GM and Consuming Less

Earthside Comments: The inclusion of the three articles here is enough to make you want smack the wall with your are fist.

First is the analysis by Al Lewis of what it is General Motors CEO Rick Wagnor thinks of himself ... leaving us to understand that Wagnor believes that we are all idiots. Unfortunately, it sounds like the Dimocrats are hell bent to side with Wagnor.

This despite the fact that average Americans are under enough economic strain that retail spending is tanking. That means that necessities are not being purchased, let alone the 'extras' that keep so much of the economy functioning.

Lastly, an explanation of the debt hole you and GM and the federal government is in.

What is so frustrating and angering is that the 'powers that be' are completely oriented towards their fellow elites -- cutting your taxes now is not on the lame duck table, nor is sending you are part of the $700 billion bailout package being discussed.

But as much as you would like to, don't damage the wall with your fist ... the cost of plaster for repairs is going through the roof.

Link: GM Chief Sings Same Old Wrong | Al Lewis/Denver Post

A government bailout of General Motors Corp. is an all-American vote of confidence in CEO Rick Wagoner.

"What the industry needs now is the most competent, most experienced, most capable leadership team they can have at each of the companies," Wagoner said in video interview with Automotive News on Monday. "And I think we have a great team at GM."

This great team led the industry with a 45 percent plunge in October car sales.

GM's stock recently hit a level not seen since 1943, a decade before Wagoner was born. And soon taxpayers may be forced to cover the $2 billion a month GM is guzzling like a rusting fleet of Chevy Suburbans.

So Wagoner — despite his clean- shaven face, neatly parted hair and self-professed greatness — was asked whether he should consider resigning.

"The issue hasn't come up, and I expect it wouldn't come up," Wagoner said, even though the issue had just come up in the interview.

And then Wagoner declared that U.S. taxpayers should trust him best to run GM.
"Any support we get is going to be based on the fact . . . that it's a good investment on the part of the taxpayer," Wagoner said. "That the business will actually be better in the future. And one of the key aspects of that is to make sure you have the strongest possible leadership in the company."

Wagoner has said he's willing to accept limits on golden parachutes and even executive compensation. But getting rid of him? "It's not clear to me what purpose would be served."

Hmm. Now there's a puzzler.

Let's go back. Way, way back. To seven weeks ago, when Wagoner appeared certain his perennial turnaround efforts were finally complete, despite whatever rocks an avalanching economy might dump on the road ahead.

"GM is here to stay," he declared, announcing a new 4-cylinder engine plant in Flint, Mich., on Sept. 25. "And today we celebrate the latest evidence."

A few weeks earlier, on Aug. 18, Wagoner was on PBS's Charlie Rose Show, boasting of a $26 billion liquidity position that would carry GM through at least 2009.

"We believe, under conservative market scenarios . . . we're good through '09," he told Rose. "And we've got capability to work beyond that. . . .

"At this point, I think the message I would like to leave you with here is GM is here to stay. . . .

"We've put together plans based on conservative industry, economic and market forecasts, conservative oil prices," he continued. "And under those scenarios that we look at, the answer is GM is going to be around and healthy and robust."

Can a CEO this wrong be trusted with shareholders' money, let alone taxpayers' money? What's wrong with a basic bankruptcy reorganization?

In a Nov. 7 interview with Fox Business News, Wagoner said consumers will simply stop buying GM cars if the automaker files Chapter 11.

"We would not be talking about reorganization," he said. "We would be talking about a liquidation. It would be a catastrophe."

But millions of U.S. consumers have filed bankruptcy themselves. Perhaps they would understand. After all, they spend money at bankrupt phone companies, bankrupt retailers and bankrupt airlines. Right?

"Sure," Wagoner conceded in the Fox interview. "So they buy a $300 ticket and use it three days from now. It's quite a bit different from paying $25,000 and planning on getting service and support for the car you just purchased for the next five to 10 years."

So I guess if GM is forced to file bankruptcy, its CEO has already put consumers on alert that he doesn't expect them to buy his cars.

Even if they are great cars.

Back to the Nov. 10 Automotive News interview:

"People will say, 'Well, boy, you can't do great cars,' " Wagoner said. "People who say that today are just not looking at the facts. They're not looking at Chevy Malibus or Cadillac CTSs or other products."

I hate when an entire market is wrong.

"Let's be honest," Wagoner said. "This industry is running at 11 million units today (as opposed to the 14 million Wagoner had expected), not because the OEMs (manufacturers) all of a sudden began to deliver poor products. We're running at 11 million units because the credit system in the country has failed. . . .

"It seems a little silly to use problems that come as a result of the credit crisis as an excuse to wipe out, really, the most important industry in the country."
Not to mention a great management team.

So for these reasons Wagoner wants another big piece of the American Pie. But maybe we should play him a verse from the song, "Drove my Chevy to the levee, but the levee was dry."

Link: Consumers Cut Back Sharply on Spending | Associated Press/Yahoo! News

Consumers, taking a beating from the worst financial crisis in seven decades, cut back sharply on their spending in October, pushing retail sales down by a record amount. As President George W. Bush and other world leaders gathered for a weekend summit to search for ways out of the mess, Federal Reserve Chairman Ben Bernanke hinted at another interest rate cut.

Bernanke said financial markets remain under "severe strain" in a speech to a central banking conference in Frankfurt, Germany. He pledged to continue working with other countries to deal with the crisis and left open the door to a fresh interest rate cut to help brace the sinking U.S. economy.

The Commerce Department reported Friday that retail sales fell by 2.8 percent last month, the biggest drop on record, surpassing the old mark of a 2.65 percent plunge in November 2001 that occurred after the terrorist attacks.

The October sales decline was led by a huge fall in auto purchases, but sales of all types of products suffered as consumers, worried about their jobs and the market turbulence, cut back sharply on spending.

The dismal report on retail sales was worse than the 2 percent decline that analysts expected. It marked the fourth straight decrease, the longest stretch of weakness on record.

Retailers are braced for what could be the worst holiday shopping season in decades with economists forecasting a recession that could turn out to be the steepest since the 1981-82 downturn.

A survey of the nation's big chain retail stores found that retailers suffered through the weakest October in at least 39 years even though they tried to gin up more sales by a frenzied round of price cutting.

Elsewhere Friday, three mayors pressed the federal government to use a portion of the $700 billion financial bailout plan to help large U.S. cities with pension costs, infrastructure investment and cash-flow problems stemming from the global financial crisis.

Philadelphia Mayor Michael Nutter traveled to Washington to deliver a letter to Treasury Secretary Henry Paulson. The letter is signed by Nutter, Atlanta Mayor Shirley Franklin and Phoenix Mayor Phil Gordon. A day earlier, the nation's governors promoted a federal spending plan that could total $126 billion in added dollars for Medicaid, highway construction and job training.

Amid the dismal economic news, Bush is hosting a leaders' summit of the Group of 20, which includes not only the world's wealthiest nations but also major developing countries such as Russia, China, Brazil and India. The G-20 leaders are meeting in Washington for two days of talks that will wrap up Saturday.

Bush on Thursday defended his administration's response to the financial crisis, which has included massive amounts of government assistance to banks and outright government takeovers of the country's biggest mortgage finance companies.
"I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown," Bush said in a speech in New York.

He put forward a list of modest reform proposals including making accounting rules more transparent but stopped well short of the global market regulator being sought by some European nations.

Paulson said he expected the meeting would address some important issues raised by the crisis, such as how credit-rating agencies failed to properly assess risks and how to develop better ways to monitor complex financial instruments known as derivatives, including credit default swaps.

It would be wrong if other nations engage in a finger-pointing game that would lay blame for the current troubles on lax regulation in the United States, Paulson said, adding there were problems in a number of other countries.

Paulson on Wednesday announced that the administration was abandoning what had once been the centerpiece of the $700 billion rescue program — the purchase of troubled assets held by banks. Instead, the program will focus $250 billion in purchase of bank stock, with Paulson arguing that this was a quicker way to get money into the banking system to encourage banks to resume more normal lending.

Paulson said the administration was examining new uses of the bailout money that would try to relieve pressures that have developed in the financial market that supports consumer loans such as credit card debt, auto loans and student loans. These loans are packaged together as securities and sold to investors, but after the huge losses for mortgage-backed securities, investors have grown leery of buying other types of consumer debt.

In a series of interviews on Thursday, Paulson provided new details of how the new program might work. He said that Treasury was exploring a joint program with the Federal Reserve that would seek to make financing of these types of loans more available. The new lending facility might buy securities backed by credit cards, auto loans or student loans in an effort to get this market back to more normal operations.
Paulson said that while the $700 billion rescue program is continuing to undergo modifications, it is proving to be a successful at its overall objective of stabilizing the financial system.

"I believe the banking system has been stabilized," he said in an interview on National Public Radio. "No one is asking themselves anymore is there some institution that might fail and that we would not be able to do anything about it."

In addition to news that jobless claims jumped sharply last week, the Treasury Department reported that the budget deficit for October soared to a record $237.2 billion, putting it on track to reach the once-unfathomable sum of $1 trillion for the year.

The flood of red ink was blamed on the initial costs of the bailout effort which spent $115 billion buying stock in the country's largest banks.

"And as bad as these numbers are, they may look good a year from now because things are going to get much worse," said Sung Won Sohn, an economist at the Smith School of Business at California State University, Channel Islands.

He predicted that the recession would drive unemployment higher, cutting into government tax revenue, and boosting payments for such programs as unemployment benefits and food stamps.

Link: Debt Trap | Doug Noland/Asia Times

The economy lost 651,000 jobs in three months. Auto sales have collapsed, and retail sales have fallen off a cliff. And there is at this point little indication that credit availability will normalize anytime soon for household, corporate or municipal borrowers. While the extraordinary efforts by the Fed and global central bankers have loosened the clogged-up inter-bank lending market, risk markets remain hopelessly paralyzed. The unfolding collapse of the leveraged speculating community continues to overhanging the marketplace. Securitization markets are still essentially closed for business.

We can continue to analyze developments in the context of two overarching themes: First, there is the implosion of contemporary "Wall Street finance". Second, the bursting of the credit bubble has initiated what will be an arduous and protracted economic adjustment. Each week provides additional confirmation of the interplay between the breakdown of Wall Street risk intermediation and the bursting of the US bubble economy. This process has gained overwhelming momentum.

I know some analysts are anticipating an eventual return to "normalcy". The thought is that it is only a matter of time before "shock and awe" policymaking and trillions of newly created liquidity entice investors and speculators back into risk assets. This view is too optimistic, and history offers an especially poor guide in this respect. By and large, the unprecedented growth in Federal Reserve and global central bank balance sheets is (scarcely) accommodating de-leveraging. Between the hedge funds, global "proprietary trading" and other leveraged speculators, it is not unreasonable to contemplate an overhang of (prospective forced and deliberate sales) of upwards of US$10 trillion.

It's popular to label Federal Reserve operations as a massive effort to "print money". Yet it is important to recognize that, at least to this point, the expansion of the Fed assets (Fed credit) is counterbalanced by the collapsing balance sheets of leveraged financial operators. The inflationary effects - the increased purchasing power created by the expansion of credit - occurred back when the original loan was made, securitized, and leveraged by, say, a hedge fund. Today's ballooning central bank holdings (and TARP spending) may very well stem financial system implosion. This is, however, a far cry from engendering a meaningful increase in either the market's appetite for risk assets or the expansion of new system credit in the real economy.

I don't want to imply that unprecedented monetary policy measures aren't having an impact. Overnight lending rates (Libor) were quoted at 0.33% today, down from a spike to almost 7.00% in late September. And at 2.29%, three-month Libor has dropped from early October's 4.82%. Other measures of systemic risk and liquidity premiums (including the 2- and 10-year dollar swap spreads) have dropped dramatically over the past month.

The problem is that the unclogging of inter-bank and money markets has had little effect on the pricing and availability of credit for the vast majority of borrowers operating throughout the real economy. After ending September at about 650, junk bond spreads have surged to 950 basis points. Investment-grade bond spreads are also higher today than at the end of the third quarter. Benchmark mortgage backed security spreads have changed little, while Jumbo mortgage borrowing rates remain elevated. Risk premiums for municipal borrowings have been reduced only somewhat from extreme levels. Unsound borrowers everywhere have little hope of borrowing anywhere.

There are complaints out of Washington that, despite oodles of bailout funding, the banks are refusing to lend. Well, total bank credit has expanded $575 billions over the past 10 weeks, or 32% annualized. Importantly, the asset-backed securities (ABS), collateralized debt obligations (CDO) and securitization markets generally remain closed for new business.

The heart of the matter is not so much that banks are refusing to extend credit but that the entire mechanism of Wall Street risk intermediation has collapsed. After ballooning into multi-trillion dollar avenues for credit expansion, intermediation through the ABS and CDO markets is basically over. The convertible bond market has also badly malfunctioned, along with the "private-label" MBS marketplace. Wall Street's auction-rate securities have ceased as a mechanism for credit expansion, along with myriad other avenues for securitization. And, importantly, derivatives markets, having evolved into an essential element of contemporary risk intermediation and credit expansion, have suffered a devastating crisis of confidence. Scores of leveraged strategies are no longer viable. Indeed, monetary processes essential for funding broad cross-sections of the economy have completely broken down. ... MORE