Wednesday, November 5, 2008

Crazy Idea #6 - Funding Our Own Bailout

Alright, so I frequently post about the automobile industry. On one hand, I apologize for giving so much attention to that portion of our state economy. On the other hand, I am unapologetic because the automobile industry is Michigan's largest employer, our economic basis, and the reason we exist in the first place. Also, this industry is teetering, in some significant trouble, and in need of drastic help. Analysts claim that Ford, GM, and Chrysler need cash to weather the current recessionary storm in the hopes that demand will largely return by 2010, when these companies will also be able to gain some significant savings through recently renegotiated UAW contracts and other cost-saving measures. Boiled down, most people think that whoever survives 2009 will thrive and prosper, but making it through 2009 is not assured by any measure. To survive, these companies need Cash Mon-Ay.

Toward this end, these companies have been lobbying the federal government feverishly for one of two things. First, these companies have been budgeted loans in total aggregate of $25B in the U.S. Federal budget. These loans should not be considered a pure bailout. In theory, this money will enable the domestic auto industry to survive, make profit, and then pay the loans back to the U.S. taxpayers with interest. It is not free money, and you would be remiss to think so. However, these loans have not been released to the companies because of the bureaucracy involved in the process. Everyone is working on making this already-approved method a reality, but it is unclear when the loans will be granted and officially transferred for use. Second, the companies are trying to gain access to a second bucket of money - ideally, by grabbing some chunk of the approved $700B package intended for banks. Another possible method would be to snatch some money directly from the Treasury, which is already acting like a giant U.S. bank. Over the past 7 days, both of these secondary measures appear to be temporarily (or permanently) shut down until after the election is completed and things have settled down. The already-approved loans are great, but they could be significantly delayed and may not be enough to push the ball up the mountain. The secondary bucket of money may not be an option.

So where might this critical cash come from for our base industries? Well, I have a crazy idea. There are currently talks that another "fiscal stimulus package" for American citizens is a virtual guarantee to avert a longer, deeper U.S. recession. Do you remember those checks that you got a few months back for $600 that saved our economy? Yeah, kind of like that because it worked so effectively before. This new package could run anywhere from $300B -$400B dollars. Of course, it could be more, it could be less, but let's work with these numbers for now.

Michigan has approximately 10M residents, and the U.S. has approximately 300M residents, so Michigan has about 3.3% of the entire U.S. population. Assuming an equal stimulus distribution throughout the country roughly based on population, Michigan should be entitled to about 3.3% * $400B = $13.3B from the new stimulus package. This new stimulus package probably won't take the form of checks directly to citizens, but rather a collection of ideas like extending unemployment benefits and funding public-works and infrastructure projects. These things could be great, but Michigan has another, much more significant and urgent need in the form of keeping our core industry alive.

Michigan residents should be given the opportunity to vote for whether or not they want their portion of the stimulus package ($13.3B) to provide critical cash for our automobile industry. I don't know how the residents would vote under this theory, but hopefully we can convince each and every member of the state that if we want the state to survive, we can not lose our American automobile manufacturers. Reports have stated that 10% of all employment in the U.S. is somehow affiliated with the domestic auto industry, and this 10% would all be out of a job if our worst fears are realized. The cost of unemployment benefits for the country alone could far outweigh the cost of providing cash to the needy companies. On top of all this, if the auto companies can return to profit, they, too, would pay back Michigan's residents with interest, possibly resulting in a reduced tax burden for the residents at some point in the future.

Dum-dums may ask why GM/Ford/Chrysler just don't go to a bank for immediate cash. Well, here's the fundamental problem - because the auto industry is so challenged right now, the interest rate these companies would pay to a bank would vastly exceed (2-3 times more) the interest rate that the federal government or Michigan residents would require as a return on their investment. Therefore, our interests would be best-served by immediately reducing the cost of borrowing for these companies. There are many more tangible and intangible reasons why we must prevent a cascading failure in the auto industry (keeping population in-state and employed for tax revenue, being able to sell one's home, being close to family/friends, and on and on and on). Would you rather lose a check for $600 now, or lose a $250K investment on your home because absolutely no one can or will want to purchase it?

Thank you very much if you stuck with me to this point. As with all problem-solving, we must think big picture - particularly in Michigan. We can either solve this problem as a functioning, single-minded group of souls, or we can falsely (I believe) convince ourselves that our individual self-interest outweighs the greater good. The quality of my home is influenced by the quality of my neighborhood, which is influenced by the quality of my city, which is influenced by the quality of my county, which is influenced by the quality of my state.


Nick said...

Why should anyone loan a company money when they can buy stock in the company? Buying stock is essentially the same as your idea of loaning to an automotive company, and instead of being paid only interest on the money loaned, you could potentially receive dividends, and ultimately if the company succeeds, a profit on the sale of your stock. If the company fails, too bad, the results would be the same as if you had loaned them money.

If you want a guaranteed return on your investment, buy baseball cards.

Anonymous said...

In the case of normal business operation, companies must service their debt before paying dividends.

In the case of a failure, company assets are liquidated and debt-holders are paid before paying stock-holders.

In either case, debt-holders always get paid first. Stock-holders always get paid last (if ever). Hence loaning money is safer and more stable than buying stock. Not everyone has 20 years to wait for the stock market to come back.

Ken said...

Thank you for the input, anonymous, and of course you are correct. I also addressed a few additional points in support of loans in my post immediately following this one. Keep on reading, and I'll keep on trying to make people think I'm a dummy.