Coyote Blog

Well, while I was gone this week, GM asked the government for another $21.6 billion, on top of the $17.4 billion taxpayers handed them just two months ago.   Reading between the lines of GM statements, it is probably not crazy to assume they are burning cash at the rate of $5-$8 billion a month, which means this new infusion would likely get the company only through May or June.  This burn rate should not be surprising, as GM was burning $2.5 billion a month before the recession even really started, and they have really done nothing substantial to restructure the company.  By throwing the company to Congress to help save its managers and equity holders, the company has subjected its restructuring not to hard-headed bondholder representatives in a bankrupcy, but to the vagaries of the political process:

When the president's auto task force meets today to begin trying to fix the broken U.S. auto companies, it must balance dozens of competing demands.

Yeah, I am sure that will go well.  GM can have its money as long as it puts a factory in West Virginia and names it after Robert Byrd. The bondholders are pissed, as well they should be.  The senior debt holders have first claim in a bankruptcy, so another way to look at this political process is that it is the action of all the other constituents of GM (employees, equity holders, managers) who are trying to get Congress to interrupt the typical subordination of interests in a bankruptcy and allow them to get ahead of the senior debt holders in the line for what limited value remains in GM's shell.

I am tired of Keynsians and their assumptions setting the tone of the economic debate.  Here is the question I would ask them:

I understand that you Keynsians think that there are under-employed assets in the country, and that you think the government can redeploy prvate investment capital to more productive use.

Ignoring the individual liberties issues assosiated with this approach, as well as the fact it has never worked in the past, answer me this:  How are we going to turn around the economy by forcing capital to flow to the assets, industries, and management teams that have proven themselves to be the least productive?

We send money preferentially to the industry (autos) that has been showing some of the worst returns on capital in the entire country, and in particular to the company (GM) that has performed the worst in the industry.  If we really wanted to create auto jobs, wouldn't we send the money to the company that has historically invested money the most productively? It would be as if venture capitalists were about to complete their 27th round of financing to keep Pets.com afloat.  I have been in a company that eventually failed and couldn't get new financing.  At the time we were trying to convince the investors that they should give us just one more round, one more chance to prove the thing out.  In retrospect, I am embarrased they funded us as long as they did.  They should have pulled the plug way earlier.  Investors have a saying "your first loss is your best loss."

And don't even get me started on housing.  A deader, less productive investment asset can't possibly be identified.  A million bucks spent on a house produces 30 jobs for 6 months.  A million bucks spent on a factory expansion produces 30 jobs indefinitely.  For years, Democrats have hammered the Republicans over the jobless recovery of this decade, which in fact has shown a fairly unique jobs profile.  I wonder how much of this could be traced to the myriad incentives that were put in place to pour our available capital into these dead assets?  And now, with the bailout and the new mortgage bailout, the government is investing even more money to prop up the value of these non-productive investments.

Apparently, Obama is trumpeting victory because a company that will recieve a lot of the stimulus money will likely hire more people.

President Barack Obama says Caterpillar's chief executive has told him the company will rehire some laid-off workers if the stimulus bill passes.

The heavy equipment maker announced more than 22,000 job cuts last month as it scales back production amid the economic slowdown.

Seriously, do proponents of the stimulus really think that we opponents don't understand that individual projects funded by this new bill will employ people on the project?  I guess they do, because I had this very argument last night.  So, to clarify my position, I fully understand and comprehend that projects that get additional funding in the new bill will likely employ more people on that project than if they had not been funded by the bill.

The issue is that the $800 billion of "stimulus" comes from somewhere, in this case borrowing paid for by future taxes. At any point in time, there is only so much investment capital out there in the world.  So, the real question is not whether Caterpillar will hire more people if the government throws money its way. The real issue is who won't be hired somewhere else because $800 billion of investment capital that was going to be employed for some private purpose is now going to be spent by the government.

For those who are not confused about this, and want to discuss the multiplier, which is another way of asking how the net gains and losses described above balance, there is a good back and forth here.

One thing this country just seems incapable of considering -- it may be that there is simply nothing the government can do to make this recession better.  Everyone, from consumers to lenders, find themselves overleveraged and new spending is simply going to go down for a while until everyone feels comfortable with their reserves.  The only thing Obama has done so far is, by spreading panic, to increase the size of reserve everyone thinks they need (example here, and my analysis here)

Postscript: Obama's actions  of late are kind of funny.  He has been criticized for lacking experience and having only really demonstrated the ability to campaign well.  So, when things get tough and he starts to come in for some here-to-fore unprecedented criticism, he runs back to what he does best - campaign.

Well, it appears that Democrats who were angry at the cost of the Iraq war (a feeling to which I was always sympathetic) are attempting to even the score by spending approximately the same amount in a single bill.

Looking at the stimulus bill was kind of an odd experience for me.  Despite everything I preach here about politicians, I must have, somewhere in my deep back brain, under the onslaught of cultish media attention, absorbed some small hope that maybe perhaps Obama was really different.   Then I looked at the stimulus bill.  It is all the same crap that various folks have been trying to peddle unsuccessfully for years, repackaged in a hurry-up emergency form to avoid close scrutiny.  This is politics as usual, but even more so.  Jeez, this easily could have come from Tip O'Neal.  Everywhere you look in the bill, it smells. And Republicans are almost going to have to go along because they have pissed away any credibility they have by doing the exact same thing under the guise of TARP.

By the way, if you are confused about Keysian stimulus, here it is in a nutshell:  The economy is contracting some as people deleverage from over-spending and an asset bubble.  I mean, that's certainly what we are doing in the Coyote den, setting goals for both de-leveraging the business and our household.  But folks are worried, because while this has happened many times, one of those times we had a depression.  So the government does not want you to deleverage.  It wants you to spend and spend.  But it knows you won't, and that it has not yet accumulated enough power to force you to.  So it will borrow and spend for you.  Government stimulus means that when you are trying to save and reduce debt, government is going to run up debt in your name.

By the way, for those wondering how well this works, the last time we tried it was during the aforementioned depression, and the depression lasted another 8-10 years.