Should we bailout the auto industry?

During the Q&A time after a presentation I gave today, a number of people asked if we will/should bail out the auto industry. For brevity, I was unable to give the following sound answer.

I first cited Richard Nixon when hearing that a company was too big to fail responded, "Tell it to get smaller."

The estimates are slightly over 1 million US jobs are directly tied to the auto industry. Some say as much as 3 million when you count things like stores in auto manufacturing based areas. Yes, this is a serious issue. And yes, if the government does not bail them out, our economy will have some serious consequences. But this is not why I believe we should let them fail.

Instead I view the behavior of many large companies as emotionally unhealthy. Consequently, we need to view them in light of counseling principles.

Codependent people (those that live off of others) need an enabler to survive. And like any 4 year old, codependents constantly test any boundaries to see if the person is serious. When the enabler allows the codependent person to cross an established boundary, the codependent person instinctively pushes farther next time. This will continue until the codependent is forced to experience the full consequences for their own actions--sort of.

The sad truth is that when consistently negative behavior continually results in consistently tolerable results, behavior modification occurs. So if/when a first experience of negative consequences happens it is not viewed as a wake up call, but an anomaly. So they will try the negative behavior again. (i.e. Michael Milken, Savings and Loan, Long-Term Capital, etc.)

This is counseling/psychology 101. Sadly the lesson that good parents teach 4 year olds has escaped all of the most influential people in our capitalist and governmental structures. I know that bailing them out will only produce a bigger crisis later than whatever this one is now. I am not nearly as afraid of the pain today as I am of two times as much pain later.
Aaron

Why Australia has Avoided the Sub-prime Crisis...

So credit agencies are watching their tales and attempting to reposition themselves as objective thinkers. The following is the last statement I think they would make if it were not true.

“…the Australian banks benefit from strong asset quality, sound capital positions, and good earnings profiles, which are partly due to the country's relatively favorable economic environment. Moreover, we expect the Australian economy to grow further, albeit at a slower rate. In addition, Australian ADIs have limited exposures to U.S. subprime loans and associated complex structured transactions, and major offshore financial institutions affected by the loss of global investor confidence.”
-Standard and Poor’s October 13, 2008

So how did Australia avoid this? Was the whole country sleeping during the global gluttony of the past few years? In order to participate in the subprime disaster, financial institutions, and end investors would have had to buy these repackaged assets. Without someone willing to buy them, risky loans cannot be made.

This new reality of the true risk is feeding the current credit crisis in America. Credit card companies can't get people to buy bonds covering credit card balances. Does America finally have a healthy fear of the ability to get our money back?

Similarly, if Australian institutions did not lend to overtly risky debtors then garbage debt (sorry, I mean "CDO's") would not exist for purchase. In large measure Australian banks and individuals did lend. Here is a link to from the Australian regulatory authority website of a real-life Australian subprime situation from the 1990's.

John and Lynette Longstaff

--Almost Pollyanna. In hindsight, don't we wish American institutions were forced to care about the public similarly?

Notice the financial product was not the issue. The advice was inappropriate.

Subprime mortgages repackaged into CDO's should not be illegal. They were simply misrepresented through conflicted advice as a conservative investment. Hiding conflicts in financial instruments with fine print and confusing acronyms can never be prevented by regulation.

So how can this new found wisdom benefit you today?

• Educate yourself on how the Australian structure actually works. See "Getting Advice." and other helpful information at http://www.asic.gov.au/.
• Just because US law does not provide for objective financial planning, you can demand it from your financial professional. If they are unwilling, you will at least know how important your financial success is in relation to theirs.

As a service to the public, point out this obvious long-term solution to your legislators. In the past too much money was taken from clients by financial institutions to protect their interests in Washington. With widespread failures and financial industry lobbying viewed like GM's private jets, this is the first time in 80 years elected officials might listen to the public instead of conflicted institutions. Australia for its part has campaigned for widespread global adoption of their regulations to the International Monetary Fund (IMF) and the United Nations. If the IMF were to look in the mirror, maybe they would take personal responsibility for allowing this crisis by not adopting and advocating for Australia's structure.

As final illustration here is a link to a telling video satire on how Australia justifiably views the United States. Very worth while to watch.

Clarke and Dawe

Aaron

What's the real problem?

So all assets of all kinds are in a free-fall. Never to this extreme have stocks, bonds (conservative and aggressive), real estate, property (both commercial and residential), and commodities all taken it on the chin. Looking critically at this conundrum may give us insight into the root problem.

I.O.U.S.A. is available online!

Everyone needs to watch the 30 minute summary of this movie, and I mean EVERYONE...

Yes some parts seem to take a few partisan shots, but the information is factual backed up by organizations on both sides of the aisle.

Could fragility of money make this worse?

Presuming that the economic environment is not as tenuous as that of 1929 (which I think is a BIG presumption), a larger and more critical risk-factor exists today, and that is cash on hand.

To get to the core issue, I am speaking of a household's ability to cover the bottom of Maslow's pyramid if everything fell apart, or gave the appearance it might. In the early 1990's households had over $4,000 (inflation adjusted) on hand (or in checking/savings accounts) to cover bills should the worst happen to them. In the early 50's they had about $185. Today households have just over $1,000. So not quite as good as the early 90's but not as bad as the 50's right?

--WRONG... Why? You don't need an econ degree or research to figure this out. Yet instead of relying on common sense, I have done the research for you...

In the early 50's, the average household had around $300 of total debt. In the early 90's just over $30,000. Today the average household has over $128,000 of debt.

So the ratio of cash to debt declines from 65% in the 50's to less than 1% today. Why is this important? Two reasons:
1) If a household loses their income (or thinks they might), the amount of cash they need to eat and keep their house is much greater today.
2) If there were a perception of a run on banks, the fragility is much greater today.

Going into the Great Depression, people had cash in their wallets--they didn't use plastic. If today's plastic line of credit stopped working many people would be hungry in just a few days. Also in the Great Depresssion, the US was a more agriculturally based economy. Many households didn't need money because they grew and canned their own food.

So even if we make the presumption that our economy is healthier, systemic issues may promote situations that would otherwise not exist.

It is not illegal to yell fire at a movie shown outdoors at a park, but is illegal in a traditional theater. Why? Because the limitation of escape routes prompts panic that creates danger even if a fire does not exist. So the danger to our economy is not only that a fire may exist, but that people may think a fire exists with fewer escape routes and create mass hysteria.

If you think humans are more rational, realize that October 30th was the 70th anniversary of The War of the Worlds.
Aaron