gm revisted and how does protectionism affect you?

Since December 2008, GMAC Financial Services, the financing arm of General Motors, has received approximately $12.5 billion in TARP money in an attempt to stabilize the company so that GM could fully recover.  At the time we were told that the money was necessary in order to save the automaker, and that they loans would be repaid once GM recovered.  Well looks like the "repayment" won't be coming anytime soon.  Yesterday the Treasury announced that it was giving GMAC an additional $3.5 billion in order to keep the company solvent.  After conducting a stress-test of the Company a few months ago, the Treasury required GMAC to raise more capital so that it would have enough capital on hand to cover any future losses, which are expected to continue into 2010.  However, GMAC was not able to find any private lenders to fill the void, so it was forced to turn to the federal government for yet another bailout.

Can anyone guess why GMAC could not find financing from the private sector?  Anyone?  It's not really that difficult a question.  Just look what happened to previous GMAC lenders.  They were the secured creditors who were left out in the cold when the Federal Government bailed out GM last year.  Rather than offering the creditors who secured their loans on GMAC's tangible assets a fair price based on the liquidation value of the company, the relative strength of their bargaining positions and contracts upon which the loans were based, Obama catered to the union special interests and made sure that lenders faced much stiffer losses (The union received approximately $10 billion in cash, $6.5 billion in dividend preferred stock and a 20% equity stake in the restructured company for about $20 billion in claims; compare this with $27 billion in claims by secured creditors who received 10-15% of restructured equity and no cash or preferred stock).

Why would anyone in their right mind lend money to GMAC after that?  If the company fails, which in my opinion is more likely than not, you will never get a fair deal for the return of your capital regardless of any contractual terms you negotiate.  This lack of private lending available to GMAC, as well as GM, is the inevitable consequence of the governmental interference in the contracts between lenders and GM.  If a lender cannot contractually guarantee a benefit for himself, then the contract has no value to him, as he now assumes all risk, and the contract will not be made.  Hence no private lending to companies that received federal bailouts.  I have no doubt that Geithner and Obama foresaw this outcome.  However, Obama has no problem nationalizing an industry and sees no problem with continued governmental control.  This was his ultimate goal.

None of this should be surprising.  Obama, although he espouses the virtues of private industry on camera to hide his socialist nature, has consistently funded government intervention and control over what should properly be a private venture.  Just look at Fannie Mae and Freddie Mac.  On Christmas Eve the government announced that it was removing the $400 billion cap on bailouts for the two GSEs.  That's right, they made this major policy announcement on Christmas Eve.  Why do yo think they would do this?  Of course they don't want people to know it.  And the vast majority of our retarded population will never have any idea.  News like this is is just words that get in the way of real news like the coverage of the Tiger Woods "scandal" and the death of Michael Jackson.  The announcement was made on a holiday and I guarantee that 99.9% of the population didn't know it happened.  But once again that's the way Obama roles.

Another example of the government intervening to protect a democratic political ally (once again the unions.  SUPRISE!) was the U.S. International Trade Commissions ruling that chinese steel imports "unfairly damaged" U.S. steel makers by receiving subsidies from the Chinese government.  The first question we should always ask in any antitrust or anticompetitive ruling is what is the goal of such a policy.  I belive that a smartly designed policy would be to ensure the protection of competition, not protection of competitors.  Our goal should be to ensure that access to a free and open market is not compromised, not that all competitors are protected from their own failures arising from rejection of their products in the marketplace.

This is the exact opposite of what occurred here.  U.S. steel makers are the United Steelworkers Union brought the case to the ITC under the dubious claim that the chinese "unfairly subsidized" their own domestic producers at the expense of U.S. producers.  First, what is the competition related problem with a government subsidy, which are often handed out in this country by the way?  How does this affect the ability of the market to function correctly?  It doesn't.  What is wrong with allowing the Chinese government to subsidize U.S. consumers of steel?  The subsidies make it cheaper to produced anything requiring steel at the expense of the Chinese taxpayer.  Sounds like a good deal to me.  There is nothing inherently wrong with that type of price competition.  If however, the Chinese jack up prices after eliminating such competition, that is an blatant predatory pricing violation of both the Sherman and Clayton Acts, and the chinese manufacturers would be subject to the stiff penalties outlined by that antitrust legislation.

However, the real reason for the I.T.C. ruling was to protect the domestic steel workers union at the expense of U.S. steel consumers (read EVERYONE).  They want to continue the status quo of impracticable benefits, unsustainable wages and absolutely no competition among workers.  I for one am sick and tired or it.  Why are the large majority of Americans expected to be productive or lose their job while teachers, government workers and other union members receive huge guarantees in pay and pensions while very little chance of ever being fired even if they are grossly negligent.  This double standard must change, and employees all across the U.S. should succeed based on merit, not political favor.

One final recommendation: to learn more about why protectionism is bad policy and why governmental intervention will almost never result in a positive outcome for the majority of the population please Free to Choose by Milton Friedman.  This rational market view of economics is straightforward, easy to understand and dispels many of the scare tactics and arguments put forward by the socialist apologists.  I still think it is the best book I have ever read (non-fiction).

the consumer nation

Often a lot is made over the large, sometimes described as excessive, consumption of the American public.  Officials from both parties decry that the U.S. cannot continue to consume at the rate it does, importing products from all over the world, and only exporting a few select products to the international community.  According to these officials this consumption is unsustainable and will eventually cost America its status as the economic leader of the free world.  But what causes these officials to make these accusations?  And are they right in their hypotheses?

The answer to the first question is almost always the same, regardless of the product or industry.   When American consumers buy cheap international products, the artificially low wages of foreign workers and subsidies of foreign governments make competition between the international producers and domestic producers fundamentally unfair.  American producers, with higher labor costs and large costs associated with complying with both state and federal industrial standards, cannot produce the products as cheaply as 3rd world labor.  In order to insulate American industries, the federal government should impose high tariffs on imports from these countries, thereby protecting the domestic industry.  Therefore the American industry will be able to compete with the international competitors, and the American workers will not lose their jobs because of cheap labor overseas.  

Now this all this sounds great, and its easy to make soundbites that can convince people that this is the right policy.  However, in reality this practice does more to harm the American people than it does to protect them.  First, we must understand that if another country can produce a good cheaper than we can domestically, it is the best interest of the large percentage of the American people to buy at this lower price.  As I stated above, the U.S. is a nation of consumers, and by allowing the consumer to purchase a product at the lowest possible cost, the maximum amount of people will see a benefit.  

Additionally, if Americans choose to buy strictly foreign products at the expense of purchasing domestic products, there is a market mechanism to counteract this balance.  The reason international labor is cheaper is because foreign workers are willing to accept less for the same work that American workers in the same industry will accept for the job.  Now these international workers are not paid in U.S. dollars, but in their home country's currency.  However, American consumers purchase their products using U.S. dollars.  In order to pay their workers, international producers must change the U.S. dollars paid into their own country's currency.  When Americans are buying large amounts of international products and few international consumers are buying American products, instead buying from their own domestic industry or another nation other than the U.S., the result is that more people will attempt to change dollars into the international currency than the international currency into dollars.  As a result the exchange rate between the international currency and the dollar will change, with the dollar becoming relative less valuable than it was in relation to the international currency.  In turn, this means that the international labors will become more expensive in terms of the amount of U.S. dollars it takes to pay for their labor.  Additionally, U.S. exports will drop in price in the international market, making U.S. exports more competitive abroad.  In the long term, if the market is allowed to function properly, an equilibrium will be struck, and the U.S. consumer will be able to buy the cheapest products, and products that the U.S. can produce most cheaply will be purchased both domestically and abroad.  

Now many are quick to point out that this equilibrium point may occur at a price where many industries that are currently being subsidized would no longer be able to operate profitably (easy example is the domestic auto industry) and thousands of people would lose their jobs.  Well this is probably true, but in the grand scheme of things it will maximize the country's benefit to let these industries fail.  The benefits to the consumer of lower prices for goods far outweigh the benefits to workers of a government subsidized industry.  In most any industry, the amount of workers is small relative to the amount of consumers of the product.  Even if some workers lose their jobs, a much larger number of people will see the benefit of lower prices.  And the people that do lose their jobs can either get a new job in a similar industry that has a business model that can compete with the international  producers, or they can get jobs in a different industry where American producers can create the cheapest products.  

Opponents of free trade like to portray economic problems as a winner/loser dichotomy.  According to their arguments, when U.S. consumers buy international products at the expense of domestic producers, the foreign country wins and the U.S. loses.  But in reality economic transactions are win/win situations.  The transaction would not take place if both producer and consumer saw a benefit.  In this case, the international producer benefits from sales of its product, and the American consumer benefits by receiving a product that he desires at the lowest price he can find.  If the U.S. is importing more value than it is exporting, than exchange rates will change until the equilibrium is reached.  If the U.S. is truly a nation of consumers, which it surely is, than it is the free market, and not the tyranny of government controls that will provide the maximum benefit to the American people.