Financial Crisis 101

PHILADELPHIA - November 10, 2008 - How about watching Penn State get knocked out of the chase for the national championship, and 24 hours later, seeing the Eagles fall to the Giants because they couldn't pick up a yard on 4th down? Obviously, that wasn't the only reason, but it is one of the lasting images. Watching last night would have caused me to pull my hair out if I weren't hoarding every strand. And isn't that the tender trap of sports? It allows us to become even more upset with what should be a diversion from everyday life than with the problems of everyday life.

The stock market tried to hold onto a decent start this morning, but couldn't overcome the death spiral of General Motors for most of the day. G-M was down 23% at mid-day. The Dow recouped about 100 points in the last hour to finish down 64 points.

So, we have officially arrived at the moment when we can ask, "Is what's good for General Motors bad for the country?" Well, not just General Motors, but Chrysler and Ford too. Momentum seems to be building for a government bailout of the Big 3 automakers. Last week, G-M reported that it's almost run out of cash having spent 6.9 billion of it during a disastrous 3rd quarter during which it lost an adjusted 4.2 billion dollars. G-M says it may not have enough cash on hand to operate by the middle of next year. Chrysler lost less last quarter, but spent even more cash. Detroit executives told Congress last week that if one or more of their companies go under, it could mean 3 million lost jobs throughout the economy.

So what's the government to do? Should it free up TARP money for crippled companies outside the financial sector, and if so, where does it stop? Congressional Democratic leaders Pelosi and Reid seem ready and willing to come to the rescue. And during his first news conference last week, President-elect Obama made a point of saying how important a healthy automotive industry is to the economy. Over the weekend, Obama's Chief of Staff, Rahm Emanuel, told ABC News that Obama had instructed his economic advisers to "look at different options of what it takes to help bridge the auto industry so they are a part not only of the revived economy, but part of an energy policy going forward." Of course, just as there is discord over the government bailout of the financial services industry, there are those who think the Big 3 are the least deserving victims of the economic crisis. From

"The auto industry allowed itself to get into this predicament by fighting against every attempt to improve the fuel economy of its fleets. Instead, the industry was intent on producing the biggest, most impractical, least fuel-efficient vehicles it could," said Joan Claybrook, president of Public Citizen.

"Each year, automakers raised the level of ridiculousness even higher, turning out an even larger version of last year's fuel-guzzling sports utility vehicle or light truck," Claybrook said.

Claybrook said DOE should not provide loans to upgrade plants that produce performance vehicles.

"Producing a more fuel-efficient, luxury sports car is akin to providing an alcoholic light beer. It makes no sense," she said.

"The federal government is giving automakers a chance to save themselves," Claybrook said. "In return, the industry has a responsibility to the public - one it can fulfill by not forcing more of these unsafe, gas-guzzling SUVs and light trucks on the American motorist."

Then there was this stunning report today. Deutsche Bank has put a target price of $0 on its shares to sell of G-M. Just think about that. One of the most important banks in the world thinks General Motors is worthless. There will undoubtedly be some kind of package of loans coming to Detroit from Washington. One would think there will be some strings attached. With 3 million jobs at stake, the strings better connected to the right ideas.

China has announced a huge government stimulus package that will see 586 billion dollars spent mainly on infrastructure projects over a period of two years, but also including tax reform and farm subsidies. Now China's current gross domestic product is about 9%. The U-S real GDP for the 3rd quarter went down 0.3%, and we're still debating a stimulus package. Scott Tong of Marketplace makes a very interesting point today. The Chinese government gets anxious when the GDP falls below 8% because of the threat of social instability. The Communist government has to keep producing an immense number of jobs for the people moving from the countryside to the cities. Well, $586 billion dollars should help. Of course, it should also help the international companies supplying all the materials and equipment the Chinese will need to build all those roads, bridges, hospitals, and schools.

So what about a stimulus plan for the U.S? President-elect Obama has made it the first priority of his administration post January 20th if one to his liking is not approved before that. We do know it will be nowhere the size of China's. The question is, how big will it be, and what will it contain. Will there be New Deal type infrastructure projects for the 21st century? I'm always interested in what young people are thinking, and this gives me a chance to give a little exposure to their educated opinions. There was an editorial in the University of Pittsburgh newspaper, The Pitt News, this morning supporting infrastructure spending as a good stimulus plan for our economy. For proponents of the idea, it states the case well.

"President-elect Barack Obama has pledged to bring change to Washington, but he might end up emulating Franklin Roosevelt in his plan for how to bring the economy out of recession.

The idea of public works projects brings to mind images of workers from the 1930s toiling to build dams, bridges and other infrastructure in order to provide jobs and counteract the Great Depression. But Obama supports infrastructure spending and could make it a central part of a stimulus package Democrats are expected to bring before Congress later this month.

Many experts ridicule infrastructure spending for being too slow and time-consuming to counteract the effects of an economic crisis, and they argue instead for stimulus checks and bailout packages that give money out as it's needed.

They also criticize the slow turnaround on public works spending, citing the fact that large public projects take years of planning and development — time when nobody benefits from the project.

Some also worry that these projects could lead to an increase in pork-barrel spending, wasting money that could go to other projects or more direct stimulus instead.

Obama could be onto something with this plan, though. Despite criticism, infrastructure and public works spending could be key to pulling the United States out of the current recession, especially now that it looks like it could go on for far longer than many estimates predicted.

Public works projects are slower than direct stimulus packages. Building a bridge takes longer than signing a check, and thus it takes longer for the economy as a whole to benefit from these projects. Instead of an extra stimulus check, these projects simply provide the same wages any other job would, which necessarily reduces how fast people will spend it.

But what's different about infrastructure spending is the added benefit it provides outside of economic stimulus. It helps people directly in the form of repairs or public benefits, like by providing repairs to public schools and office buildings or performing necessary upkeep for crumbling bridges and water systems.

Public works projects can provide beneficial urban renewal and more efficient infrastructure systems, and the benefits of these projects endure for years longer than the quick fix of stimulus checks. Even after the work is done, the project itself still remains and gives a tangible benefit to anyone who uses it.

For instance, Pittsburgh's "Three Sisters" bridges - the Roberto Clemente, Andy Warhol and Rachel Carson bridges - were built between 1924 and 1928 by the Allegheny County Department of Public Works and are still a crucial part of transportation in the city today.

Residents of Allegheny County recognized the benefits of public works spending last Tuesday, as they voted in favor of a referendum allowing the state to incur $400,000 of extra debt for the construction and upkeep of water and sewer systems.

These projects create more long-term benefits than stimulus checks and also provide needed jobs.

They are simply a more attractive and socially conscious way to improve the economy and the well-being of American citizens. Hopefully Congress sees it the same way."

By the way, it appears that women are more susceptible to stress from the economy than men. At least that's what the American Psychological Association says. The APA conducted a survey and found that 84% of women expressed anxiety about the economy, compared to 75% of men. An official with the APA explained that some women are more in touch with their feelings and are more willing to express themselves about those feelings. The survey also suggested that the economic crisis can cause more stress if you're the one primarily responsible for caring for children and older relatives. I thought this might spark some interesting dinner table conversation.

Jim Gardner

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