Friday, December 19, 2008

The News Media and Politicians Strike Again

As usual, it seems that the news media and politicians are either distorting or just plain don't understand the real economic issues that are confronting the U.S. and world economic systems.

The two headline stories of the week have dealt with the Madoff multi-billion dollar swindle and the constant screaming by CNBC's Larry Kudlow and others regarding how the U.S. has become "Bailout Nation." The most recent controversy has focused on the government loan package to the auto industry which was announced Friday morning.

The market popped higher early Friday on that news but ended down slightly on the day as investors accurately determined that the $17 billion loan package will mean nothing. There is ZERO equity value in any of the Detroit automakers and common shareholders will probably suffer the same fate as investors in Lehman, Bear Stearns, AIG, Citigroup, Wachovia, Fannie Mae and Freddie Mac. In each of those situations, the companies themselves survived in some form but whatever assets they had were nowhere near enough to pay off their creditors--each of whom get a place in line ahead of the shareholders.

Whether GM goes into bankruptcy or not is irrelevant. The shareholders are likely to get nothing even if they don't. All of the political posturing that has taken place had nothing to do with saving the car makers. It was all about politicians going on record to either support or try to bust the UAW. Democrats can now go the the unions and say that they tried to help and Republicans can go to their supporters and say they tried to help level the playing field. None of the conversation of the last few weeks matters. Detroit went broke because for years the companies were managed badly and, unlike the Japanese, they did not design and produce cars that Americans wanted to buy. End of conversation.

The other phony argument that has been spread goes something like this: "How can the government not bail out the millions of autoworkers when they gave $700 billion to bail out Wall Street?"

Wall Street was never bailed out. The stock of every company I just mentioned has lost between 85-100 percent of its value during the last year. Most of the employees have lost their jobs and those that remain are being paid a fraction of what they previously earned. You call that a bailout? Most of the bailout money has been used to protect the interests of their customers and counter parties to keep the entire financial system from imploding which would create a true catastrophe. I am thankful every day that I work for a conservative Midwestern firm that steered clear of the whole mess but as investors and Americans we're all affected.

This is very different from what would happen if the auto makers went into a structured bankruptcy--but enough about that. The point is that not only are not getting good answers, the issues themselves are once again being totally distorted due to politics and incompetence.

The other huge lie is the widespread complaint that American taxpayers are picking up the tab for all of this. The truth of course is that no taxpayer has paid a penny for any of the trillions of dollars in rescue and stimulus packages. It is likely that none of us ever will. Our kids might, but the far likelier scenario is that the government will just print trillions of dollars to pay back our creditors with paper money that will be worth less and less as time goes on. It may not be a bad time to put a little gold or oil in your portfolio.

The irony of course is that investors are lined up to loan money to the U.S. Government for five years locking in a 1 percent return or for 30 years at 2.60 percent. Our ever-growing multi-trillion dollar deficits almost guarantee that the buying power of our dollars--and every other currency in the world--will drop pretty dramatically when it becomes clear that we can't raise taxes enough to pay down this debt without starting a revolution.

That's the story the politicians and news media should be talking about. Instead all we hear about is how the U.S. taxpayers are bailing out Wall Street and the automakers. Meanwhile, Wall Street and the auto makers are not being bailed out--they're going broke--and the taxpayers aren't paying an extra penny. How's that for good leadership and honest reporting?


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