Fail? Bail? Default?

Earthside Comments: The possibility of a default on the debt run-up by the federal government of the United States actually is increasing. We were correct about this debt crisis when we started posting about it years ago ... we hope we are not right about this looming probability.

By the way, this is the kind of information and forecast that a lot of readers of Earthside are not helping us to present.

But put the articles below together; think about what they mean when connected in context. The 'funny money' bailout program is growing larger and larger everyday. The hot topic this week is General Motors -- managerial incompetence, the off-shoring of factories and jobs, and the manufacture of products Americans don't want has driven GM into insolvency. So, the corporate elite want a central government bailout. All we (taxpayers) will get is the hope that millions of auto workers will not end-up on unemployment lines in the next few months. That is a big deal to be sure, but the likelihood is that they will find themselves there sooner or later anyway. Sadly, Obama, Pelosi and the politicians in Washington of both political parties will approve this bailout -- every elected representative is petrified of twenty percent unemployment.

After General Motors (and probably Ford and Chrysler, too) gets its billions and billions of dollars, then what? Will they suddenly be rolling out thousands of electric cars? In time to save the company? Let's be honest -- it is too late. Frankly, it would be better for Congress to pass an auto industry specific, special case bankruptcy bill for the 'big three' -- protect union contracts and pension obligations, then make the companies reorganize, re-negotiate debt, downsize, so on and so forth. The central government, however, should not reward failure -- GM has been so stupid as a business that it deserves to fail. Of course, no one wants massive unemployment, but to behave as if there can magically be no consequences for reckless and irresponsible corporate and government actions is ultimately foolish and will make the coming inevitable crash just that much deeper and worse.

Finally, even Nobel prize winner Paul Krugman is falling for the error of "fighting the last war." Krugman in a blog entry reproduced below, tells us that it will take a 'stimulus package' of at least $600 billion to save us.

Deficit spending to "prime the pump" is what FDR ended-up trying to do in the 1930s and Keynesian economics is how the federal government has battled every recession since WW2.

But, never before has the federal government been $12 Trillion in debt already!

We really need to think through a gigantic 'stimulus' spending package that is going to add trillions of more dollars to the interest and debt owed by the federal government -- that is -- you and me (and our progeny).

The kind of spending and assistance that Krugman would favor undoubtedly will sound great, but we wonder if this isn't using the same strategies to fight this recession that were used in the past ... however, under different circumstances that will render them more hurt than help this time.

Earthside would like to see some more creative thinking about how to deal with all of this debt being piled on top of more debt. Maybe we need some anti-trust action right away. Maybe we need some tariffs to stimulate American manufacturing again. Maybe we need to cut the military budget in half and close down at least half of our overseas bases.

We should all be afraid that spending massive amounts of more borrowed money will turn a 'recession' into a depression ... or leave us with a devastating spate of hyper-inflation.

Link: More US Bail-outs – But Where's the Money Going to Come From? | John Stepek/Money Week

Investors start to worry that the US won't repay its debts

As Randall W Forsyth points out in Barron's, all these bail-outs don't come for free. "What happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the US government itself?"

Forsyth points out that the yield curve is getting steeper. All that means is that the yield on short-term US government bonds is much lower than that on long-term US government bonds. This would normally suggest that investors expect a recovery in the future, as economic growth picks back up again and interest rates start to rise to more normal levels. But at the same time, the cost of insuring the US Treasury's debt via CDS has also risen sharply, which in short, means that investors are getting worried that the US may not be able to repay its debt.

This suggests that investors are demanding a much higher payback on long-term government bonds not because they expect a recovery, but because they suspect that the US government will try to inflate its way out of trouble, or even – unthinkable though it may be - default on its debt.

"All of which," as Forsyth puts it, "suggests America's credit line has its limits."

We may well find out what they are before this crisis is over.

Link: Summer 2009: The US Government Defaults on Its Debt | GEAB

In this 28th edition of the GEAB, LEAP/E2020 has decided to launch a new global systemic crisis alert. Indeed our researchers anticipate that, before next summer 2009, the US government will default and be prevented to pay back its creditors (holders of US Treasury Bonds, of Fanny May and Freddy Mac shares, etc.). Of course such a bankruptcy will provoke some very negative outcome for all USD-denominated asset holders. According to our team, the period that will then begin should be conducive to the setting up of a « new Dollar » to remedy the problem of default and of induced massive capital drain from the US. ... MORE

Link: As US Bailouts Expand, 'Where Do You Stop?' | CNBC.com

The US government could be entering a bottomless pit of bailouts if it starts propping up failing companies outside the financial sector—including the struggling auto industry, economists say.

With both Ford and General Motors coming treacherously close to severe cash shortage, Congress will convene next week to consider emergency aid for the troubled sector.

Many economists are against the idea, saying an auto maker bailout would open the door to a taxpayer rescue of virtually any major company with cash problems.

"Where do you stop?" says Bill Isaac, former chairman of the Federal Deposit Insurance Corp and now managing director at the LECG global consulting firm in Vienna, Va. "Circuit City's going down. Do we help them? What do you do if Starbucks gets in trouble? Do you help them?"

In recent days the government also has stepped in to to assist credit-card company American Express and ramped up its aid to insurer American International Group.

That has raised the issue of why the government is willing to provide help to Wall Street financial firms but not assembly-line workers in Michigan.

There are, in fact, increasing calls for a second economic stimulus package to help consumers and small businesses as well as more help for distressed homeowners.

"At some point you have to say this doesn't make any sense anymore," Isaac says. "I don't know whether we draw that line after General Motors and Ford or before General Motors and Ford. But at some point we have to draw the line." ... More & Video

Link: Pelosi Supports New Help for Ailing US Automakers | Associated Press

House Speaker Nancy Pelosi wants Congress to support a financial bailout for the troubled U.S. auto industry, which is suffering under the weight of poor sales, tight credit and a sputtering economy.

Pelosi, D-Calif., said Tuesday she was confident that lawmakers would consider "emergency and limited financial assistance" for the auto industry under the $700 billion bailout measure that passed Congress in October. She urged the outgoing Bush administration to support a compromise.

"In order to prevent the failure of one or more of the major American automobile manufacturers ... Congress and the Bush administration must take immediate action," Pelosi said. ...

... Lawmakers are expected to take up the issue when they return to the Capitol for a postelection session beginning next week.

Democratic leaders will need to convince some skeptical lawmakers who question whether a bailout would cause changes in the auto industry or simply lead to more handout requests from other industries.

"Once we cross the divide from financial institutions to individual corporations, truly, where would you draw the line?" asked Sen. Jeff Sessions, R-Ala.

Michigan Gov. Jennifer Granholm said Wednesday that the crisis in the auto industry is urgent, arguing that "the national economy rests on this."

"This industry supports one in 10 jobs in the country," Granholm said Wednesday on CBS'"Early Show.""If this industry is allowed to fail, there would be a ripple effect throughout the nation." ...

... Pelosi said any assistance to the industry should include limits on executive compensation, rigorous government review authority and other taxpayer protections.

Her request for legislation came less than a week after General Motors Corp. and Ford Motor Co. posted bleak third-quarter earnings reports. GM, the nation's largest automaker, posted a $2.5 billion quarterly loss Friday and warned that it may run out of money by the end of the year without government aid. ...

... Congress approved legislation in late September to provide $25 billion in loans to domestic automakers and suppliers to upgrade factories to build more fuel-efficient vehicles. But the funding has stalled and supporters of the industry say it will not be sufficient to help the companies with their immediate financial problems.

Executives with GM, Ford and Chrysler LLC and the president of the United Auto Workers union pressed Pelosi and Senate Majority Leader Harry Reid, D-Nev., to provide an immediate $25 billion loan to keep the companies operating and a separate $25 billion to help cover future health care obligations for retirees and their dependents.

Link: FBR Sees Fannie Mae Losing $20-$40 Billion in Next 4 Quarters | Reuters

Fannie Mae, once a mortgage giant, could post losses totaling $20 billion to $40 billion in the next four quarters, as elevated credit costs continue to hurt the company's capital position, an analyst at FBR Capital Markets said.

Rising credit costs and the amount of losses will determine how much capital the U.S. Treasury would have to inject into Fannie Mae, analyst Paul Miller said in a note to clients.

Fannie Mae said on Monday it is losing money so fast it may have to tap government cash to avoid shutting down after the largest source of funding for U.S. homes posted a record $29 billion quarterly loss.

Credit expenses for Fannie Mae also soared to $9.2 billion in the quarter due to deteriorating mortgage credit conditions and as home prices declined. Further losses this quarter may wipe out shareholder equity, which fell to $9.3 billion in the third quarter from $44 billion at the end of 2007.

Link: AmEx Seeks $3.5 Billion From Government | Reuters/Yahoo! News

American Express Co, the No. 4 U.S. credit card issuer, is seeking about $3.5 billion in tax-payer funded capital from the U.S. government, the Wall Street Journal said, citing people familiar with the situation.

It was not clear if the application under the Troubled Asset Relief Program (TARP) came before or after the company got Federal Reserve approval to become a bank-holding company.

American Express has not announced the application, and it is not known how it would use government money, the paper said.

The company won the approval of the Federal Reserve Board to become a bank holding company on Monday.

Link: Stimulus Math (Wonkish) | Paul Krugman/New York Times Blog

... When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

That’s twice what the unreliable rumor says. So if there’s any truth to the rumor, my advice to the powers that be (or more accurately will be in a couple of months) is to think hard – you really, really don’t want to lowball this.

Comments

[Joe]

Bailout or not, I don't think American consumers should just wait on the sidelines. I also have a hard time with the suggestion of tarrifs if that just ultimately means that we are forced to pay more for inefficient American cars. We should make ourselves competitive, and we should do it as consumers by making it clear to the American industry what it is we want. Long term, the American auto industry will only survive if it is able to become the technology leader for cars of the 21st century. Re-brand General Motors into Green Motors. Here's a campaign to put upward pressure on the manufactures themselves. You build them, we'll buy them. http://www.thepoint.com/campaigns/save-general-motors-and-the-planet-at-the-same-time

Give it a read. If you're thinking about buying a car in the next 10 years, join. The point is, we need to not just send letters to the Pelosis and Obamas, but the Wagoners too.