Following Iain Murray’s farewell to 2008’s bailout-o-rama, Former CEI Brookes Fellow Tim Carney, in his Washington Examiner column, bids farewell to “The Year of the Bailout”:

Americans used to get exorcised any time the federal government considered bailing out private interests. When Chrysler got a $1.5 billion loan in 1979 (about $4.25 billion in today’s dollars), there was an outcry. When the Clinton administration bailed out Wall Street bankers in 1994 with a bailout of the Mexican peso, it was scandalous.

But as 2008 wound down, we got bailouts so large and in such rapid succession that we never had time to catch our breath.

Unfortunately, there’s probably more to come.

For more on bailouts, see the site (co-sponsored by CEI) BeyondBailouts.org.

Happy New Year!

The Bush administration’s outline of its automaker bailout package lists some seemingly sensible changes in labor practices that GM and Chrysler need to make. (Ford, to its credit, is seeking private financing instead.)

Targets: The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

• Reduce debts by 2/3 via a debt for equity exchange.
• Make one-half of VEBA payments in the form of stock.
• Eliminate the jobs bank.
• Work rules that are competitive with transplant auto manufacturers by 12/31/09.
• Wages that are competitive with those of transplant auto manufacturers by 12/31/09.

But…

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

Conditions with a loophole wide enough to drive a GMC truck through are hardly the stuff of which corporate transformations are made. To be fair, the Bush administration has recognized the biggest labor-related problems affecting these companies, so it is particularly unfortunate that it is being this timid.

The requirement to pay contributions to VEBAs (voluntary employee benefit associations) draws welcome attention to a looming problem. VEBAs are intended to serve as health care trusts that allow companies to pass their health insurance obligations on to another party, in this case a union. It makes sense for a company to want to shed those costs, and GM has already passed $35 million on to the United Auto Workers.

But, as Brian Johnson and Ryan Ellis of Americans for Tax Reform point out:

[T]he United Auto Workers has been given a free hand to define “health care” under the Treasury regulations—not coincidentally written by IRS officials of Presidents Lyndon Johnson and Jimmy Carter—which implement VEBAs.

Payments in the form of stock would at least help make VEBAs less liquid and thus prone to abuse — but even then, the requirement is only for half of payments, and is only a non-binding target for use of taxpayer money.

Finally, handing a large union a large wad of cash requires holding the union to a high standard of accountability, something for which President-elect Obama’s pick for Labor Secretary doesn’t provide confidence.

Tomorrow, electric utilities and green groups team up at the National Press Club to ask for billions of new spending on what they term energy efficiency. New versions of such stimulus and bailout proposals appear almost daily.

We spend a lot of time at CEI now proposing wealth-enhancing alternatives to these massive wealth transfers to government contractors and corporations. The right “stimulus” instead liberalizes wealth creation, it doesn’t spread around the dwindling wealth that already exists, like a self-appointed Benevolent Vulture; I submit one important approach–especially in today’s crisis situation–is to inventory all the regulations that impact a small business as it grows, and look hard at rollbacks. Below is the rough inventory I’ve compiled over time, but I’m sure it’s out of date and some things have changed. And this doesn’t even addess industry-specific rules (see endnote), which are probably the ones most in need of reform. I heartily welcome any additions and subtractions. We can’t manage something if we can’t measure it.

FEDERAL WORKPLACE REGULATION IMPOSED ON GROWING BUSINESSES* (Draft—Wayne Crews)

ONE EMPLOYEE

-Fair Labor Standards Act (overtime and minimum wage [27% min. wage increase since 1990])
-Social Security matching and deposits
-Medicare, FICA
-Military Selective Service Act (90 days leave for reservists; rehire discharged veterans)
-Equal Pay Act (no sex discrimination in wages)
-Immigration Reform Act (eligibility must be documented)
-Federal Unemployment Tax Act (unemployment compensation)
-Employee Retirement Income Security Act (standards for pension and benefit plans)
-Occupational Safety and Health Act
-Polygraph Protection Act

4 EMPLOYEES: ALL THE ABOVE, PLUS

-Immigration Reform Act (no discrimination with regard to national origin, citizenship, or intention to obtain citizenship)

15 EMPLOYEES: ALL THE ABOVE, PLUS

-Civil Rights Act Title VII (no discrimination with regard to race, color, origin, religion, or sex; pregnancy-related protections; recordkeeping)
-Americans with Disabilities Act (no discrimination, “reasonable accommodations”)

20 EMPLOYEES: ALL THE ABOVE, PLUS

-Age Discrimination Act (no discrimination on the basis of age against those 40 and older)
-Older Worker Benefit Protection Act (benefits for older workers must be commensurate with younger workers)
-COBRA (continuation of medical benefits for up to 18 months upon termination)

25 EMPLOYEES: ALL THE ABOVE, PLUS

-Health Maintenance Organization Act (HMO Option required)
-Veterans’ Reemployment Act (reemployment for persons returning from active duty, reserve, or Nat’l Guard)

50 EMPLOYEES: ALL THE ABOVE, PLUS

-Family and Medical Leave Act (12 weeks unpaid leave or care for newborn or ill family member)

100 EMPLOYEES: ALL THE ABOVE, PLUS

-WARN Act (60-days written plant closing notice)
-Civil Rights Act (annual EEO-1 form)

*Assumes non-union, non-government contractor, with interstate operations and a basic employee benefits package. Includes general workforce-related regulation only. Omitted are categories such as environmental and consumer product safety regulations, and regulations applying to specific types of businesses such as mining, farming, trucking or financial firms.

Jacob Sullum’s recent column argues that Bush’s auto bailout plan is an unconstitutional violation of separation of powers.  We earlier argued that it was either illegal or unconstitutional. 

Meanwhile, the Federal Reserve, with little public awareness, is attempting a financial system bailout far bigger than Congress ever authorized, resulting in one failure after another, as economics professor Jeffrey Rogers Hummel explains in a recent editorial.  “All the emergency initiatives of both the Fed and the Treasury since the subprime problem first emerged have not merely proved stellar and consistent failures. As Anna Schwartz . . . and other economists have suggested, the thrashing about of Fed and Treasury policy has undoubtedly made the financial situation worse.”

Professor Hummel describes how an unhinged Federal Reserve has “opened the monetary floodgates,” to the point where “Federal Reserve Bank credit [has] doubled to around $1.8 trillion.”  That massive  “increase of the monetary base . . . heralds future inflation.”  And the Fed is using money from the Treasury to buy up risky securities, putting the taxpayers at great risk:  

“Essentially, the Treasury is now issuing extra securities to borrow money from the economy, then loaning the money to the Fed in these special deposits so that Bernanke can re-inject it to make his bailout purchases of various securities, all without increasing the monetary base. In other words, what the infamous bailout act permitted the Treasury to do directly is something it had already started doing indirectly through the Fed to the tune of half a trillion. All in the name of easing a tight Treasury market.

This means that the total bailout is not the $700 billion that Congress appropriated, but at least $1.2 trillion. And that figure doesn’t include the Fed’s mid-October promise of $540 billion to bail out money market funds, which if not covered by the Fed’s sale of other assets, will require either further monetary increases or further Treasury borrowing. Thus we now have the worst of both worlds: a massive bailout financed both by Treasury borrowing (in order to avoid inflation) and a Federal Reserve increase of the monetary base (which heralds future inflation anyway).

Of the $1.2 trillion increase in federal government borrowing, at least half took place within the space of a month. This sudden 25 percent increase in the outstanding national debt qualifies as the most dramatic peacetime experiment in fiscal stimulus the U.S. government has ever implemented. If Keynesian theory were correct, the economy should have been well beyond the reach of any potential recession by the end of October. But how many economists are going to acknowledge this striking empirical refutation of the fiscal policy they hold dear?

This enormous increase in government debt may at least partly explain the sudden stock market collapse after the bailout passed.”

The Fed’s increasingly radical bailout measures have been described by sympathetic journalists as “creative.”  That polite euphemism disguises the fact that many of the Fed’s bailout measures have been illegal and lacking in any statutory authorization.  Federal Reserve Chairman Ben Bernanke should be removed from office for usurping powers not granted to the Fed by any federal law. 

Even recent Fed actions that are perfectly legal — like its unprecedented cut in the federal funds rate to virtually zero – are likely to be completely ineffective in reviving the economy, even as they discourage responsibility and thrift.

The Treasury Department, meanwhile, is using financial system bailout money for purposes Congress never intended, like buying up ownership shares in banks, leading even some former supporters of the bailout to protest that they were deceived by the Bush Administration.

National Review editor Rich Lowry, who mistakenly supported the financial system bailout because he trusted the Bush Administration, now realizes that he was deceived by Treasury Secretary Hank Paulsen, and that the bailout was sold to the public under false pretenses.

Having promised to use bailout money to buy up troubled assets, the Bush Administration instead used the money for completely different purposes, and now wants to use some of it to bail out an entirely different industry — the automakers.  The Bush Administration reads the bailout bill as giving it almost limitless discretion as to who to bail out and how.  That interpretation of the bailout statute should be rejected, because such a vast grant of discretion would be unconstitutional.

The proposed bailout of the automakers would itself be a grave mistake, costing taxpayers billions while avoiding the painful reforms to the auto industry needs to enable its long term survival and failing to make inexpensive deregulatory reforms that would allow the auto industry to recover.  The bailout would repeat the mistake England made in the 1970s, when it completed the ruin of its failing auto industry by attempting to bail it out, at a cost of billions of pounds, making it uncompetitive and dependent on welfare instead.

The Federal Reserve has just cut the federal funds rate for loans to banks to an unprecedentedly low rate — ranging from 0.0% to 0.25% — well below its prior 1 percent rate.  After taking inflation into account, the Fed is literally giving money away.  The Fed’s low interest rates since 2001 helped spawn the current financial crisis and the mortgage bubble, greatly weakening the value of the U.S. dollar and reducing capital investment in the U.S.

The Fed’s rate cut will also have the effect of reducing already very low interest rates on savings accounts, costing savers money.   Not only is your bank interest rate less than the inflation rate, eroding the value of your savings, but to add insult to injury, you have to pay income tax on the insultingly-low interest, too.

The Fed’s action misdiagnoses the cause of the financial crisis.  Banks aren’t refusing to lend money because interest rates are too high — they’re refusing to lend because they are afraid they won’t be paid back.  The Fed’s irresponsible actions lend weight to such fears.

The Fed’s action, which is partly intended to prop up overextended borrowers by reducing their interest payments, sends the message that the government will protect such borrowers from the consequences of their own overspending and recklessness, regardless of the cost to others.

That same mentality is behind Obama’s campaign call for a freeze on foreclosures; the FDIC’s failed policy of reducing the mortgage payments of delinquent borrowers at failed banks; and calls by politicians like House Speaker Nancy Pelosi to bail out defaulting mortgage borrowers.   Banks’ reluctance to lend money in such a political climate, and fear that they won’t be fully paid back, is understandable.

A bailout would be worse for the auto industry than automakers filing for bankruptcy, explains banking and bankruptcy expert Todd Zywicki, a law professor, in the Wall Street Journal.   Indeed, by enabling automakers to get rid of expensive union contracts (such as $70 per hour compensation) and red tape,  a “Chapter 11 bankruptcy filing will likely result in a stronger domestic industry.”    “Chapter 11 also provides a mechanism for forcing UAW workers to take further pay cuts, reduce their gold-plated health and retirement benefits, and overcome their cumbersome union work rules.”  It would also help them get rid of redundant auto dealerships that should be terminated but aren’t because of state dealer franchise laws that milk automakers for the benefit of dealers (GM has vastly more dealerships than Toyota, even though Toyota has more sales worldwide than it does).

In the New York Post, professional investors who own shares in the Big Three automakers argue that a bailout would be counterproductive and that the Bush Administration fundamentally misunderstands and is mismanaging the current financial crisis. 

The proposed auto industry bailout is similar to the British government’s unsuccessful auto bailout in the 1970s, which utterly failed despite a cost in the billions.

There are inexpensive ways to help the automakers that would do more for them than a bailout, like getting rid of costly regulations and red tape, such as burdensome CAFE mandates that downsize cars and thus cost thousands of lives yet are less effective at conserving fuel than a simple gas tax.   Moreover, the Bush Administration’s proposal to divert financial system bailout money to bail out the automakers is likely illegal or unconstitutional.

Maybe not really him, just a new viral email flying around. Pretty funny anyway.

1. The US has made a new weapon that destroys people but keeps the building standing,. Its called the stock market - Jay Leno

2. Do you have any idea how cheap stocks are ?? Wall Street is now being called Wal Mart Street - Jay Leno

3. The difference between a pigeon and a London investment banker. The pigeon can still make a deposit on a BMW

4. What’s the difference between a guy who lost everything in Las Vegas and an investment banker? A tie!

5. The problem with investment bank balance sheet is that on the left side nothing’s right and on the right side nothing’s left.

6. I want to warn people from Nigeria who might be watching our show, if you get any emails from Washington asking for money, it’s a scam. Don’t fall for it - Jay Leno

7. Bush was asked about the credit crunch. He said it was his favourite candy bar - Jay Leno

8. The rescue bill was about 450 pages. President Bush’s copy is even thicker. They had to include pictures - Jay Leno

9. President Bush’s response was to meet some small business owners in San Antonio last week. The small business owners are General Motors, General Electric and Century 21 - Jay Leno

10. What worries me most about the credit crunch, is that if one of my cheques is returned stamped ‘insufficient funds’. I won’t know whether that refers to mine or the bank’s

Last night, the Detroit Big Three bailout package crashed and burned for the best of reasons. To their credit, Senate Republicans refused to abide the United Auto Workers’ cavalier attitude toward further, drastic concessions. Reports The New York Times:

Late Thursday, the Senate did not take up an assistance measure passed by the House, after hours of negotiations between Senate Republicans with the auto companies and the U.A.W. The sticking point apparently was the union’s refusal to agree to lower wage and benefit rates as soon as next year.

Representatives for the union, which had already accepted a series of cuts in its current contract, sought instead to push any more concessions back to 2011, when the U.A.W.’s contract with Detroit auto companies expires.

And the UAW’s stated reason for wanting to take so long? The union put out a statement:

“Unfortunately, Senate Republicans insisted that this had to be accomplished by an arbitrary deadline. This arbitrary requirement was not imposed on any other stakeholder groups. Thus, the U.A.W. believed this was a blatant attempt to make workers shoulder the lion’s share of the costs of any restructuring plan,” the statement said.

Isn’t it inconvenient how an emergency can impose an “arbitrary deadline”? The UAW’s argument of “Make them do more!” cannot obscure the fact that the union itself still needs to make further concessions, no matter what.

If the Detroit auto makers’ situation were truly as dire as they and the union claim, they’d be renegotiating contracts now.

Apple's 1984 "Big Brother" ad

An article over at Ad Age brings up an angle on the whole auto industry bailout probably not considered much before.  The fact that a yet-to-be-appointed “car czar” will have control over a multibillion dollar advertising budget for the big three.  Under the guise of “oversight,” this would effectively “Create World’s Most Powerful Marketing Exec[utive].”  

The draft rescue plan for Detroit sent to the White House by Congress yesterday calls for the appointment of a “car czar” who will oversee the Big Three automakers’ expenses over $25 million — which, by extension, would include media buys. Based on Advertising Age’s estimates of spending by General Motors Corp., Chrysler and Ford Motor Co., that would give the as-yet-unnamed car czar control over some $7.3 billion in marketing spending in the U.S. alone.

The most disturbing thoughts about this (particularly to those concerned with liberty) are provoked here: 

The car czar would wield a budget more than double those of AT&T, Verizon, Unilever and Johnson & Johnson, which round out the nation’s top five marketing spenders, and give the car czar more clout with media and agencies than such famed names in marketing as Walmart Chief Marketing Officer Stephen Quinn and Anheuser-Busch VP-Marketing Dave Peacock.

…If the bailout goes through, agencies that work for the Big Three will essentially be toiling on a government account, with all the associated red tape and strictures that involves.

So there you have it.  We should all be concerned about this for many reasons.  As mentioned, the large ad budget that comes with a czar-controlled U.S. auto industry will allow a government bureaucrat to wield unbalanced and unchecked influence over not only who gets ad contracts, but what media outlets get ad money. The czar can simply refuse to give business to an advertising agency who works for a foreign competitor of the big three (or a “non-compliant” corporation), or refuse to pay money to show ads on outlets that they deem “unfriendly” to the administration or its mission.   This will be an unequivocal disaster.  We have already seen the lengths to which administrations (and pre-administrations) have gone to influence and/or silence media they do not like.  What kind of power plays do you think are possible when the administration’s appointee controls a major source of media outlets’ ad revenue? Whatever it ends up being, it won’t be pretty.