Jon Stewart Eviscerates Rick Santelli of CNBC

This is too funny…and so true. I have to disagree with Jon a bit as I don’t feel we should be bailing out all of the homeowners who bought a house they clearly could not afford. There are those who should be helped but some of the more egregious cases are clearly going to have to be allowed to lose. Same with GM and the banks…but this is just too funny.

Way to go Jon!

Cut Them Loose

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.

Shock Therapy — For More Than Banks

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.