Setting the future economy straight

Gennady Stolyarov II does it much better than I can in a guest post on Bob Murphy's blog.

My summary: young people are f'ed. New and existing laws, along with entrenched norms, make it effectively impossible for them to succeed through standard education and career paths. Success has become decoupled from merit, and the upcoming generation will be barred from home-ownership, even if they're responsible. A constellation of irresponsible financial policies by the government shifts most of the cost of government to these young people through ever-growing inflation, taxes, and one-size-fits-all laws. The only answer is for the new generation to break from traditional norms and bypass the standard dinosaur institutions, using new technologies -- mainly the internet -- to meet their economic needs, without the waste and inefficiency that has crept into the system over time.

Lots of thoughts I've had, but put together with rigor I have yet to match on the issue.

Government loan to Chrysler now a gift

So it turns out that all that money the government "loaned" to bankrupt Chrysler doesn't have to be paid back, making it a gift, a handout, a chunk of free money. (Incidentally, this is one of my complaints about the whole vocabulary of discussing the crisis. Companies whine about how they need "liquidity" or "credit" or "short-term working capital". No. They need free money. More on that some other time.)

It just gets worse with every passing day. First, it was, "Don't worry guys, we're just giving loans to troubled companies, they'll pay them back, it's not like we're favoring anyone here!"

And now they throw all that to the wind, making it a $7 billion gift to failing Chrysler to cover up its complete inability to meet its obligations, and draw in people who had nothing to do with the management of Chrysler. (A friend and I dubbed it the "bridge loan to nowhere".)

Gee, when do *I* get my $7 billion loan that I don't have to pay back. I'll make sure to pay taxes on it! (Anyone think Chrysler's going to do the same for their "lobbying income"?)

A version of this is cross-posted as a comment at Naked Capitalsim.

"Cynical comment left elsewhere" of the day

I've been pretty fed up with the combined favoritism and outright stupidity in the financial system these days. This has led me to guess that any exchange involving a promise from a large, old (and therefore probably protected at all costs by our Overlords in Washington) corporation is going to, less and less often, be treated as something they have to *sigh* actually honor. With Sears and K-Mart reinstituting layaway (in which you make installment payments and then, after the last, receive the product), I figured this would be just another promise you can't trust anymore.

Well, a former happy customer of layaway services, calling herself "Princess of Swords", didn't seem to notice this trend and so disputed my prediction in a discussion on a Megan McArdle post. (UPDATE: previous link was to the wrong site.) Here, I post my response, in which you'll start to understand the basis for my pessimism:

******

Princess_of_Swords: Thanks for taking the time to detail your experience with the intricacies and standard practices prevailing with respect to layaway at the time you availed yourself of it.

Now I'm going to explain to you how it works in the real world.

In the real world, an obligation no longer means anything.

-GM was obligated to pay pensions. They didn't even bother to internally classify them on the same level as a bond, until forced to by law.

-Insurance companies are obligated to pay when disaster strikes. They fight as hard as they can to avoid paying, even for plain vanilla cases.

-Individual consumers buy things on credit, deferring the first payment for a long while. They are routinely caught not having saved for that big first payment.

-Securities brokers engage in naked short-selling of stocks, which obligates them to produce actual ownership of that stock at a later date. Yet as we've seen recently, they've ended up flooding the market with fake stocks and then casually aver that they "can't locate your stocks" and offer to reverse your purchase as if it were no big deal.

-Gift card issuers are unilaterally stealing money from gift card owners on the grounds that "they need it" because they're in financial trouble, despite having obligated themselves to treat the gift cards as equivalent to cash.

-AIG got a massive bailout from the Fed, but, we were assured, they would be obligated to pay a hefty penalty interest rate and start immediately and orderly unwinding their enterprise. Well, the Fed went back and cut their payments in exchange for nothing, thus debasing the Fed's assets (and thus the dollar). And AIG has done virtually nothing to liquidate its assets.

You get the point. I just don't care how you think things used to work back then. We are in a new world, where only us responsible commoners have to keep our word.

Why I can't stop laughing at GM

Because they just posted a large quarterly loss.

...greater than their entire market capitalization. (market cap being ~$6.5 billion)

...by more than a factor of two.

...for a second time.

...in under a year. (check the Q3 2007 column)

Did I mention their uncovered obligation to contribute $46 billion (7 times their market cap) to cover legacy costs?

And the steadily high cost of fuel scaring people away from their only profitable line of cars and forcing them to close plants (though this post will NOT get the oil label, since I think we all know they would be f'd even if magic fairies gave everyone free oil)?

And how they're so desperate they may even sell Hummer -- when its value is at a historical low?

And the subprime mortgage crisis ripping up its other formerly-profitable arm, GMAC?

And how they think dumping the brains behind the cars is the way out, since they can't touch unionized factory workers?

HAHAHAHAHAHAHAHAHA!!!!!!!!!!!!!!

Okay, okay, I can breathe again. Ah, that felt good. Now, for part that will scare the hell out of you:

First, given all the costs GM has to cover, there are only two reasons anyone would pay a positive price for GM shares:

a) because they can turn around and sell it to another sucker on its next upswing, and

b) because expect GM to be able to stiff their pensioners -- not have to pay the full legacy costs, courtesy of a lenient bankruptcy court judge (oh, no, no, can't think about bankruptcy of GM, can we now?) and an undercapitalized Pension Benefit Guarantee Corporation.

And second? GM is listed on the bluest-of-blue-chip Dow Jones Industrial Index.

I think I'm going to cry now.

Setting GM and corporate pensions straight

So apparently GM is back in the news. Mark Thoma does his usual thing of posting a lengthy quote without his own analysis, of a New York Times piece in which Roger Lowenstein discusses the history of GM and the legacy costs that are currently bringing it down.

Many, many people think it is legacy costs or bad management or fuel costs that is causing GM to falter. While I've said this in many posts across the internet, it's time to set things straight on this blog: only the legacy obligations can account for GM's poor health.

Why? It's simple. Even if you were to go in and replace whoever you think is a fool at GM, with whoever you think is capable of doing a superior job, that still wouldn't save them. Because those very same supergeniuses would just get bid away buy someone that doesn't have to dock off the legacy costs from the supergeniuses' pay!

Failure to recognize this insight has led to some monumentally stupid analyses of the issue. For example, the perpetually hate-able Malcom Gladwell blames GM's problems on the magical dependency ratio, ultimately claiming that when a company can do the same tasks with fewer workers, that makes it harder to pay retirees!

What happened in GM's history was this: management convinced the unions to accept lower wages in the present, in return for guaranteed pensions later -- that is, deferred compensation. And where would the money for those pensions come from? "Durr, well GM's always going to be superprofitable, no matter how many people they have to support, right?" Well, that's what the unions had to be thinking in order to accept such a deal, in which they didn't have oversight in the (non-existent) pension fund. (It would have made much more sense just to take the higher wages and divert them to a union-controlled pension fund, but I guess if you think GM can't fail ...)

Today, such practice of having an unfunded pension -- or, in effect, stuffing the pension fund with low-grade GM bonds -- would get management thrown in jail, and only recently are they making them actually, heaven forbid, fund the pension.

The upshot is, GM should have taken the wage savings and invested them in a diversified portfolio. But instead, they saw the cheaper labor as free money and threw it off as dividends. And that, my friends, is what enrages me about the whole thing. As deferred compensation, the pension is effectively a wage and thus should have priority over debt. Yet even up to today with an underfunded pension, GM is (and has long been) throwing off dividends. No dividend should be paid until GM has bought a third-party annuity and health insurance plan for everyone they've promised those things to.

The surest sign GM's going to face bankruptcy? Check out this AP article:

The chief executive of General Motors Corp. dismissed speculation that the largest U.S. automaker might soon seek bankruptcy protection ... Comments in the past week about a potential bankruptcy are "not at all constructive or accurate," Rick Wagoner said Thursday.

That certainly sounds like a weasel! "Not constructive"? Right, because it's our job to help you rook people into trusting that you'll be around for a while. And people thought I was crazy for avoiding GM in fears that the warranty promises are a joke...