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 five most interesting people

So here is the question. If you could sit down and have dinner with five people from anytime in the history of the world, who would they be? I think this is an extremely difficult question. At this dinner I would want to discuss a variety of issues, and there are many diverse people whose minds I would want to pick. So let's get to my answers. Here they are, in reverse order.

5. Thomas Jefferson

The founding father and author of the declaration or independence is arguably the most influential figure in the founding of our republic. His views of personal responsibility, liberty and autonomy shape many of the ways I think today. Although he was not the most brilliant economic mind (see the embargo of British and French goods prior to the war of 1812) he was still a brilliant statesman and one of the pioneering thinkers regarding the inherent freedom of men.

4. John Locke

Locke's lasting legacy was his notion of the social contract. He was the first documented human to state that the proper role of government was a limited one, and that a legitimate government only had powers that were conferred upon it by the people it governed. It was upon Locke's guiding principles that our republic was founded, and he was the first to question the tyranny of authority that was present in all governments of human kind up until his time.

3. Milton Friedman

It is Friedman's belief in the power of markets to efficiently and fairly distribute wealth that I base almost all of my political beliefs on. He refused to accept that central planning was the path to prosperity and recognized that it is the collective wisdom of all people (consumers through the price mechanism) that determine the best outcome in almost all situations. He revolutionized modern economics and showed how humans rely on incentives, which are created through numerous circumstances including free market prices, to best determine how to allocate scarce resources. To this day, Free To Choose is the manifesto I live by.

2. Albert Einstein

Perhaps the most brilliant mind of all time, Einstein could reason on a level beyond comprehension to almost all other men. He thought of the universe in a way that was unheard of in his time and was widely criticized until empirical evidence proved his theories as correct. Thanks to his theory of relativity we now recognize that the universe is a much different place than we ever imagined and that all natural forces are most likely interconnected. Although there is no general theory of physics yet, Einstein pushed us to accept the unexpected, and revolutionized modern science in the process.

1. Adam Smith

The father of modern economics, no one has done more to improve the general welfare of humanity than Adam Smith. His revolutionary work, The Wealth of Nations, moved humanity beyond the dark ages into an age where free individuals were able to make their own choices to better themselves while at the same time bettering society as a whole. This revolutionary idea that the "invisible hand" will lead free actors to improve the life of both themselves and society as a whole was the foundation of capitalism. Thanks to Smith, human kind has advanced tremendously, and the standard of living had increased at an exponential rate. He was the first to establish a functional theory of prices, equating them to the relative value of the goods and services to both producer and consumer. In my opinion, there is no other individual in history who had more influence on the history of human civilization.