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SOME THOUGHTS ON THE BAILOUT

Author: Pundit
Category: News Watch

GORDON GECKO WAS WRONG

gordon-gekko.jpgThe notion of our government bailing out private industry is not new. In the 1970s, when Chrysler Corporation was about to go belly up, our government put up the money to get them over the hump, and, under the highly professional leadership of Lee Iacocca, they got back on their feet.

And branches of government bailing out other branches of government is hardly a new concept either. It happened here in New York when, under Mayor Abe Beame, the city was about to go bankrupt. The result was that the state jumped in, took over several of the city’s functions and brought fiscal stability back to the Big Apple

The problem here is that we have never done a bailout as large as the ongoing 700 BILLION dollar bailout currently being foisted upon us by Congress and the Bush Administration.

I was not in love with the bailout right from the beginning, but I believed that something had to be done. I saw that the imminent collapse of banks and other financial institutions could drag us into a depression deeper than the 1929 crash.

Then, everyone else wanted their piece of the pie.

Municipalities on the verge of fiscal collapse want their piece.

The Big Three Automakers want theirs.

The airlines are saying, hey, what about us.

Meanwhile, average folks are losing their jobs and their homes because of their bad financial planning, and they want theirs too.

Let’s look at each of these situations.

New York learned a long time ago that you simply can’t continue to spend money you don’t have in government, if there is no reasonable chance that you will ever get that money. Governments issue bonds to do projects that pay tax exempt interest. The problem is that the interest must be paid out of tax revenues, and those revenues are lessened by the tax exempt status of the bonds. It’s sort of like a giant Ponzi scheme.

The automakers started crying that they couldn’t sell enough cars to complete with their Japanese counterparts. Of course, when gas was expected to reach 4 or even 5 dollars a gallon, the U.S, car companies continued to push gas guzzling SUVs into the marketplace. When those didn’t sell, or lost their resale value because of the gas crunch, what did the Big Three do? They ended their leasing programs.

Leasing, as a rule, is based on the expected resale value at the termination of the lease. Since our automakers were pushing vehicles with severely diminished resale values, they were getting hung for big bucks at lease termination time. Should I feel sorry for them? Not really. They knew what was on the horizon and chose to keep selling Expeditions and Hummers. The Japanese companies, on the other hand, began turning out more and more hybrids, including hybrid SUVs that sold well and retained their value, making them excellent for leasing.

It was sort of a self fulfilling prophesy. If the auto companies make vehicles that don’t sell well, then they won’t sell enough vehicles. Then, they can abandon their lease programs, which will increase the monthly cost of their cars, thus causing them to sell fewer vehicles. Wowee Zowee! What a novel concept. It guess the heads of GM, Chrysler and Ford missed that class in Economics 101.

Which takes me to the airlines that also want a piece of this action. You see, their convoluted logic is that since people aren’t flying as much as they used to they should charge them for things that once were included in the price of a ticket. That includes a guaranteed seat, luggage checking and a can of soda. Yes sir, that same economics professor would have been proud of folks who think that if customers aren’t buying your product, the way to get them back is to charge them more. That goes double in a bad economy.

As far as those folks losing their homes go, I do feel sad for them, but . . . . You see, nobody forced them into buying homes they couldn’t afford with adjustable mortgages that would eventually lead them into to foreclosure. Sure I understand that some of these folks were unsophisticated, but didn’t they have lawyers at their closings? And why should we bail these folks out? What about the people who pay their mortgages on time every month? Shouldn’t they get something? What about renters, folks who realized that they couldn’t afford those adjustable mortgages? Shouldn’t the government be doing something for them too?

I mean, really, there’s 700 Billion dollars in Hank Paulson’s bank account. Couldn’t I get just a little piece of that? I own a business. Can’t Mr. Paulson put a couple of mil in my company’s bank account? And what about subsidizing my rent? I’m a nice guy, shouldn’t I get my piece of the pie?

Of course, the answer is no, but the notion of people being bailed out by the government because their own greed and foolishness put them in a bad way sort of irks me. In fact, it pisses me off. It really pisses me off.

Now, I understand that the Democrats and the Republicans have both taken part in this elaborate shell game, and I do not know that partisan arguing will solve any of the problems that exist in our country. However, I have come to believe that all of these companies need to go into some form of Chapter 11 bankruptcy, have new management installed, and learn how to do business in a fiscally responsible manner. As for the old management teams, they need to be kicked out on their collective butts with no golden parachutes of any kind. In fact, perhaps, some of them need to go to jail for malfeasance or be sued by their shareholders for the loss of those shareholders’ investments. Yeah, that’s the ticket!

And, yes, I understand that those poor folks in danger of losing their homes need to have something done for them. The country simply cannot afford to have that many vacant homes and possibly homeless people. That aid, however, should be in the form of lower fixed interest rates and extended term mortgages, not in the lowering of the principals of their loans.

This recession, depression, or whatever it is, will eventually end. They always do. We need to then get back to having our economy on sound footing and to operating our country and our businesses in fiscally sound manners. When that happens, it is important that we come to also must understand that we cannot go back to our old, profligate ways when things get good again, or we will end up in the same old place that we are in today.

Gordon Gecko was wrong.

Greed is not good.

HENRY A. HONIG – THE PUNDIT

One Response to “SOME THOUGHTS ON THE BAILOUT”

  1. Ollie Says:

    Over time the symptoms of depression got easier to handle as I developed an understanding of the disease, and tireless work on my self from a bunch of angles reaped enormous benefits. Would you agree with this approach?

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