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I recently came across an MSN article that was published recently on how a bill is currently winding its way through the halls of Congress that is essentially a “cash for clunkers” concept to encourage Americans to trade in their old vehicles and buy new ones. The general concept, on the whole, is not bad — American car buyers will get rid of their old, gas-guzzling vehicles and buy more fuel efficient (and hopefully less polluting) cars to replace them. The upshot is that theoretically America’s car fleet will, on the whole, go up in fuel efficiency which means that our gas consumption should, theoretically, go down and therefore our reliance on oil will, theoretically, go down.

On pure face value this is absolutely a “good thing”. However, the way the government is approaching this (and how the interests in Congress are shaping this bill) worries me. The government will offer consumers a $4500 voucher if the vehicle that they purchase gets 10 miles per gallon (mpg) more than the vehicle they are scrapping. If the new vehicle only gets 4 to 9 mpg more then the old one then the voucher is only worth $3500. And that’s just for cars. For light trucks the mileage gain would only have to be 5 mpg and 2 mpg for the respective vouchers.

Ok, yes, it’s an incentive (just like the incentive that sales tax on new vehicles purchased this year between February 17, 2009 and the end of the year will be deductible on your income taxes next year). The idea is to spur the American consumer to go out and “shop” (sound familiar?) and spend money they may not even have on a big ticket item (i.e. durable goods). In theory, Americans buy vehicles, old gas guzzlers are scrapped, car sales — which are about as anemic as they come — are boosted, and the automakers get a bit of a reprieve from the recession.

The problem is that this is money that the American government doesn’t have. Yes, we could just print more money and, voila!, we’ll have the money for this program. But to do so we must tread carefully. We are already seeing the effects of printing more money as the value of the U.S. dollar is declining with respect to other currencies. Other governments are becoming increasingly concerned about their investments (i.e. U.S. Treasury Notes) in the United States and may slow down or stop buying them altogether. With increased dollar circulation we are diluting the value of the dollar and driving inflation. This is what happened in the mid- to late-late 70s and early 80s and it took the Fed quite a bit of time to take enough dollars out of circulation to help stem the tide.

Now, don’t get me wrong, I understand the concept of deficit spending in order to help pull us out of this economic deep dive but I tend to be a fiscal conservative in my overall outlook. Yes, in my opinion, we need to spend on health care and on infrastructure but I see this bill as another congressional way of throwing a lifeline to the auto industry when already two out of the “Big 3” (i.e. G.M. and Chrysler) have already received a huge amount of bailout money and have both declared bankruptcy. The difference here is that this is something that Washington doesn’t have to do. Already the auto makers are doing an enormous amount to try and spur sagging sales. I recently traded in my 1997 Nissan Maxima for a 2009 Toyota Prius because Toyota was offering 0% financing on 2009 Toyota Prius models (the car that just 8 months ago dealers couldn’t even keep on the lots because they were such a hot item). I did it without a government voucher and got a great deal.

There were many other great offers from Toyota as well…I just happened to be in the market for a Prius. And that’s where this bill won’t do much. In the article “Cash in on your gas guzzler” on MSN Catherine Holahan notes

Even if it passes as now written, the bill might not affect sales much. In a recent Kelley Blue Book survey, nearly 40% of car buyers said that the bill wouldn’t spur them to purchase a new vehicle. Only 13% of survey respondents said that they would be “highly motivated” to buy a new car, if the bill passed.

(Holahan, Catherine, “Cash for your gas guzzler“, MSN, May 19, 2009)

And as for environmental impact — in the current form of this bill (it was originally calling for vouchers for new vehicles that “got at least 28 mpg and new SUVs that saw 23 mpg or more.” (Holahan, Catherine, “Cash for your gas guzzler“, MSN, May 19, 2009)) this bill will do little since it has been watered down.

“This will not benefit the environment, but it will help sell a new pickup truck,” said Ann Mesnikoff, the director of green transportation with the Sierra Club, the nation’s largest environmental protection group. “They are trying to make it possible to sell anything under this bill.”

(Holahan, Catherine, “Cash for your gas guzzler“, MSN, May 19, 2009)

The clear winners in this bill are the auto dealers and the auto manufacturers (which is not a bad thing for the auto dealers given the way that G.M. and Chrysler will be cutting thousands of them off in their bankruptcy proceedings). Even the aftermarket parts industry will lose (and so will many Americans who cannot or choose not to buy a new car at this time) as the parts from older vehicles that typically get refurbished and reconditioned for replacement parts are destined for the scrap heap under this bill. Repairing older cars will become more expensive as parts become scarce. The clear losers in this bill are the American taxpayers — both present and future who will have to pay back this additional debt.

I’ve thought about it quite a bit and I’m about to do an about face…but I think it’s time for Congress and the Obama administration to cut GM and Chrysler off from the government dole. It’s not an easy decision as I know that it will affect thousands of people but I think it’s time for the government to say “enough.” Both GM and Chrysler received about $17 billion back in December and now come back to the government and are asking for another $20 billion. Where does it stop? When will they do what is really needed of them — massive restructuring, renegotiation of union contracts, eliminating top management — when?

If the Obama administration gives them this new round of money what does the American taxpayer get in return? While I haven’t finished looking over GM’s restructuring plan (also available here) it’s already being criticized by GM’s bond holders. According to the Wall Street Journal

A group representing General Motors Corp. bondholders fears that the auto maker’s latest restructuring plan fails to address all the challenges facing the company and doesn’t cut costs enough in light of the deteriorating economy, a person familiar with the bond negotiations said Wednesday.

(“Bondholders Say GM’s Plan Fails to Tackle Issues”, The Wall Street Journal, February 19, 2009)

If General Motors and Chrysler can’t come up with plans that will bring them back to profitability within a reasonable time frame then they will simply become another welfare recipient like the banks currently are. As John Stoll of The Wall Street Journal noted, Senator Richard Shelby of Alabama argued, after receiving the plans from GM and Chrysler, “The focus of the restructuring process should be to make these companies self-sufficient, not to increase their dependence on taxpayer money.” (Stoll, John, D. “Sen. Shelby Says GM, Chrysler Viability Plans ‘Fall Far Short’”, The Wall Street Journal, February 19, 2009). The best course for these companies may well be bankruptcy protection under Chapter 11…and this may well apply to some of the banks as well.

It’s time that the government do what it needs to do to truly head off this continuing downward spiral. If that means nationalizing the banks in order to sort out the healthy from the weak — mirroring the Swedish model of the past — then that’s what needs to be done. If that means cutting GM and Chrysler off and letting them sort their problems themselves then that’s what needs to be done. We cannot continue to subsidize these failing entities, propping them up. If we do so then we will not have the money available to invest in other startups to take their place or in other industries like green energy.

Personally I like Tom Friedman‘s approach in his opinion piece this morning “Start Up the Risk-Takers”.

You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors’ upside and keep 80 percent for themselves.

(Friedman, Tom, “Start Up the Risk-Takers”, The New York Times, February 21, 2009)

This is exactly the approach we need. We need to stop keeping dead corporations on a lifeline simply because they claim that their demise will “would cost more than keeping them on life support” (Friedman, Tom, “Start Up the Risk-Takers”, The New York Times, February 21, 2009). The same approach can be applied to the banks…sift through the wreckage, find the ones that are viable, and cut the rest of them loose (either by forcing them to merge with the healthier ones or by simply dissolving them shutting them down). As it is we are headed down our own “lost decade” as Japan did in the ’90s.

As for stemming the tide of foreclosures…it galls me to no end that I am being asked to pay to help people keep homes that they had no business buying in the first place. To that end I would recommend that the Obama administration look at the cases on an individual basis. As with the banks, those homeowners who have a chance to actually survive and pay their mortgages, the government should offer the mortgage holder an incentive to restructure the mortgage so that the homeowner can succeed. For those who haven’t got a chance…they’ll have to lose the house. As cruel as it sounds, the fact is we cannot reward bad behavior by people who had no business buying a house that they had no chance of honestly affording.

In his opinion piece in today’s New York Times, “Time for (Self) Shock Therapy“, Tom Friedman argues that when President-elect Obama takes office he should gather the heads of the top 300 banks in the U.S. and set out a course of action of “shock therapy.” The President-elect should tell the bankers that the economic mess began with them and their lax lending standards and is prolonged by them by the fact that they are now unwilling to lend at all. He envisions the new President telling the bankers

Those of you who are insolvent, we will nationalize and shut down. We will auction off your viable assets and will hold the toxic ones in a government reconstruction fund and sell them later when the market rebounds. Those of you who are weak will be merged. And those of you who are strong will receive added capital for your balance sheets, after you write down all your remaining toxic waste. I am not going to continue rewarding the losers and dimwits amongst you with handouts.

(Friedman, Thomas, “”Time for (Self) Shock Therapy“, The New York Times, January 18th 2009)

I agree with Tom on this matter, but I would argue that the “shock therapy” should extend beyond just the banks but out to American businesses in general. Consider that Circuit City just announced that because it could not restructure its debt and because it failed to find a buyer for the company that it was forced to completely liquidate all of its remaining stores and go down the Chapter 7 bankruptcy path. Add another 34,000 jobs lost. Two out of three of the major American automobile manufacturers, GM and Chrysler, have secured $17.4 billion in loans from the federal government to help them through 2009 (“Feds give GM, Chrysler $17.4B bailout“, The Detroit News, December 26, 2008 ). Retail sales fell 2.8% during this past holiday season according to the National Retail Federation (“Store sales fell 2.8% during the holiday, National Retail Federation says“, InternetRetailer.com, January 14th 2009).

This is not just about banks (although they certainly do provide much of the impetus for the current economic trouble). It’s also about a failure of American business to be competitive in a global landscape (in the case of GM and Chrysler — and to a lesser extent Ford) as well as the belief that we can continue to spend and spend as though tomorrow will never come and the bill will be due. As Americans we must refocus our perspective. We cannot continue to live with the idea that we should buy just for the sake of buying. As Anna Quindlen noted in her Newsweek piece “Why Stuff Is Not Salvation”

“I looked into my closet the other day and thought, why did I buy all this stuff?” one friend said recently. A person in the United States replaces a cell phone every 16 months, not because the cell phone is old, but because it is oldish. My mother used to complain that the Christmas toys were grubby and forgotten by Easter. (I didn’t even really like dolls, especially dolls who introduced themselves to you over and over again when you pulled the ring in their necks.) Now much of the country is made up of people with the acquisition habits of a 7-year-old, desire untethered from need, or the ability to pay. The result is a booming business in those free-standing storage facilities, where junk goes to linger in a persistent vegetative state, somewhere between eBay and the dump.

(Quindlen, Anna, “Why Stuff Is Not Salvation“, Newsweek, December 13, 2008 )

Americans must re-learn how to save money, to invest wisely (no more of these “get-rich-quick” schemes), how to make thoughtful decisions (fortunately, we will soon have a President who appears to be thoughtful in his decision making) and how to lead once more. This will not be an easy transition and it will require some tough choices, but we as Americans can do it but more importantly, we must do it.

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