GM Would Not Disappear–Even if Bankrupt

Many people really do not understand what bankrupcy means.  Bankrupcy means that an entity does not have enough money to continue to pay its debts, and files for protection under bankruptcy law.  It seems like airlines go bankrupt every few years.  Kmart went bankrupt.  Texico went bankrupt.

If General Motors files for bankruptcy protection it does not mean that it will totally disappear.  The dealerships will not vaporize.  The assembly lines will not vanish into thin air.  The company will go into a harsh restructuring and emerge as a company the can *hopefully* actually make some money. Because as it is run now, it would have to be bailed out indefinitely because it cannot make any money!! This is way different than AIG, Fannie, Bear, WaMu, and Wachovia.  If the financial system explodes, like a real total collapse, the world as we know it would be over.  (In the Great Depression the unemployment was 25%, and we donʻt have a farm economy anymore to help absorb labor anymore!)

If GM goes into bankruptcy, they renegotiate their union deals, layoff a bunch more people, plunge forward with the Volt, and hope to emerge as a new company.  Face it–people will get laid-off by GM whether or not they get a bailout.  A bailout would just extend the inefficiency, bleeding and pain.  The incompetence over the last 20 years of GM management would be paid for by the US taxpayer.  This is not cyclical.  They suck.

Some commentary I liked.

No-Risk Capitalism

The argument.

Exhibit A.

Chavez Gives Shout-Out To Prez Bush

Hugo Chavez, the socialist leader of Venezuela, gave a shout-out to President Bush during the last episode of huge government interventions in the market.

I thought it was worth a post.

Obama is not a Socialist

Today’s absolutely essential Democracy Now! details the similarities of Obama and McCain’s approach to the bailout, Obama’s Wall Street-friendly economic leanings, the difference between “debt nationalization” and socialism, and what will be an increasing pressure to look at actual socialist solutions as the risk of industry collapse, particularly the auto industry, increases. 

A must listen!

Finally! Capital!

The banks have always needed capital, not liquidity.  And now it seems like the treasury is prepared to invest directly in the banks.

As brief as I can be:

Banks hold lots of assets (like deposits).  They then use these assets to make loans, providing the vital financial lube.  Banks can usually lend out 10 times their assets without any problem (notice how bank runs are so terrifying to an economy).  This crisis came about because banks had billions in mortgage backed assets.  When home prices declined, the assets declined in value.  Banks still had the same amount of outstanding loans, but with lower assets.  (Investment banks like Bear and Lehman had like 35 times more debt than assets)  The way to rectify the situation is for the bank to raise money, and return to a good loan-to-asset balance.  Banks raise money by selling new stock.  This hurts current shareholders by diluting their ownership share, and has been highly resisted, but it is the only way to get banks the capital footing they need.

If they won’t do it on their own, maybe they will be forced to.  This power of the treasury, to invest directly in banks, was one of the ones added to bailout after it went around the second time.

Renewable tax Credit Stuck into Bailout Bill

A revised bailout package passed both chambers of congress, and stuck into the bill before voting was an extension to the renewable energy tax credit.  I blogged about this earlier, and I really believe that the renewable infrastructure boom will be Americas saving grace over the next 15 years.  Extending the tax credit could prove to be as important as the bailout package.

McCain Hasn’t Even Read the Bailout Plan

John McCain says that for the good of the country, they should stop campaigning and return to Washington to help address the financial turmoil.

First a few point I found as I poked around the internets:

• Senate Democratic Leader Harry Reid doesn’t want them to come back to Washington, because they will be a distraction.
• McCain has skipped more votes than everyone but the guy with brain cancer. (tip to Huffington)
• McCain said that in regards to the three-page bailout plan, “I have not had a chance to see it in writing.”  So…uh….you haven’t read it yet, Mr. McCain?  Three pages?  Really?

And seriously, what the hell is McCain going to add to the proposal?  Well I hope he doesn’t add much because the economy is fundementally sound.

Current Event Analysis & Summary: a post of posts

Two recent posts from my favorite economics blog.

Why Paulson is Wrong[PDF] A short essay about how the proposed depressed asset bailout is bad for everyone but the bailout-ees and ignores established procedure.  (link to the Freakonomics post)

Two professors on the recent financial uphevals An easy to read assesment of the recent hubabaloo in the financial world.

Marc B is AGAINST the bailout.