I’m reading about the big three car maker bailouts and I’m not sure whether I want to laugh or cry. I think I’m leaning towards crying. I understand that car makers circulate significant money through the US economy. My question is: aren’t there a lot of businesses doing the same thing?
Are we going to see T.G.I. Fridays asking for a bailout next? Aren’t they hit hard by the falling stock prices and the economy? It’s pretty clear to me that people are going out to eat less. Why else would every restaurant want to save me money? If T.G.I. Fridays goes under, cooks and waiters will be out of business. Companies that supply Fridays with food will lose business. Surely Friday’s is deserving of some money, right?
Let’s take it to another level of absurdity. One of the first things that companies cut in the rough times is advertising. This blog is supported entirely by advertising. If there’s no advertising, I make no money. If I have no money, I don’t spend it on restaurants and other things. So, due to the poor economy should I get some bailout money? Wait a second, that’s what the economic stimulus packages amount too, isn’t it?
Maybe I’m just not very smart, but it seems like this just moves money around the United States. It doesn’t seem to bring in new outside money. The Red Sox had general manager named Lou Gorman once. Whenever he couldn’t make a trade to bring in a great player, he’d say, “You can’t rob Peter to pay Paul.” By this he meant that you always had to trade something of value to get something of value. So with these bail outs, aren’t we simply robbing a nation of tax-paying Peters to pay a few car-making Pauls? Perhaps we should focus on tourism so that we bring in dollars from external sources.
I (and I’m not the only one) have a problem with people getting a break when they make irresponsible decisions. I think it sets a bad example for one. However, I also feel that I should be able to get the similar breaks if I need them – especially if I can show that I’m making smart decisions.
So how do you feel about these bailouts? Is there an end in sight? Where does the line get drawn?
Hey, you got it right about the money just circulating. It’s like your blood, when the blood stops circulating then the organism dies. Even if you have all the blood you need it can’t be static.
That’s really what the credit crunch is: Money stopped moving. These bailouts are attempts at getting money moving again. In the economy when money stops the money supply shrinks as well because lots of money is created through loans.
People with money need to lend it and spend it. Highly leveraged businesses are screwed if they can’t get loans anymore nor can they raise equity. They’re just out of cash. All businesses get their money either from shares or from loans, or if they’re small, from the profits. All those are very hard to come by right now.
This is going to be an incredibly unpopular opinion …
but perhaps it is time for the domestic automakers to sell the companies to a more efficient competitior – get some value for the brand name when they have the chance.
I struggle to place the automaker problems squarely on the recession. These companies have been bleeding red ink for years … it just doesn’t seem that their business model is viable.
Regarding advertising – one of the current thoughts is that you should maintain or increase your advertising in a bad economy. If your competitors are cutting on advertising, it could be a golden opportunity for you to grow your market share.
I’m not going to get into the whole bailout thing, but I just wanted to highlight what kosmo said. These companies have been bleeding for years. Even back in 2005, when the economy was relatively strong, GM alone lost what, over $10 billion? It isn’t like 2008 came and the automakers said, “oh crap, last year we were making billions, and suddenly we’re losing billions!” This has been going on for years.
So the notion that a couple billion dollars in a loan will magically turn your company around when he’s been failing for many years is completely absurd. The amount of money GM would get from this “bailout” is probably as much money as they lose in a quarter. So what is that really going to do? Help them pay their bills for an extra 3 months before realizing they are again out of money?
You just can’t throw money at this type of problem and expect it to work miracles. It might keep people in their jobs for a little longer, but they are still going to be producing the same products, paying almost the same in labor, and making less money per vehicle sold than their competitors.
That’s why the only thing that will work is a reorganization that could come through a bankruptcy. They need to change how they do business, not simply receive a few bucks in hopes they can reverse a few decades of mismanagement and inflated wages and benefits.
I agree with you: We need to bring in new money. The bailouts are just a massive band-aid that won’t really solve our problems in the long run. We can export technology, services, ideas and more. Plus, we can make ourselves welcoming to tourists.
Anyway, the bailouts are frustrating because it gives people incentive to just keep doing things the same old way.
Amber Weinberg says
AAAHHHHH!!!! Sorry. That’s how the government is making me feel. How stupid are they? I agree with Dav Ramsey, Phil Valentine, and others who say the recession is all in our heads. I STILL can’t get into Opry Mills, I just paid $20 for 1 hour parking at Opryland Hotel to look at Christmas lights and they were PACKED on a Monday night! Walmart….you can’t get through a line in less than 30 minutes. I think the economy is just deflating back to where it’s supposed to be….I mean $600,000 for a 400 square foot house in California? I’m glad prices are dropping because it’s gotten ridiculous. Domestic automakers are failing? GOOD their products are horrible, and maybe now they’ll wisen up and start making cars that actually run. My design business has slowed a bit for the holidays, but I’m not in Washington begging for a bailout. (Hey the economy of Weinberg will fail if you don’t give me $600 billion dollars!) When will America wake up, stop going into debt, stop expecting the government and us taxpayers to foot their bills instead of getting a job, and stop asking for handouts. What will happen when the Chinese decide to finally call our bills due? Will somebody give America a bailout? LOL Sorry for the rant but I’m so tired of hearing this junk on the news.
Word on the street is that Homebuilders are going to be asking for bailouts next.
Eventually the government is going to bailout so many corporations that in the end it will be the government needing bailing out.
Lazy Man says
I agree with you that it’s good to keep money circulating, but that’s not the big issue here. It’s that people and businesses have simply been piling on the credit for years and years. That’s not sustainable and we are realizing it now.
One of the problems with a “credit crunch” is that any business will die. Say my business is to buy $1,000,000 worth of goods from a supplier, he gives me 30 days to pay, I sell the goods for $1,050,000 — paying the supplier back, paying $30K for rent and sales-people and ads, and earning $20K at the end of a month for myself. A typical store, maybe like the size of a pharmacy or grocery store.
If I can’t get the 30 days worth of credit then my business is done. There will be a vacancy, several people unemployed, etc.
This will also hit my supplier because they didn’t give me credit terms likely because they are tight on their own working capital. Supplier folds too if not for the same reasons as me, at least because I folded and couldn’t buy his goods.
The business exists because of credit. There would be no way to run that business without credit unless you started tiny and saved up for a gazillion years … I’m talking like 20 years or something.
It’s why America has big stores and cheap stuff while countries with no good credit system have kiosks and tiny shops.
Lazy Man says
I agree with that scenario Goalhunter.
I see a different problem that’s summed up by Kosmo and Jeremy above. The car makers just weren’t making enough profit on their 1,000,000 (to use your nice round number) to have left over money at the end of the month. They’ve been losing money for years now. In the past, it’s not a problem because they just hit up a bank for a new loan. That doesn’t work now for two reasons: 1) the one you pointed out, frozen credit and 2) you just can’t keep getting loans on loans to sustain your business. At some point you have to make a profit.
The bailouts don’t really fix anything because the government has to recoup the money for the bailouts somehow. It can either raise taxes, which will cause people to be less able to buy cars (i.e. that doesn’t work). It can try to print more money, which causes the dollar to lose value which is all sorts of bad for America. The other option is to bring in new money from other countries. This “fixes” the issue as it has no drawback for Americans.
Mr. ToughMoneyLove says
My problem with the bailouts is that there are no clear standards as to who is and who is not deserving. It’s more a matter of who has the most political clout. As for advertising, I agree that in a down economy, businesses should be doing more, not less, but for gosh sakes, businesses need to quit talking about the bad economy in their advertising. Rebuilding confidence is the key to recovery and wallowing in pity is not constructive.
And I agree with you Lazyman that US car makers have a pretty poor business model.
I’ve always wondered how a huge company like a GM or some airlines or some telecoms can lose money almost in perpetuity. But I’ve been too lazy to investigate. Maybe one of your commenters can say.
The economy for the most part should fluctuate. It is the job of the government to avoid unnatural or overly emphasized fluctuations. Most people don’t understand that there has to be recessions and growth. I think throwing good money at bad has always been one of the worst decisions you could make with money for a business or for a country.
As you know, I’m all about easy. And the easy (and best course of action) thing to do is to let these companies try to stick it out on their own. The strongest will survive, lean and mean, and ready to make a huge come back when the cycle circles back. The others will be sold off, file for bankrupcy, but that’s what happens to underperforming companies in any type of market condition. If you want to spend money, pay people to fix our roads and invest in education. This will have a far greater return.
I think I’m inspired to write a post about this now…
Pumping up the money supply should melt a credit freeze. The Fed chairman faces huge obstacles
in trying to restart the credit engine and get maxed out consumers spending again. Given the
scale of the Fed’s interventions, it should be weakening the value of the dollar and setting
us on a course toward inflation. Inflation happens when prices rise. Deflation happens when
they fall. In this December’s dark economy, falling prices for gasoline, cars, and clothes and
just about anything would seem like a silver lining.
Writer's Coin says
I was pretty firm on my opinion about all this: let them declare bankruptcy just like the airlines have done. Maybe then they’ll learn their lesson. Then I read this article by Ben Stein and he pulled all the right strings because now I’m rethinking it…
East Side Food Geek says
The thing that makes the Big Three different than, say, TGIFriday’s is scale. If TGI Friday’s went out of business tomorrow, it would hurt some people, but not enough to affect the larger economy.
If, on the other hand, Friday’s, MacDonald’s, Wendy’s, Burger King, Arby’s, Chili’s and all the other major chains went under, even though there would be a lot of restaurants left, it would impact the economy enough to create a domino effect, and that could be disastrous.
The Big Three don’t deserve a bailout, but the portion of the economy they represent needs a bandaid until the damage can be rectified.
Yeah, they’ll be back wanting more, and yeah, they’ll misuse every penny they can get away with. (I’m from Michigan. We know how adept the Big Three are at taking local governments for every penny they can.) But that just means there has to be serious oversight.
Matt - SF says
For some reason, I flashed back to the old UBS Evening News scene where Howard Beale shouts “I’m mad as h**l, and I’m not going to take this anymore!”.
I’ve been somewhat vocal on the subject matter, and I’ve asked this question:
Ask a line worker at a Honda or Toyota plant (U.S. based) if his/her tax dollars should go to bailing out the Big Three.
Lazy Man says
Yes, T.G.I. Fridays was just an example of a number of any sit-down restaurants that could line-up for a bailout.
I think fast food places are doing well as people are choosing those lower cost options.
Fit Wallet says
Actually, to compare you asking for bailout money to the automakers, you’d have to stop posting anything useful or interesting–THEN ask for money. Likewise, TGI Friday’s would have to make really mediocre food that nobody wanted to eat–THEN ask for a taxpayer subsidy. This is essentially what the auto industry is doing. I don’t care if GM is as American as apple pie. The times have changed, and this is a dying industry. Why do we keep taking out the shock paddles to revive it at taxpayers’ expense? Ugh!
I hate the bailouts, there’s no end in sight, and the government doesn’t have a clue what this strange line thing people talk about even is.
I said it before, and I still say it, and I’ll go on saying it – let the economy sort itself out. I think the bailouts are just prolonging the problem. They’re propping up failing businesses. Are those businesses really going to recover and come back strong? Probably not. Even if they do, we’re likely better off with some other company that was able to stay solvent or at least afloat. Why do we want to keep companies that make stupid business decisions like sub prime loans around?
“TGI Friday’s would have to make really mediocre food that nobody wanted to eat”
done and done!
Lazy Man says
If anyone has any spare TGI Friday gift certificates they don’t want, they can send them to me.
I dont really like it but i think it is the lesser of 2 evils pay billions now or trillions later because of the ripple effect of them failing.
I think the cars guys are just hoping they can hold on long enough for the turn around
LazyMan..The other option is to bring in new money from other countries. This “fixes” the issue as it has no drawback for Americans.
I intersted in this do you mean barrow, and from what countries?
Lazy Man says
I guess I just don’t see where it ends, where the line is drawn in the sand. The problems with the car makers pre-date this economic downturn.
I don’t mean borrowing from other countries. When you do that, you create more debt and interest on top of that debt. It’s going in the opposite direction.
I mean Americans should come up with ways to bring foreign dollars to the US. An example is tourism. If we can somehow boost people from other countries to come to the US and say visit the Statue of Liberty (just a random example) they buy goods and products from people in the US. That’s money that wasn’t in the US that now is.
I think we will have to fix our world image and since 9/11 not so easy to get in country, or worth the trouble to other countries.
Lazy Man says
I haven’t tried to get here from another country without iron-clad credentials (military ID, passport, drivers license, etc…)
I know that I went though a bit of trouble to go Australia and Thailand, so I’m not convinced there are barriers to entry for those that are willing to work within the guidelines.
I am so disgusted with the whole auto thing – it seems to me that they figure they are absolutely necessary to the economy, and that the government will be FORCED to bail them out over and over again due to the sheer numbers of people directly or indirectly employed by them.
They think it shouldn’t matter that the vastly over-paid CEO’s make stupid/bad decisions, and that their unions make outrageously greedy and ludicrous demands (it seems to me that they no longer know what to ask for so their demands are now over-the-top) What happened to previous bailout monies given to these companies – they just keep coming back with their hands out over and over, and I deeply resent the fact that they seem to think they are entitled, and should be recession-proof. I, like many others, am also facing lay-off or even completely losing my job – where is my (small business)company’s hand-out??? I would be willing to take a pay cut to keep my job if necessary – something the unions seem reluctant to consider. GET REAL – and maybe even get rid of the too-powerful greedy unions -perhaps they have outlived their usefulness and now are just a big part of the problem!!!
Again, a little late, here is a rant….If we are to assume that we are a Capitalist nation, then we defer to the belief that the weak die off and the strong survive. Let those that cannot survive go under and from the ashes, the phoenix will resurrect itself. There will be the companies that have the dollars to buy up these “lost souls” and make themselves a stronger company or a VC firm could go in with a potential investor/owner and form some new conglomorate that will be run at a profit. The jobs have already gone away and this would allow for new jobs to be created WITHOUT a bailout. Let the system run its course. Somebody should go back and read Adam Smith’s “Wealth of Nations” or at least take a beginning business course!