Russ McBee

Glad you brought this up.  I watched the senate hearing yesterday and was thinking ...

 One hypothesis that lurks in the back of my mind stems from some of these thoughts:

 Is it possible that all this noise is just the screams of a few spoiled brats who are finally reaching the end of their ride on easy street that began in WWII, and we should all be celebrating.

 Is it possible that our fear of losing 3 million jobs is unfounded; created and overblown by these same brats who are just trying to extend their ride by capitalizing on our fear.

 Is it possible that these institutions are a disgrace to the free market, which actually could work better without them.

 Is it possible that the deaths of these huge institutions could actually be great for most people - finally opening doors for smaller innovators and companies who have been stifled by the big players?

 Could smaller, little-known companies immediately jump into the void and provide a relatively smooth transition to the next generation of our economy?  

 Could the supposed 'credit crunch' really be just about the cardhouse of a few big colluding players finally falling down, and that the credit market for legitimate business is just fine.

 Is there a healthy market economy that exists outside the cardhouse economy, just waiting for its chance to burst into the public awareness?

 So, I guess the hypothesis might be:

We are currently experiencing the loud death throws of an entire generation of illegitimate businesses and practices which have long survived through a domination based on their shear sizes, which have become not only inefficient, but finally unstainable; and the economy, on the whole, will be much healthier and more widely prosperous when they are gone.

Hard to tell, but I doubt that anyone would be willing to gamble on that hypothesis!  And I'm not saying I believe it either, but the thoughts do lurk.

Revelator:

I agree with much of what you said, with some caveats:

The recent quarterly and annual reports from GM show that it is hemorrhaging money at an astonishing rate, and as of its most recent 10-Q filing, it has a *negative* equity of $60 billion. I believe those numbers are accurate (or perhaps optimistic). I believe GM's management, the leaders of the UAW, and industry analysts when they say that GM may only have a few weeks left before it faces closure (Chapter 11 is out of the question). There is no evidence to the contrary.

I don't believe this is fear-mongering.

The credit crunch is very real; banks have simply stopped lending out of fear of default, and that includes banks lending to each other. That's what prompted the Fed and the Treasury to guarantee the commercial paper market, which in any other year would have been a headline-grabbing, astonishing move. However, this fall has been a season full of such astonishing moves, so their intervention in that market sort of faded among all the other noise.

Companies (even totally healthy ones) are finding it nearly impossible to raise credit right now, as are state governments. The state of California was recently caught in such a crunch that the governor petitioned the Treasury for an emergency loan of something like $8 billion just so the state could keep paying its workers and its utility bills. That only happened because their usual sources of credit (i.e. banks) had basically started refusing loans to anyone, including state governments.

I would love to see the Big Three broken up and divested as independent corporations, but they have to survive long enough to allow that to occur. They've already lost their stranglehold on the domestic passenger car market, so it's really only a matter of time before they either shrink into irrelevance or adapt to new markets and technologies. I wouldn't mind seeing either one of those things happen, but if they close their doors the week after Christmas, the very real loss of jobs would permanently cripple one of the few remaining bastions of the formerly dominant US manufacturing base.

Instead of a rapid, catastrophic collapse, the end of the Big Three as we have known them should only be allowed to happen as a slow, somewhat controlled transformation toward the next generation of products and manufacturing technologies. An abrupt transformation isn't possible, since it takes years to bring new products online, even under the best of conditions.

This crisis was certainly caused by charlatans on Wall Street and their enablers in Congress, the Federal Reserve, and the Executive branch, but it's metastasized so far beyond those players that any more sudden shocks to the system could cause irreparable damage. Our economy is still near the brink of a major, long-term depression, and we can't afford to sit by while yet another large corporate failure pushes us closer to that brink.

That's the main reason I'm reluctantly in support of a bailout for Detroit.

I fully agree with your penultimate paragraph, but the replacements for the failing behemoths (from AIG to GM) cannot emerge fully developed overnight. That kind of transformation takes a while, and the unemployed can't sit around for years waiting for that revolution to commence.

Right now, trillions of dollars are sitting on the sidelines, waiting for the dust to settle. Banks are hoarding cash, terrified of making the startup loans necessary to launch and fund GM's replacement (or anything else, for that matter). If GM were to fail abruptly, that terror would only increase.

That's when the new Depression would really start.

And I'm not aware of a limit on the length of a comment. Write as much as you want. ;-)

On the credit crunch, I understand it in theory.  But, I have not been directly affected so it's still a mystery to me who exactly is affected.  I believe I still have access to all the credit I had the year before last, which is admittedly, just north of zero.  I'm a small business owner and I did it all with cash because no bank would/will ever give me a dollar.  Paradoxically (knock on wood), my business did 10% better in Q3 this year than it did in Q3 last year.  Figure that one out.  Part of me says to these mysterious entities who can't get credit, 'welcome to my world'.  Another part says 'if your pain is my gain, see ya!'.

I had learned that banks are so conservative that even the notion of a 'loan' is a myth.  In my experience, all bank loans are secured by collateral to a high degree of probability.  So, when a bank gives you a 'loan' for a house, they 'give' you nothing.  They let you live in their house while you pay them rent.  'Small business loan' - myth.  I never thought that banks even feared default.  If you quit paying, they still own it.  So, the only way for banks to lose is when valuations fall, which is I guess what has happened, especially to the ones that overpayed for stuff.

So, it leaves me wondering, who are these banks and who are these people who used to get credit, and will it really matter to you and me?

Even so, I'm playing devil's advocate a bit, and I completely concur with your statment:  'I reluctanctly support a bailout'.

On the issue of who gets credit and who doesn't, you're absolutely right that most individuals don't receive unsecured loans from banks (unless you're Warren Buffett or somebody), but other banks certainly do. State governments do. Large corporations do. The best example of that is the commercial paper market, where banks lend out money for a day or two, or a week, or maybe a month. They also makes those short-term loans to other banks, corporations, and governments. Commercial paper loans are used to make payroll, pay utility bills, and meet other short-term expenses which are then paid back quickly. That market is one of the linchpins of our economy, since it provides the economic grease that keeps the wheels turning.

The commercial paper market completely froze up this October. It stopped entirely, and it's only started to move again within the last few weeks. If that had continued for much longer, large corporations and government entities would have been unable to make payroll.

That's a whole different world from the loans or credit you and I will ever be exposed to, but just imagine the damage that would have caused had it been allowed to continue.