one backed by trillions of dollars of debt.
I wonder if our economists can tell us how far into the future we can spend and manipulate without actually having to earn anything? I wonder if they can predict who will own America's debt... and tell us, like our wise Republican senators, how our nation must restructure?

Meanwhile, isn't it great that Wall Street and the banks got all of those billions without any sideshow before Congress... no justification or explanation needed... and didn't have to share it with anyone? They get to screw up the economy and industry has to explain why it didn't plan for the screw up!
The Republican Sens. Corker and Shelby would like to see laborers at the automobile firms and suppliers to the automobile firms bear the brunt of the financial institution screw-ups so that banks won't have to use some of that $700 billion to get the economy going again. Of course, Sens. Corker and Shelby have their own states and those foreign assembly plants to protect... factories owned by companies that receive a lot of support and subsidies from foreign governments, too.

Besides, lending to U.S. business is risky, you know?
Maybe the domestic automotive industry isn't a lynchpin. Perhaps that is why it is getting a lynching in Congress.
Do you suppose the French and Chinese and Japanese and Germans are laughing at us now? Why not? It is laughable.
Oh, just one other thought. You know the $25 billion that was revised to $34 billion and somehow reduced to $15 billion? Well, according to Nancy Pelosi, that amounts to 3, 4, and 2 months of U.S. spending in Iraq, respectively.
Hey, Republican senators, why is donating money so good in Iraq and lending money so bad in the U.S.?
Sorry senators, but I say "America first" whether that is a parochial view or not... just like the French and Chinese and Japanese and Germans are saying about their countries and industries... so why aren't you?


The US Treasury signalled it was ready to step in with funds intended to prop up the financial system to prevent the biggest industrial failure in US history.

“Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry,” the Treasury said.



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There is always an easy solution to every human problem—neat, plausible, and wrong.
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“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)