Financial Crisis 101 - 11/11/08

November 12, 2008 2:42:24 PM PST
The federal government has announced a plan to help suffering homeowners and stabilize the real estate market, but already, critics are saying it doesn't go far enough.The plan focuses on Fannie Mae and Freddy Mac, both of which were taken over by the federal government in September. The plan would have the two agencies adjust interest rates and increase the length of repayment plans for eligible mortgage holders. What the plan does not do is reduce the size of the mortgage, even in those cases where the size of a mortgage is larger than the value of a home. Those are cases that can lead to foreclosure when the homeowner simply walks away from the loan. The plan only applies to Freddie and Fannie mortgages, but the government is hoping that private lenders will follow. Said Senator Charles Schumer of New York, "These voluntary plans seem nice, but they don't do the job." Moody's Economy.com forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or distressed sale, and another 1.9 million are projected to lose their homes in 2009.

The American love affair with the car apparently doesn't include General Motors these days. The company's stock plunged another 15% today, that after yesterday's loss of 23% to reach levels not seen since World war Two. G-M announced today it's putting 1900 hourly workers on indefinite layoff starting the first quarter of next year. Of course, this is part of a much bigger story. Should the government bail out the big 3 automakers? Analysts are saying that should G-M, Chrysler or Ford declare bankruptcy, it would cost the American economy 3 million jobs. If the vultures aren't hovering over General Motors yet, they're probably getting the scent. So, isn't a bailout a no brainer? Not so fast. Nothing about the economic crisis is simple, especially government intervention.

We are learning that president-elect Barack Obama urged President Bush during their meeting yesterday to support emergency aid for the big 3 automakers. According to sources, Bush said he might agree to some kind of aid if the Democrats agree to end their opposition to a free trade agreement with Colombia. Officials close to Obama and congressional Democratic leaders say they're not inclined to make that concession. For me, this all begs the question: is there ever a time when politics and horse trading don't figure into the decision making process in Washington. I guess we're not there yet. But before you question the sanity of anyone who doesn't immediately support government emergency aid to the automotive industry, you might recognize that there is another viable point of view. Agree with it or not, an editorial today in the Los Angeles Times raises some thought provoking points, and after all, isn't that why we're all here, to provoke thought?

"The Democratic leadership in Congress and President-elect Barack Obama have hinted about helping Detroit. But before they take that step, they need to consider how GM, Ford Motor Co. and Chrysler reached this point and what position they'll be in after the economy rebounds. Last year, a study by UC Berkeley professor Kenneth E. Train and Brookings Institution economist Clifford Winston noted that U.S. automakers have been on a downward slide since 1970, with their share of the domestic car market falling from 86% in 1970 to 42% in 2005. In other words, their slippage started too long ago and has continued too steadily to have been caused by the factors cited over the years by Detroit, including healthcare costs, pension obligations, unfavorable exchange rates and, most recently, burdensome fuel-economy standards. The best explanation for the declining popularity of the Big Three's cars and trucks is that they haven't kept pace with other brands in the features consumers value the most. It's worth noting that many of those competing cars were made by U.S. workers at U.S. factories -- the ones owned by Toyota, Honda, BMW and other foreign firms. Some of the Big Three's supporters have called for higher barriers to imported cars -- a move that could help free-trading partners Mexico and Canada but would be of limited benefit to Detroit. A 25% tariff on imported light trucks didn't stop U.S. automakers from losing more than 20% of their market share, according to the study by Train and Winston.

Advocates for the Big Three say that bankruptcy, which would allow them to restructure more aggressively and shift huge pension costs onto the taxpayers, is not an option because it could wipe out any remaining loyalty to their brands. A $50-billion loan to the automakers, however, isn't likely to bring about the changes the notoriously insular companies and their unions have resisted for three decades, especially if the companies continue under the same management. Before putting taxpayers on the hook for billions in aid, policymakers need to ask Detroit for change they can believe in."

It's interesting to find signs that the economy is suffering in places you wouldn't ordinarily think off. How about the concession case at your favorite movie theatre? Carmike Cinemas operates 250 theatres in the U.S. and it reports that admission revenue dropped by 7.4 per cent in the 3rd quarter. But revenue from concessions dropped by 8.3%. That means that movie goers at Carmike theatres are buying less popcorn and candy. If buying habits at the candy counter are an indicator of consumer confidence, or lack thereof, these numbers are not encouraging. Call it the Gummy Bear economy.

Jim Gardner


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