Peter Schiff, Economic Soothsayer - Big Three Bailout Edition
By mw | Related entries in Bad Decisions, Economy, HistorySome of you may have seen the video of Peter Schiff clips posted by Justin a few days ago. It is getting a lot of play around the blogosphere. If you have not seen it, take a look, it is well worth a few minutes of your time. Like Cassandra, Schiff exhibits the gift of economic prophecy. Also like Cassandra, his prophecies were dismissed and ignored.
Watching it, you might have had a reaction like mine: “Gosh, It is too bad that no one was paying attention to him.” And upon further reflection while reviewing my IRA brokerage statement: “Why didn’t I pay attention to him.” Well, here is the good news - he is still making predictions, and we have another chance to listen to him now. From his most recent commentary:
“With the Big Three auto makers now in a plainly visible death spiral, the automotive bailout debate is kicking into overdrive. The disagreement hinges on whether a bailout is necessary to support an important industry or whether the unprofitable dinosaurs of the past should be allowed to fail as America focuses on an information-age, service sector, and alternative energy future. As usual, both sides have it wrong. The government should let the Big Three fail not because we no longer need an auto industry, but because we desperately do. What we do not need is the bloated, inefficient auto industry that we have today. By allowing the Big Three to fail, their capacity will be turned over to new owners who will be able to acquire the means of production at fire sale prices and hire workers at globally competitive wages. The result will be a more efficient auto industry making cars that people around the world actually want to buy at prices they can afford. Such auto makers could conceivably be profitable and could become the cornerstone of a manufacturing renaissance in the United States. In contrast, Ford, Chrysler and GM are never ending money pits that threaten to swallow a good deal of our economy.“
Now, there are plenty of politicians, pundits and blogger predicting dire consequences for the economy if GM is forced to take the normal course for troubled companies and reorganize under Chapter 11 protection. For at least some of them, this is much more about protection for and payback to the UAW than it is about GM or the automobile industry. Verily, I say unto you -
“Beware of false prophets, which come to you in sheep’s clothing, but inwardly they are ravening wolves. Ye shall know them by their fruits.” - Matthew 7-15
Excerpted from “Divided We Stand United We Fall“
This entry was posted on Tuesday, November 18th, 2008 and is filed under Bad Decisions, Economy, History. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
November 18th, 2008 at 11:10 am
Here, Here, Mr. CW;
While I’m in favor of the overall point of your post, I don’t agree with Mr. Schiff’s analysis that the Big Three Auto’s are simply Dinosaurs, deserving of bancruptcy only. I submit that there must be a middle ground here where we can offer them a loan, with stipulations, that can help them through this period of economic crisis. We’re talking about only 4% of the bailout we’re doing for financial co’s and we’re talking about a manufacturing industry that has as much to do with the systemic health of our economy than any other business in this country.
It’s not just the numbers, it’s the idea that we can outsource everything and just make piles of money on “services and information-age” kinds of business. Which means, what, financial and dot.com company’s? How’s that workin out for ya these days. Mr. Schiff? How’s that workin out for your 401K retirement plans Mr. CW? Maybe you could spend a few of you golden years out in the sun and fresh air in a nice landscaping business for your service industry retirement plans?
I’m not saying that the Big Three shouldn’t be downsized, splitting them up would cause them to employ new management to a large extent. But not through bankruptcy, please. That would be a serious blow to their and to our hopes of ever again being the leaders of the free world economy. It sounds a little over the top, but it may be that important.
November 18th, 2008 at 11:59 am
Ben, you seem to have done a splendid job of missing Schiff’s point that he AGREES that we need a strong a domestic auto industry. He’s talking about how to get there when he talks about new owners buying the means of production at low prices and hiring workers at competitive compensation rates.
Seems to me there’s substantial agreement that much reform is needed. One thing Schiff doesn’t address is this:
Personally, I’m inclined to try to manage the reform transition to minimize transitional pain. For all of us, not the big 3. But if the big 3 and the UAW conspire to force a game of chicken, with every tweak and additional concession like pulling tooth and with some changes inevitably bartered away to the point of not being useful, then maybe I’m with Schiff.
Here’s the thing; the starting point in figuring this out is to construct a viable business model for these companies first, and then base reform on figuring how to get there as quickly as we can. The rest is static. If the big 3 stick with paying higher compensation and keep shouldering their legacy cost burden, there is simply no way on Earth they won’t fail sooner or later. Probably sooner.
I don’t get why some folks are so reflexively anti-bankruptcy. This system was designed to protect the workers of struggling companies at the expense of creditors and shareholders, and to try to establish a company on a revised and sustainable model freed from the flaws of ones established by existing disadvantageous contractual obligations.
If there’s one part of reforming the Big 3 that troubles me the most, it’s taxpayers poised to be stuck with the bill for the pensions and benefits of retired workers without any sort of renegotiation.
November 18th, 2008 at 3:58 pm
Mr. K,
I understand Schiff’s argument, and I thought I said that there was agreement with the main point that you highlighted. My question is, to put it simply, do we have to have bankruptcy to accomplish these goals?
Why don’t we, as part of the deal when we lend them the money, say the 25 Billion that’s been mentioned, demand to GM that they divest themselves. They would keep the flagship company’s; GMC, Chevy, Buick. and sell off Cadillac, Saturn, Hummer, for starters. The future of GM’s foreign cars makes such as Saab and the British car (?) are too complicated for me to weigh in on, but there’s plenty to go around. I believe they currently own 12 makes and many dozens of models.
GM has already begun the restructuring with the sale of Isuzu and Suzuki, and the new UAW contract they negotiated recently. It’s this economic crisis that has put them over the edge and to that end I think we should do something to help get them through the next 2 quarters, with the many stipulations attached to insure that good money isn’t thrown away with the bad.
November 18th, 2008 at 4:17 pm
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November 18th, 2008 at 8:01 pm
BenG, did you know that GM couldn’t even produce a profit at the height of the bubbles? Why would you want to save them? Why do you think the government would do a better job managing/stipulating rules for them when they haven’t managed anything in history any good? Let them fail because what will rise from the ashes is a booming new auto industry under the same names but smarter people behind the helm.
Any money thrown at them is bad money. The only people wanting to bail them out have some financial stake in them in some direct or indirect way. Whether stock or receiving money from lobbyists……
November 18th, 2008 at 8:25 pm
Again, Mr. Schiff hits the nail on the head. But of course, what our pundits and politicians ignore is the real problem — sorry about this — but the UAW will never allow the industry to become competitive in the global economy. The solution is hard to swallow, but must occur for any of the big 3 to survive without repetitious US bailout funds, get rid of the UAW and cut wage and benefits by 1/2 — at a minimum, plain and simple.
November 19th, 2008 at 10:06 am
Watch the DVD Who Killed the Electric Car. It’s a good lesson in how American auto manufacturer’s have shot themselves in the foot. Bad decisions should have consequences.
November 19th, 2008 at 4:32 pm
The auto companies can get money with conditions attached like asset sales, reduction or freezing of executive compensation, review of workers contracts, investment in green fuel cars etc. The process of chapter 11 is exactly for the then management (receiver?) to get painful but right things done. Maybe the government can act as the entity giving money to GM for example once it gets into Chapter 11.
Since there is a risk that no creditor will lend money to GM which means it goes to liquidation, which is not at all a good choice. I dont believe taxpayers should bail out poor management decisions specially when taxpayers have no say in the future decisions being made. Job losses are the last thing we need since this means there is less money to spend for the rest of the economy to begin growing again.
December 11th, 2008 at 3:56 pm
If they take the bailout - Boycott GM and Chrysler. Buy a Ford….
The merits of a “Detroit 3″ bailout has been debated at Donklephant ad nauseum. Since I cross post and already weighed in there, I won’t repeat those arguments here. But there is one point that seems to get lost in all the discussion and is repeated…