Archive for category: Economics

Economics Professor Atrios notices that the housing industry is–predictably–asking for its share of the bailout and points out that it’s probably not a good idea to try to reinflate the housing bubble.

 Department Of Really Bad Ideas

While I’ve been more than a little skeptical about Treasury and Fed shotgunning trillions to their rich friends, there are at least germs of arguments here and there for why some of it may be desirable. But the home builders are serving up an even stinkier shit sandwich!

The builders’ lobby is ramping up its sales pitch for a $250 billion stimulus package called "Fix Housing First," arguing that financial markets won’t recover until home prices stop falling. They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner’s mortgage rate.

REINFLATE THE BUBBLE! REINFLATE THE BUBBLE!

But that’s a problem with bailing out our economy, in general. You can’t bail out the housing industry–at least not in the way they want–because that’ll just encourage the same kind of foolish investments that got us into this problem.

Similarly, though, we need to make sure any auto bridge attempts to shift the profit calculation for manufacturers, because right now, producing gas guzzling behemoths would be the quickest way to pay off federal loans.

And what about the retail industry? While the emails listing tons of retail closings are over-stated, you’ve still got outlets like Ann Taylor and Footlocker and Macys closing stores and crappy chains like Circuit City going into bankruptcy–and that’s before what promises to be a dismal Christmas shopping season. That means that a lot of people who can least afford it–those with minimal education, seniors returning to the workforce, and so on–may lose their jobs. Nevertheless, I sort of regard it as a good thing that people aren’t going to spend $3000 on a fancy new teevee this year–that much money would feed entire families for a year in some developing nations. Eventually, we’re going to need to cushion the losses of the retail sector–but hopefully we don’t do it in such a way that encourages the orgy of conumption we’ve been on in recent years.

Granted, with sound policy decisions, we might be able to help out these struggling sectors while still encouraging sounder consumption choices: Read more →

Flint, by afk

I was talking with mr. emptywheel about what one of the bad–but by no means worst–case scenarios in a GM bankruptcy would be. This scenario is just one of several that might happen–by no means guaranteed, and Congress would fight the scenario at every stage, though with increasingly less leverage. But it is a scenario that follows a great deal of logic about possible outcomes. It is this scenario, though, that explains why both Toyota (I’ve seen reported–looking for the link) and many in Congress want to bailout GM before it gets to bankruptcy.

Here’s the short version: more details below.

1. GM files for Chapter 7 bankruptcy
2. GM’s Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)
3. GM/SAIC starts importing Chinese-made Buicks and Chevys, undercutting Toyota’s cost advantages
4. GM/SAIC owns the Volt technology, requiring US firms to lease it if they wanted to use it

GM Files for Chapter 7 Bankruptcy

As Jonathan Cohn points out, an imminent GM bankruptcy is more likely to be a Chapter 7–total liquidation bankruptcy–rather than a Chapter 11 bankruptcy. That’s for the same reason why GM is begging for cash right now in the first place: no one is lending.

In order to seek so-called Chapter 11 status, a distressed company must find some way to operate while the bankruptcy court keeps creditors at bay. But GM can’t build cars without parts, and it can’t get parts without credit. Chapter 11 companies typically get that sort of credit from something called Debtor-in-Possession (DIP) loans. But the same Wall Street meltdown that has dragged down the economy and GM sales has also dried up the DIP money GM would need to operate.

That’s why many analysts and scholars believe GM would likely end up in Chapter 7 bankruptcy, which would entail total liquidation. 

So if GM goes bankrupt in January, as may happen, it may well have to sell itself off (unless the government guarantees the same kind of financing that it is refusing now). And I believe one company is one of the most likely–and indeed sensible–buyers: Shanghai Automotive Industry Corporation, or SAIC, the Chinese company with which GM partners to do business in that country.

GM’s Chinese partner, SAIC, buys much of GM (Buick, Chevy, Cadillac)

SAIC is, in my opinion, by far the most sophisticated of China’s automobile companies. Read more →