Posted on 12/06/2008 8:13:03 AM PST by Brilliant
If you've watched the mainstream media recently, you know that our current recession was caused by laissez-faire economics, and that this meltdown marks the end of all credibility to the free market system.
In reality, though, the direct cause of this recession was Big Government--a point that is laughed at by the media and the Democrats, and completely ignored by the Republicans. No one seems to be willing to confront the truth.
It was Big Government that caused the current financial crisis. Congress abused its oversight powers over Fannie Mae and Freddie Mac to exercise influence over Fannie Mae policies. The Congressional Democrats used their influence to cause the appointment of a Clinton crony, Franklin Raines, as CEO of Fannie Mae. Then Mr. Raines did the bidding of the Congressional Democrats by diverting hundreds of billions of dollars in Fannie Mae assets to the purchase of mortgages to unqualified homeowners in the name of "affordable housing," all the time receiving the accolades of Congress for his efforts.
But a system that is even partially based on free market principles will not take such abuse indefinitely. Eventually, the market-oriented elements of the system revolt and refuse to swallow more of the crap generated by the political system. And that is precisely what happened here.
After the financial system meltdown, the malaise spread to the entire economy. The first to suffer a collapse has been the auto industry.
The Congressional fools, never willing to take the blame for their own mistakes, of course blame Detroit's problems on the auto companies themselves. And they make a plausible case that the automakers have made mistakes. The media is only too willing to portray the Detroit disaster as a failure of the free market system and capitalism. Your average guy does not fully understand the key role that Big Government played in causing this collapse. The so-called "experts" have only a simplistic understanding of the problem Detroit faces, but they are quite active in giving their opinions anyway. Even the automakers' management does not fully understand how they've been screwed by Big Government. Either that, or perhaps they don't want to say for fear that an accusatory demeanor will make things worse, or that they simply do not have the needed debate skills to take on the arrogant fools in Congress.
But the reality is that it was Big Government that caused the financial crisis and recession that now threatens the viability of the US auto industry. It was Congress that wrote the labor laws that have resulted in the Big 3 having a 50% cost disadvantage vis-a-vis the foreign makers. And it was the Congress that opened the door to free trade and forced the US makers to compete against companies that have a big cost advantage over US makers.
Now some of you might say, simplistically, "What about the fact that the US makers simply don't produce the cars that people want? That's not the fault of the union or of Congress."
But you would be wrong about that. When you have a 50% labor cost disadvantage relative to your competition, you can't produce the same kind of vehicle that your competition produces and stay in business. If you try, you can produce vehicles that are very similar, but they will cost a lot more, and you won't be in business for long. Your only hope is to cut corners and produce a cheap imitation of the foreign vehicle, and sell it for less than the foreign company sells its higher quality vehicles for. And that is precisely what Detroit has done for decades.
Of course, you can understand why the Big 3 management doesn't want to come out and make that point, though. They don't want to admit that they are selling a cheap imitation of the foreign vehicles.
The proof of what I am suggesting is very clear. First, Ford has in recent years greatly improved the quality of their vehicles. They bought into the endless complaining about quality and made quality job one. Now they produce a vehicle that is on par with what Toyota produces, and in fact their vehicles line up very well against Toyota's in every category. Yet, they are still showing an eye-popping loss while Toyota has a company wide profit.
So why is this? The answer is simple: Ford has a huge cost disadvantage against Toyota because of the union wage scale it must pay. While Toyota makes money on a Camry, Ford loses money on a Taurus, which is very similar to a Camry.
If you still aren't convinced, then consider this: As late as the 3d quarter of 2008, Ford was losing money in the US, but it was making money over seas, where it must presumably compete even more directly with the foreign makers. GM is also doing much better overseas than it is in the US. But how can this be? The answer, again, is simple: In the US, the Big 3 must contend with the huge union-induced cost disadvantage that they have, while overseas they are not at a disadvantage because there is no UAW.
So the Big 3 can compete with the foreign makers, they can sell vehicles that people want just as the foreign makers do. They just can't do so in the US because of the labor laws forced upon them by Congress.
Of course, I am not saying that Big 3 management has not made mistakes. Everyone makes mistakes. Even the management of the foreign companies makes mistakes--big ones. The difference is that when you are a foreign company that has a 50% labor cost advantage, you can afford to make more mistakes, and bigger mistakes and yet still make a profit. When you are a US manufacturer with a 50% labor cost disadvantage, you can't afford to make mistakes--you've got to be perfect.
I refuse to believe that US managers are somehow less competent than Japanese managers. That is not consistent with what we see in other industries. If so, then how did we win WW II? How is it that the US has a higher standard of living than Japan? The managers in the auto industry do have one characteristic that is not admirable, namely they are selected because they are deferential to the labor union, but that is entirely understandable given the Congressional policies that have been forced upon them. In other respects, they are no less competent that managers in other industries, they simply have a more difficult landscape to navigate due to the handicaps set up by Big Government.
My view is that any auto bailout should force a reduction of the pay scale to the same levels that the foreign makers pay. And management should be told that they will also be paid at the union scale until the loans are repaid. But this idea of imposing greater Congressional oversight on the industry is just plain insane. It was Congressional oversight that resulted in the collapse of Fannie Mae and Freddie Mac. Congress is not a constructive force in running our industry. It is destructive.
The fact is that this problem is not Detroit's mistake so much as it is Washington's mistake. Washington must fix it, but Washington must also be held accountable for it. Unfortunately, I don't see either of those things happening because even those of us who are free market capitalists are not doing what we can to expose the real problem. The problem is not that industry is inefficient. The problem is that Big Government is inefficient.
Damn good, Brilliant.
And another “Brilliant” statement. :-)
Thanks for sharing your thoughts.
Of course we had recessions back when private parties and the states could issue money.
I'm envisioning a recession about 6,283 BC, in fact, where the reindeer herds swung East rather than South during the winter, and boy was that a recession.
Yes but, with the help of miscalulating managers of our financial institutions.
Very well thought out and well written. I couldn’t agree more. Like you I think this economic crisis is going to bring more government into things, not less because people have been sold a bill of goods that government can actually fix things.
Brilliant...too bad we’re the only ones who will see this, and understand the cause of it all...unless the Ghost of Recessions Past pays a late night visit to the producers of ABCNBCCBSCNNMSNBC
This argument that the recession is proof that laissez-faire economics doesn’t work is the most inane thing I’ve ever heard. It might have some plausibility if we actually had laissez-faire economics in this country, but we’ve got the biggest most intrusive government in the history of the nation. If the Big Government liberals can’t make things work now, then Big Government just doesn’t work.
But a system that is even partially based on free market principles will not take such abuse indefinitely. Eventually, the market-oriented elements of the system revolt and refuse to swallow more of the crap generated by the political system. And that is precisely what happened here.
Brilliant, Brilliant!
It’s not ‘fear’ that’s running through the country, it’s ANGER.
Until the ‘crony capitalists’ are gone, this won’t get any better. Does anyone think that DC/Wall Street would change anything?
Welcome to the New Economy!
My recent letter to the editor of the local fishwrapper:
11/30/2008
The Tom Friedman column on the financial melt-down of 11/30 is classic MISinformation.
Friedman portrays the greedy bankers and Wall Streeters as the villains.
Yes, many of them may have gamed the system, bundling this “junk” into “derivatives” even PhDs in economics didn’t understand.
But if that “system” hadn’t been created, the gaming would not have even been possible. Friedman conveniently failed to mention that the system was a creature of the 1977 Jimmy Carter sponsored “Community Reinvestment Act.”
Allegedly designed to make the American Dream of home ownership available to all, it was expanded in the Clinton years to include even those with virtually no prospect of repaying. Lenders who refused to “get with the program” were threatened with loss of their charters.
Until it unraveled, it was a brilliant Democrat vote-buying scheme.
And as it unraveled, Barney Frank, Chris Dodd, et al stood silently by and watched.
http://www.latimes.com/news/opinion/commentary/la-oe-cutler6-2008dec06,0,6357166.story
This article wins the Head up Rear Award.IMHO.
bump
They are making the most productive cars in Brazil, but the UAW won’’t let them use the same techniques here in the USA.
I’ll find the link. Detroit News is the source.
To me, the cause of credit collapse (CC) is the rapacious and unregulated, unfettered proliferation of credit and debt instrument "engineering" that has gone on. Most people understand by now that we are not rescuing "mortgages" or "banks" or "AIG" or "Fannie" with these bailouts: We are rescuing large-scale credit structures, the opacity of which blindsided the financial system. The continued opacity, upon near-vaporization of these entities, has, upon closer examination, resulted in all these "come to Jesus" moments all over the financial system. It has been a FINANCIAL phenomenon, not (until recently) an ECONOMIC phenom.
I'm not a big fan of assigning "blame" per se, nor am I a big fan of regulation. But the single element of regulation that would have prevented CC would have been the placement of the default swaps and debt arrangements so plaging us now on transparent exchanges operated by a third party...EXACTLY how the stock, options, and comodities markets run today. In those markets, a neutral third party (the "exchange") is guarantor of the integrity of the arrangement and thus is mightily interested in the ability of both sides to perform. You exceed your margin requirements in a trade, accidentally or on purpose, you find out about it very quickly and act or get sold out, and I mean right now. It's just that simple. The amount of money involved in these bailouts so far would probably be enough to pay off the FACE VALUE of every mortgage in America! That's why it is not, IMO, really a mortgage problem, it's a default swap problem. No, what we are doing is bailing out the folks who levered these arrangements/contracts up 30, 50, or 80 times their face value. The threat, and it is unquestionably a serious threat, is that there simply isn't anything to hock against 30 times the value of every mortgage written or refi'ed and every leveraged buyout and every 3-year-no-payment mattress deal sold since 2005. That there isn't backing for such a credit expansion; that so many deals were written so grossly exceeding the "mother" counterparties' ability to perform [AIG, FNM, FRE et al] is PRECISELY the item that has destroyed trust in the system and has made even the strongest lenders unwilling to lend. Because there is simply no transparency out there, and every opportunity has apparently been taken to game the system and to sell bunko paper. Hank Paulson and the "strategy shift du jour" hasn't helped either. Quite simply, TRUST has been destroyed.
.....not less because people have been sold a bill of goods that government can actually fix things.
:::::::::
Yes, and as long as the the ignorant and naive half of the electorate believes this, the general condition of America will CONTINUE to deteriorate.
Good piece Brilliant. Kudos to you.
Actually, all our economic problems are caused by government oversight, interference and regulation of business. Free the American free-enterprise, competitive, capitalist system from government and all our problems will disappear.
Exactly right...and we need to communicate this to people if we want to win again.
The point about the automakers is an important one. The Big 3 are criticized for not successfully selling small cars, but their labor costs have put them into the position of being unable to sell small cars profitably. Besides, small cars were only especially popular in the last couple of years.
The way back is the free market. Really free. We have to cut regulation and taxes. We must shrink the size and scope of government. If we’re not willing to seriously entertain these ideas, we don’t deserve to be in power.
“If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” -Ronald Reagan
Response; Absolutely Correct.
Comment: I believe that this point is almost ready to be accepted by the public at large. I do not have the political know how but believe that a well run campaign with names, dates, acts, omissions, conditions, circumstances and events would effectuate a peaceful revolution. Further, it might even result in jail time for the politicians responsible. If not stopped the coming revolution will be other than peaceful.
Quite simply, TRUST has been destroyed.
Still, I see that as a government failure. Where did these instruments originate? In mortgages. The ability to trust that basic instrument was gutted by ‘lets roll the dice on this’ Barney Frank and most popular contribution receiver Christopher Dodd. If I’m a bank that has been forced/encouraged to make a risky loan, I am going to treat it like a hot potato, bundle it up with a few others and get it off my books. Would setting up the trading exchange you describe not have been in opposition to the socialist goal of placing everyone in mansions?
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