Nationalized car production

My contribution to the auto bailout debate.

Europe's in trouble, says Gary North

Normally, I would've put this article in my "Sunday Best" category. It sure deserves to be called "best news-related article". However, its implications are too important to wait for Sunday.

Gary North writes about a Daily Telegraph article which, before being edited, said that a secret EU report available to DT editors warned about the magnitude of toxic assets on the balance sheets of European banks. They may amount up to 16,3 trillion pounds which is about 18,4 trillion euros. Failure to bail out these lending institutions with a comparable sum may lead to bank failures and ensuing bank runs. A breakdown of major European banks would basically collapse the European economy which is just as dependent on credit as any other. Plus, if people lose their savings, there's nothing left to spend or invest.

Worse even, since the European community consists of countries with vastly different debt conditions and financial credibility, a uniform solution is highly unlikely to be found if such a great sum had to be scraped up. For example, while investors may still have a lot of trust left in Germany's stability, they may refuse to lend to Italy. But since both Germany and Italy are part of the Euro monetary union, Germans would have to tolerate massive inflation by the European Central Bank to make up for a lack of creditor confidence in Italy. How long will they be willing to take that?

In my view, the European public still has faith that the governments and the central banks will successfully intervene to restore commercial banks. But if the original article was correct, that 44% of bank balance sheets have disappeared, then the public is living in la-la land. The entire structure of Europe's capital markets is at risk. Or, I should say, what remains of the capital markets is at risk.

Reality is an unforgiving mistress. If the public refuses to acknowledge the severity of a problem, it will not disappear. It will come back in an even worse fashion. If European banks have lost nearly half of their balance sheet, I honestly don't know what's going to happen. It could be everything from an exceptionally long and severe depression to a complete breakdown of civilization, but in any case, you bet it won't be pretty.

The validity of the cited Daily Telegraph article has not been verified as of yet, but I wouldn't take that as a relief. Try to imagine what's going to happen when welfare checks stop coming in because governments are out of credit and a vast number of people lose their savings. You can't picture it? Neither can I.

Brace yourselves, we may be in for a rough ride.

All hail the recession !

First, I'd like to apologize to my dear readers for being unproductive over such a long time span. Lack of inspiration, business in out-of-blog life and general tiredness kept me from writing.

Today, however, I feel like commenting on the craze of the day: claims that someone finally "get us out" of the coming recession.

It is a generally accepted view that recessions are bad. 'Something' ought to be done about them, we are told by all the concerned-looking pundits, otherwise we might face the full impact of the bust. And that is, supposedly, "bad" for "the economy".

That may be true in Bizarro World. On Earth, a recession indicates a reallocation of resources away from seemingly unproductive enterprises to those which actually satisfy customer demands. Various shifts in preference patterns may occur: market participants may either change their preferences for certain goods and services while remaining in the same time preference pattern, e.g. change their fondness for chewing gum to a liking for white bread, or alter their time preference altogether, e.g. stop buying video games and instead save for a house. As long as this happens in small doses, the impact of the reallocation is hardly recognizable. If, however, for some reason a large amount of market participants decide to switch from popular industry A to unpopular product B, markets need to restructure on a grand scale.

This, in turn, leads to temporary inconveniences such as unemployment, wage reductions, short-time work (or overtime) or business failures.

Think about it again: politicians, economists and pundits generally support fighting this process. How does that make any sense? It is not some bad voodoo that tends to haunt our world for an unknown reason from time to time, but simply markets reacting to future trends and expected modifications in supply and demand. So why would they want to stop it?

Of course, the argument "it's bad for the economy" holds some truth: it is bad for those entrerprises that are expected to undergo enormous changes or go bust due to production of goods or services that are not in demand (anymore). Nobody wants to leave a front row seat in the ride of life, but we have to decide at some point: Do we want an economy that produces goods and services according to market demand, or a museum economy which reflects demands and speculations of the past, but is unwilling and unable to adapt to our changing wishes and needs?

If you don't want to live in a museum, you'll be just as glad as me to see the recession unfold. Gas prices dropping, house prices dropping, commodity prices dropping in general, laggard companies like GM that have been more busy meddling with Michigan politics than producing neat cars for decades threatened to be finally gone for good, Ponzi schemers like Bernie Madoff going broke as well and, maybe of paramount importance, politicians that are too busy "fixing the economy" to think about going to war another time. I might be wrong with that one, but at least it's a reasonable hope.

Thus, as the headline said: all hail the recession !

With A Little Help From My Friends ...

What would you do if I sang out of tune,
Would you stand up and walk out on me?
Lend me your ears and I'll sing you a song
And I'll try not to sing out of key.

Joe Cocker's famous interpretation of this classic at the Woodstock festival has certainly been a source of inspiration for millions of eager listeners. Quite inspiring are also the vast amounts of money Washington has decided to raise in order to bail out major failing players on the US market, especially if you're a major failing player yourself. This is probably what Detroit's Big Three had been thinking all along, and indeed, now they've come out of the closet.

The last line of the article is, in my opinion, the most revealing:

But he added that "our trading partners give us no choice. Every other major auto manufacturing country protects their industry so we may have to do the same."

This ties in perfectly with the song lyrics posted above. He might as well have said:

Well, they may have done some malinvestments, yes, they kept producing gas-guzzlers for an increasingly shrinking market, maybe they didn't care too much about future planning, but everybody makes mistakes, no? You don't want to leave them alone right now, do you? After all, they're uniquely American car manufacturers. Just lend them a few billions and they'll honestly try to get in touch with customers again.

But seriously, he does make a point. Shouldn't we protect our domestic industries when foreigners do the same for their manufacturers? After all, foreigners will be able to export cheap cars, thus undermining our own efforts. Wouldn't it make sense to face "market realities" and fork some money out for a couple of minor subsidies?

First of all, there is no point in having "domestic car producers" if foreign car producers do the job more efficiently. Whether or not this is the case should be decided by customers and not by central bureaucrats. Now one might argue that tax-subsidized foreign car producers are being advantaged since they can make cheaper offers or include more features for the same price or whatever. To this I say, good for the customer. Taxpayers in a far-away land had to give their earnings to allow for such a great bargain, and Americans would only be disadvantaging themselves if they did the same or refused to take the subsidized offer.

Furthermore, subsidies lower the incentive of producers to improve price and quality conditions. Faced with below-market price competition from abroad, domestic car producers would have a huge incentive to implement even the smallest improvements, thus constantly pushing for the most efficient ways of production, the highest gas mileage, the most economical transportation routes and so on. In short, they'd be working for the customer which is what free markets are all about.

Subsidies, to the contrary, would set an incentive to hire more and better lobbying personnel to make sure the next bailout won't be all too troublesome to get. Car quality would be degraded to second rank, in spite of what all those neatly dressed spokesmen will tell you in the next few weeks.

However, there's still one concern left: jobs. Not subsidizing failing companies may result in a temporary unemployment rate hike. But there's no reason to believe that a) no new car producers would fill the gap (think, for example, of Tesla Motors, pretty much pioneers in mass-producing electric cars [thanks to Opponent for pointing me to this]) and b) people wouldn't find employment outside the car industry. Instead of producing cars that don't sell, people would engage in more profitable endeavors and would thus be doing society a much greater favor than by clinging to (at least for the moment) low-demand industries and products.

And for those (including myself, American trucks and SUVs are sure to draw my attention) who fear their "tough-built big block wonder machines" might stop being produced: there's always room for niche markets. If one of the Big Three, for example, decided to specialize on building heavy vehicles, they'd probably have to cut down on their production lines, but might be able to sustain doing "big car business" on a smaller scale, always according to market demand.