As long as the Banks and Auto industries are in denial, the worst is still ahead. The financial institutions cannot move ahead and will keep ripping off the taxpayers if Congress does not wake up and realize that they are the real culprits. Based on Greenspan’s advice along with Summer and Geithner, they made the fatal mistake of not regulating derivatives, the root cause of the current fiscal fiasco. Congress can’t keep rewarding the Foxes that have raided the hen house with absolutely no strings attached continuing to reward these crooks.
If Congress had passed a Federal gas tax comparable to what the Europeans have (that is used for infrastructure and education), the American Auto industry would produce fuel efficient cars, and not what many Americans think they deserve .
If Detroit is gone, who will produce the Limos if Ford and Lincoln no longer exist? The financial institutions will continue to be unstable and not command the trust of the American people until they take the hit and the legal responsibility of selling to unsuspecting buyers all over the world an enormous pile of toxic crap valued in the trillions backed by ‘default swaps’ of insolvent insurance companies.
“Is the worst still to come for both the auto and banking industries?”
I think, Paul, you answer your own question when you write “But this stopgap measure is just the beginning of what will probably be a major restructuring of the industry. So it’s not surprising that the initial auto euphoria quickly waned.”
Your quote from Peter Sorrentino, senior portfolio manager with Huntington Asset Advisors in Cincinnati, also helps to explain the problem:
“There will be a slow realization that consumers are tapped out and will have to retrench. We have the capacity to build more than 18 million autos a year but we probably only need little more than 10 million.”
So the it might not get materially worse, but will IMO last a long time. The banks will continue to have problems just like the Big 3.
I think Americans and Canadians will still buy cars from the ‘domestics”. But the volume will be way, way down, for a long, long time. Let’s just hope that with all these “bridge loans” — and many more will be needed — that we don’t end up finding out that the bridge is just TOO LONG to cross — given that the loans we realistically can hope to make are limited in number and amount.
Why does the problem exist?
It’s called Aggregate Demand.
This demand, which represents overall demand for goods and services, at a macro level, was artificially boosted by the FED and by other factors over the first 7 years of this century, and even prior to that time. That allowed all of society to expend money we did not really have.
The overall demand (“Aggregate Demand”) was artificially stimulated with our Broken Money System operated IMO by a broken FED, and by other Central Banks around the world. The model is broken and it badly needs an overall overhaul.
That model also forced up asset prices, housing included, that are now reverting back to mean — that is, they are dropping back to the historical trend line. Unfortunately, the debts built up to buy those price-inflated goods are not dropping back. They are fixed in value.
In a sense, the FED, much like Bernard Madoff, was and still is, operating a Ponzi Scheme. The only difference between the FED and Madoff is that the FED has a modern invention called the printing press which it can use to print new money from thin air — Madoff only wishes he had such a wonderful modern contraption in his back office.
To “fix” the problem caused by the Greenspan FED, the new Bernanke FED is writing the same prescription to “cure” the patient, that in large measure caused the disease in the FIRST place.
This morning’s Late Edition with Wolf Blitzer on CNN was very instructive. The transcript can be found at http://transcripts.cnn.com/TRANSCRIPTS/0812/21/le.01.html
There is a lot of fighting going on in the Congress and yet no one seems to want to address the roots of the problem — the causes that have brought us to this “credit crunch”. It seems to me that if we don’t look at those base causes, there is not much hope of solving anything meaningful. All it seems to do is to put everyone at everyone else’s throat.
For example, Republican Rep (Virginia) Cantor states: “We’ve got to modernize our system. But one thing we must be careful of — we don’t want to stamp out the need for America to continue to have the most innovative, entrepreneurial industry in the world.
“Because that’s, frankly, what has allowed us to grow to this point, until, frankly, in September, the bottom fell out, and we’ve been in a real difficult time since then.”
I would like to ask Congressman Eric Cantor just what EXACTLY does he think caused the ‘bottom to fall out’?
Was it just lack of regulation?
Or was it too much of a good thing — easy money that nobody objected to when the going was good? Now that the chickens have come home to roost, we prefer to blame lack of regulation? What’s that all about?
Sometimes, the FED can do just TOO much Social Engineering, in hopes of avoiding a recession. If only we had been allowed the puny recession of 2001-2002. What could we have avoided?
Former Clinton White House economic adviser Laura Tyson says: “I agree that what we need to do is to stimulate demand. You can do that in two ways. You can do that by tax cuts that help households. You can do that with foreclosure relief that help households. You can do it with business tax relief for small businesses. You can also do it, though, by spending money, the government spending money, the multiplier effect.”
But what if we can no longer “stimulate demand”. What if the consumer is really tapped out, as Peter Sorrentino states in Paul’s article?
Then won’t this deficit spending by government just crowd out whatever worthwhile borrowing and spending there is to do in the private sector, which presumably reflects some real demand, instead of that artificially-created from the public sector? Won’t we needlessly burden future generations with more useless debt? Won’t we be courting serious price inflation down the road?
In effect, for consumers who would prefer to be (over the next few years) repairing their own balance sheets, isn’t the government on their behalf causing those balance sheets (in net terms) to go into even worse disrepair?
Even if credit conditions have tightened, who is to say that they have not gone back to some norm, that was heretofore, considered normal?
Why do we need to go back to artificially-induced aggregate demand? What would that solve? It was not, ultimately, sustainable. Why should it become sustainable now, all of a sudden?
And who is so wise, as to know at any one point what the NLOAD = Natural Level of Aggregate Demand is? If we cannot know that, how can we ‘reset’ the A.D. (Aggregate Demand) to what it should be?
Economists know that there is an any-point-in-time overall capacity in the manufacturing sector for producing goods. Economists don’t like to see the capacity utilization going too high in percentage terms for fear of igniting price inflation. It would mean that capital expenditures for new plant and equipment would be needed to accommodate the new utilization, so as to avoid high capacity utilization.
Why is Aggregate Demand any different? We kept it artificially high. Most would agree with that observation. And now it has come down. It will likely overshoot on the way down. Maybe that will hurt.
But it will come back up to a more natural level by itself. We don’t need to hook the patient to electroshock treatments and to give him adrenaline and cocaine.
This is like saying we know what the “best” temperature for the Climate is — which of course we don’t and should not pretend to know.
The banking/finance business is far from dead.It may get worse before it gets better ,and this cyclical downturn may last several years ,but it will recover once we get through the many issues at hand.
There will always be a need for sound financial advice for individuals and business clients around the world.Investment advisory,corporate finance,consumer banking,lending and other financial services will all remain important vital area for many years to come.
The US auto companies ,on the other hand need to reshape and rethink their long term business plans. This will require bringing in new fuel efficent technologies in order to compete and prosper going forward.You mean to tell me that with the great minds we have in this country we cant come up with attractive looking cars that can give us 60-70 mpg fuel efficiency with safer fuel emmissions and “greener” technologies?Im sure we can and will.
With this being said,I think there is plenty of good reason to be short term concerned(next 2-3years) but long term optimistic that both these industries will recover and rebound over time.
Where was everyone when the steel industry was collapsing in early 2000? There were no talk of loans or government assistance. In fact Gettelfinger will do exactly what the USWA did in 2001. That is they would not even negotiate with Bethlehem Steel, but were actively negotiating with ISG behind the scenes. Sure Gettelfinger and the boys will drain all they can from the big three, until time is right to find more blood. Gee I guess that required reading Animal Farm by Orwille mad a lot more sense than I realized
Funny, the online banks don’t have a care in the world and give their customers high APR and most with NO minimum. It’s the B&M taco stands that are folding, like CITI, who required a ridiculous $1,500 min balance to get their interest rate with no fees.
People got wise to that crap quick and jettisoned in the lifeboat to other institutions. Like me.
the worst is yet to come.
we are not close to stability in the housing industry because ordinary working families can not buy a house with affordable payments. That’ll only happen when either incomes rise or housing prices fall enough that we can return to the historic practice of paying about four times your annual income for the house.
[Government fiddling in the mortgage market is a temporary measure. All it does is spread out the pain over time. It does NOT fix the housing market.]
when/as the housing market continues to slide, more and more mortgages will prove to be losers and there will be more and more loan losses.
***
That said, the mortgage servicing industry is going about things the wrong way. When a sale is probably several years away, protecting the asset they have to foreclose on means renting the house NOW. We must have people living in it to prevent it from being destroyed.
Getting it ready to rent is fairly simple … the foreclosing loan agent simply pays the old owners cash for leaving the property in “ready to rent” condition — or as close to that as they can accomplish.
***
The auto industry is salvageable. The retirement contracts, esp. the health care parts, of the UAW contract maybe aren’t.
What seems true is that the managers of the auto companies, by agreeing to the foolish contracts in the first place, have probably wiped out the entire shareholders’ value. It is time to end the silliness and tell the truth — the shareholders are wiped out and the retirement plans are the new shareholders.
If this requires a bankruptcy court to impose the sanity, so be it.
Fairly obviously, the amounts that can be paid thereafter toward retiree health care depends on the companies making money. No profits, no money for payments.
So the parts of the union contract about retiree health care are dead.
*
Before this recession began, the pension plans of the auto workers were fully funded. Great — let’s simply stuff the pension plans with company shares and tell the workers and retirees that their future pension depends solely on building a successful and efficient company.
Do it and you win, fail and you’re poor.
What? You think this is unfair?
This is exactly the retirement plan of nearly every small business owner in America. Build the business now so that it can take care of you when you can’t or do not wish to work any longer.
Why should auto workers get a retirement any different from the rest of us?
So the Gov’t has decided to “invest” billions in companies that are failing because consumers aren’t willing to buy their products. Real smart investing!
Considering the banks are all totally bankrupt and the Fed is pouring 3 trillion dollars into their coffers without effect and the car makers have quit making cars I would say the worst is ahead of us.
I suppose the Feds will pour another 3 or more trillion dollars into the bottomless pit of the Wall Street bankers and allow the UAW contracts to be broken and force them be competitive with 25 cents a hour Chinese workers. Too bad we did not force Wall Street bankers to compete with 25 cent an hour Chinese workers and reduce the pay at Wall Street banks to only $4,000 a year. We should all take our money out of the major banks and put into local banks until the major banks go bankrupt or reduce their pay scale. We can not support $500,000 a year bonuses for all Wall Street bankers.
If the Big 3 go away, people won’t stop buying cars. They will need to buy more from Toyota, Honda, and other manufacturers. In order to handle this new demand, these companies will need to higher skilled auto workers to build the parts, vehicles, etc. as well as find an infrastructure to handle increased sales demand.
If the Big 3 go away tomorrow, it won’t take long before the local Pontiac/Buick/GMC dealer ends up selling Huyndais.
I have owned a number of American vehicles in the past – Buick (2), Pontiac and Chrysler Dodge. They were all bad.
Traveling a lot, I have rented German, French and Italian cars. I have even driven Russian cars. American and French cars are of the equal quality – mediocre or even worse. Russian and Italian (those which are available for common rent) cars are even worse than French. German jobs were superb.
How about Japanese? It is enough to say that the last 7 (seven) cars I have purchased for myself are all Nissan. I know that my ex drives Hondas and Hondas only.
Will American car manufacturing survive? It is already dead. It has been mortally ill for a long time and now it is dead. Monies are wasted.
One good thing should be said about American cars. They are better than Russian. Not all. Not all, but most of them.
As a National priority, none of us should care whether or not any of the banks fail. They are greed-driven and entirely self-serving institutions that only “cost” us all money.
If and when we ever recover from the financial meltdown, we will do so by returning to sounds business practices and making things that we can sell to others. This whole notion that banks create wealth by dreaming up ways to push paper around has failed and the strategy is unlikely to succeed ever again. ALL OF THEM! and support real manufacturing, real prosperity and real jobs.
“”"”"” YES “”"”" I see the Feds. and alot of the Wall Street Crooks are still able to conduct business as “”" USUAL “”" more of the peoples money down the tubes…..GIVE THE MONEY TO THE PEOPLE MR. GOVERNMENT !!!!!! Can’t you here them crying out for help…Help the People not the private corporations, bankers,investment brokers etc…the ones who caused this problem in the first place…Hey Mr. Government…what you going to do when Bank of America goes belly up….they themselves will probably need half a trillion…A real crying shame what you guys are doing to this country or should I say what you all have already done to this country…What A Pitty…
Of course the worst is still yet to com for the banking industry – but let’s call it Wall Street to include the hedge funds and “creative financing” businesses that are not true “banks”.
The Weasels of Wall Street still infest the industry, they are still hanging around waiting for their bonuses and other excessive compensation, as the enormous amount of money the Federal government has provided for “liquidity” is too attractive to ignore.
And their lawyers are there with them, parasites all, greedily grasping for the pot of gold that just arrived.
Bernie Madoff got flushed out but that was an easy one, and his “auditor” is hiding from the press.
The business press would do us all a favor by publishing the names and business titles of all of these weasels, and that includes their lobbyists.
Maybe then we can file treason charges against them, and see where that goes.
The auto industry – yes, the worst is yet to arrive, for they have to permanently reduce some of their manufacturing capacity. That means eliminating some models and shuttering some plants, the remaining plants handle the reduced volume. And it will mean layoffs.
But what about the rest of the country ? People have too much debt, and the Baby Boomers will have to reduce all non-mortgage debt to zero, then reduce any mortgage debt to zero. It won’t be easy for the spendthrifts.
Those of us who have no debt, and have rather liquid assets (like CDs) will have it easiest, but only because we are already accustomed to being stingy.
why the heck are investors enthusiastic about the auto bailout? Is this going to be making people buy their cars? Because as far as I can see the issue is that they can’t sell all the cars they are built up to make. Unless or until that changes, the latest bailout is just money down a rat hole.
Oh, right, our government is pouring money down that hole as fast as it can. What difference does make where they pour it?
How in the world does ANYBODY look at this thing and think putting money back into this ponzi scheme/house of cards/crooked casino is a good idea?
The auto industry must be saved because it is so much more concentrated: the Big 3 supply 50% of the autos in the US, employ more than 50% of the auto workers, and have way more than 50% of the retired auto workers. On the other hand, we have over 8,000 banks, so there will always be more banks to step forward and lend as banks fail and the workers are spread over many more banks.
Auto makers must consolidate: move their retirees over to PBGC and Medicare Part B. Lower the Medicare age to 50 for everybody; this will cover all of the early retirees in all industries and other experienced workers who cannot get/afford health insurance. Then, merge the Big 3 into the Big 1, probably run by Ford. Consolidate the new company down to its natural, profitable market size. Once it’s profitable, where it goes from there is up to management.
Banks must consolidate, too; while we probably have about the right number of banks, too many of them are impaired. These are the ‘bad banks’ that will have to eventually be closed. Examples of bad banks are Merrill Lynch (going, going, gone) and Citi, who together produced most of the mortgage bonds and didn’t quite sell all of them off to unsuspecting investors. Examples of good banks are Bank of America, JP Morgan, and Wells Fargo. We really don’t want to force them to buy up all of the bad banks because then the good banks will also become bad banks. It’s better to shut down the bad banks one at a time, then sell the assets privately for whatever they’re worth: not much.
It would be better to take the remaining $350 billion and use it to set up a new ‘master good bank’ with lending power of $3.5 trillion at a conservative 10% capital ratio. This would be the size of combined FNM and FRE, but without all of the junk mortgage assets, a true lending powerhouse.
The odds are even money that we have a bank holiday for about a week to permanently shut down all of the bad banks. After the good banks reopen, then we march forward with renewed vigor, as there will be no more banks to fail. We can do it.
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I believe the worst is still to come for both the auto and banking industries. Massive writedowns are still to be announced and taken. So much for good earnings going forward.
I’d like to focus on the banking biz, if I may. I started to really think about how the banking system works (in it’s most simple form)and it just plain stinks to be a depositor in any bank. I give them my money to hold (at an incredibly low to non-existent interest rate, if I’m lucky), they then loan that money out to some other poor schmuck at a higher interest rate and they pocket the difference. I get a pittance of a return, limited to no access to my money without a penalty, then I get to pay taxes on that pittance return, including (potentially bank fees, etc. for the priviledge of letting the bank make money off of my money). What a screwy system. Is it really any wonder why we as Americans don’t save any money, what’s the point? Saving money is a losers game, which is what the government has forced us into. The government has removed absolutely every incentive to encourage the working man into saving money, and then they wonder in wide eyed amazement when the economy hits the fan. When a nation has no savings, a nation has no economy. You cannot borrow and/or lend your way to economic prosperity…can’t be done. Which brings us to today…no work, no money, no savings, no economic activity. This is not going to be pretty going forward.
The auto industry as it formerly existed is DEAD. The prices of American made cars had increased to the point where the system became unsustainable (just like the cost of housing did). Did the Big 3 really think that selling cars forward into the future (after 9-11) was really going to end well. Once you start ingraining into peoples heads that there are discounts to be had, taking them away is NOT going to help your business model. Also, aren’t all these mega-corps (auto’s and banks) supposed to have the best and the brightest working for them looking into the future and making all the right moves so they stay on a steady course??? What a bunch of crap…those idiots can’t see any further into the future than the next reporting period. We, as a nation, live from one financial reporting period to the next (just like paycheck to paycheck), so how can we EXPECT our banks and corporations to make the right moves and investments when all we seek is constantly improving earnings and stock price escalations. We shouldn’t and obviously, the game can’t keep going on forever. The financial days of reckoning are upon us, God help those that were swimming naked.