Well, this is a fine kettle of fish for a brand new President. I've been saying for many months now that we faced an economic disaster on parallel with the Great Depression and while I didn't diary specifically on the point I've several times commented that I concur with the opinions of Stoneleigh and Ilargi from The Automatic Earth; Detroit can not stand for a variety of reasons and that it will all come to a head during the witching hour between Obama's election and Bush's final exit.
The election is done, the inauguration is agonizingly distant, General Motors has lost 95% of its value in the eight years Bush has been in office, and as predicted the troubles are going to boil over before the swearing in of our new administration. Not even if we got Alaska, Georgia, and if Lieberman stepped down to "spend less time annoying the Connecticut voters" could anything be done; it's a political problem now, but it doesn't have a political solution.
Misery detailed, beneath the fold ...
This Wall Street Journal article is the latest update on Detroit's situation, as reported in the November 12th Debt Rattle. I'm going to offer a short primer then pull out a few paragraphs for comment.
The credit markets froze up August of 2007 due to a couple of Bear Stearns funds crashing, or more correctly due to their resolution - synthetic investment vehicles such as CDOs were found to be worth a nickel to the dollar. Everyone with a dollar left to loan froze like deer in headlights. This won't come unstuck until the year after everyone comes clean about what sort of worthless crap they've got on their balance sheets.
This is NOT a liquidity crisis. It's a liquidity crisis if I'm out of gas at a service plaza on the Mass pike and all I've got is my lucky 1921 Morgan silver dollar on me. That coin is 90% silver and it's worth a hundred miles in my little sedan, but only if I can find someone to give me an exchangeable form of currency for it. If I had taken it and traded it off for a bunch of monopoly money, which is what everyone who took a "financially innovative investment vehicle" from Wall Street has done, then I'd have a solvency crisis.
If someone worries aloud about inflation you may hit them to ensure you've got their attention, then carefully explain to them that we're in the midst of a massive deflation. Yes, it's The Big One(tm). All of that casino paper out there is still counted as worth something when most of it is nearly useless - we'll experience massive paper wealth destruction as the cleansing of the financial system begins. Do not bring up the price of a gallon of milk the last time you were at the store - it might have been higher, but that isn't a sign of inflation, which is defined as an expansion of the money supply, that is a simple price increase.
So, simply put, we've got a systemic bank mess. That systemic word is key - there isn't going to be any functional bailout, not even if Obama personally cuffs and stuffs Pickpocket Paulson along with Bubbles Bernanke, then does exactly the right thing, because there isn't anywhere left to bail to - the entire economy is compromised by the gambling debts of Wall Street and all politicians can do is pick who loses first, because we're all going to lose in the end.
No debate about General Motors' impending doom - those are their words.
The moves come as General Motors Corp. has warned that it could face a debilitating cash shortage by year's end. On Tuesday, GM stock fell an additional 13%. The Bush administration has balked at expanding the bailout to the stricken auto makers, saying it doesn't have specific authority from Congress to do that.
Obama knows nothing can be done to take the pain away - Detroit will shrink for one simple reason - they aren't going to have customers, due to this systemic finance problem - it got everywhere, remember? Even so, he can't avoid the issue.
Democratic leaders in Congress said Tuesday they will push legislation next week to use the $700 billion Wall Street rescue fund to bail out Detroit auto makers, and President-elect Barack Obama ordered his transition team to look at ways to aid the car industry even before his inauguration.
Right now they're playing chicken - anything acceptable to the UAW is not going to fly with the investors who hold G.M stock, and none of it will work as the customer base is going to shrink to maybe half of what it was. A 50% cutback is devastating to the sector and the American companies are least likely to compete going forward; they build bloated, expensive machines and lack what customers will want. Even if they had the right vehicles and could quickly retune plants to produce them they're stuck, because the margins on a large SUV are higher than the whole cost of a sensible entry level sedan.
To forestall a voter backlash, Obama aides and Ms. Pelosi separately made clear they intend to impose significant conditions on federal aid. Auto makers would have to offer the government equity stakes or warrants, one Obama adviser said, and would have to accept the same rules on executive compensation that financial-service companies have swallowed with the Wall Street rescue.
I hope the heck this paragraph translates into "recognizing the fact that General Motors would have been too large for the debtor in possession financing market even in good times, Obama is steering such a deal using federal dollars." That word "uncontrollable" I think speaks volumes - G.M. needs financing to execute an orderly unwinding of its massive operation down to a sustainable level but there is no sense of them escaping consequences.
The president-elect doesn't want to take office Jan. 20 with the auto industry -- long the backbone of the nation's industry -- in a shambles, according to aides. "He wants to prevent a situation like Lehman, where you flail yourself into an uncontrolled bankruptcy," a senior Obama aide said Tuesday, referring to the sudden and damaging collapse of Lehman Brothers Holdings Inc. "This can't wait until Jan. 20."
Senator Mikulski from Maryland has a gimmick she'd like to offer up for consideration. This is welfare for the banking system, taking revenues from the public coffers and puts them into the hands of those collecting interest. It'll do nothing for demand, which we need to be trimming, not stimulating.
In the Senate, Maryland Democrat Barbara Mikulski is already pushing a proposal not only to help the auto makers directly but also to boost consumer demand for new autos, by making interest on car loans tax deductible. In an interview, the senator said the proposal, which will be unveiled Wednesday, would help manufacturers as well as dealers, and would be temporary.
"I have a real sense of urgency for this," Sen. Mikulski said. "The cost of doing nothing would be horrendous."
George W. Bush just can't help proposing something silly and irrelevant. They'll be gone in just ten short (NOT!) weeks and they won't be missed, now will they?
Mr. Bush and congressional Republicans have strongly opposed those plans, which they contend won't help the economy. Instead, Mr. Bush is pushing for passage of the free-trade agreement with Colombia.
I wish I had a nice, tidy, everyone lives happily ever after scenario here, but it doesn't exist. There will be at least a million jobs lost if Obama manages a Vin Diesel adventure movie style save and if one little thing goes wrong, say some Roadblock Republicans not recognizing the gravity of the situation and doing what they usually do, then we'll see double or triple that number receiving pink slips.
Putting this all in context there are a hundred and forty million total employed in the U.S. and roughly fourteen million of them are in the transportation sector. That group will see an unemployment increase between 10% and 20% in the next ninety days.
(UPDATE:
The secret to the rec list seems to be going to tuck in my girlfriend, snuggling up and falling asleep, then coming back six hours later. This is the second time in the last month that scenario has occurred :-)
Since I'm up here I must put in a plug for Set America Free and their plan to require Detroit to make cars that will take gasoline, ethanol, and methanol - a $100 change in vehicle cost that will free us to use whatever fuel we want. Ethanol and methanol can both be produced locally and renewably; Third Mode Energy, a commercial venture formed by some of the volunteers of the Stranded Wind Initiative, holds patent and have business interests in pushing both of those fuels.
Notice that I'm pointedly not plugging the massively overhyped Pickens Plan. I met him, we had a conference call with his staff, and the lead of that group later got caught being involved in Minnesota robocalls. Lots of unanswered questions about water rights and electric transmission corridors, same dirty tricks as 2004 - We don't need a national T. Boone-doggle.
*sigh* 85,000 more homes are gone into repossession. This has to happen - predictions are we'll see one sixth to one third of all housing going empty as jobs disappear and folks double up. What happens to the Michigan epicenter when a million jobs are cut in short order? Detroit circa 1975 with the Devil's Night fires spreading everywhere?
Here are a few more articles gleaned from The Automatic Earth. Note that the suppliers are union and they're going under, too. This means a bailout of the Pension Benefit Guarantee Corporation is right around the corner.
http://www.bloomberg.com/...
http://ap.google.com/...
http://www.bloomberg.com/...
http://www.reuters.com/...
http://www.telegraph.co.uk/...
http://www.guardian.co.uk/...
http://bloomberg.com/...
I am badly remiss in failing to mention Edwin Black's The Plan, a tidy little book about what do about when we have our next oil shock. Seems like now might be the time to get such things put in place. Edwin is the editor for The Cutting Edge News and he has pretty much given me the run of the Sci-Tech section recently.
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The world energy report is out. I'm afraid to open it. (PDF warning).
IEA World Energy Report
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