Moon of Alabama Brecht quote
October 21, 2008

Race to the Bottom

On October 4th I wrote in Smoot-Hawley By Subsidies:

Bad times often lead to economic fights across borders. Smoot-Hawley used tariffs with the intend to block out imports. Another method of preference of domestic producers is to feed them with subsidies.

Last weekend Congress passed a bill that will give the U.S. auto industry access to $25 billion of subsidized federal loans. Additionally the Paulson bailout is worded in a way that allows the Treasury to buy up bad performing car loans the big three have made to sell their products. If the Treasury pays more than the market value for such 'assets', the result is a direct capital injection by the government into the Detroit companies. (Only without any upside for the taxpayer.)

As a consequence of U.S. subsidies to its carmakers, European carmakers also asked their government for money. As the FT reports today, their wish will be fullfilled:

German and French carmakers, which have asked the European Commission for €40bn ($53bn) in cheap loans, are eligible to tap their governments’ banking rescue plans, according to government officials.

Both the German and French finance ministries said on Monday that the financing arms of carmakers could use the state guarantees for new lending of up to €400bn and €320bn respectively.

This is protectionism by subsidies. Protectionism by ramping up custom duties made the 1920s/30s depression great.

Trade wars via subsidies have the same consequences though they might cost the taxpayers more than tariff schemes. The propping up of overcapacities eventually leads to state bankruptcy.

The money for the subsidies should better be used to help dismantle some overcapacity and to prop up new industries in alternative energies.

It seems like the politicians are trying their best to repeat the errors made 80 years ago.

Posted by b on October 21, 2008 at 11:49 UTC | Permalink

Comments
This is protectionism by subsidies.

AFAIC, it's a lot more than that. For one thing, this stuff is mostly out of US public/"Joe the plumber's" view & consciousness. 2nd, w/in that context, it's a gov funded recovery fund for a Detroit that heavily lobbied K-street to prevent more stringent CAFE standards. The lack of doing so is very much at the heart of Detroit's current very big problems.

The previously unthinkable notion that GM could go completely toes up is not just a possibility, but a strong one.

Everything I've seen as this "financial crisis" has unfolded over here, eg. media coverage and (even approximation of) honest description of conditions, had been kept from public view. While Rome is burning, we're getting narratives about ACORN, Powell's an ungrateful racist, rather small shift in tax rates being "socialism"...

Pretty sorry state of things.

Your "protectionism" allusion is accurate AFAIC, but the many layers of desception, "crisis to crisis" band-aids as opposed to honest assessments, and national especially political narratives which not only obscure all this but feed-the-beasts of ignorant, bigoted jingoistic nationalism... at least for me, are much greater concerns.

With an honest inward looking national moment, at least there would be some hope of positive moves forward. W/out it, none.

Posted by: jdmckay | Oct 21 2008 12:03 utc | 1

It also has to do with the fact that automotive companies were just as involved in making loans to buy cars as they were in selling them. They got caught up in a financial crisis that added to the woes already besetting them because they were delivering poorly built, high- consumption products.

Posted by: ralphieboy | Oct 21 2008 12:09 utc | 2

It also has to do with the fact that automotive companies were just as involved in making loans to buy cars as they were in selling them.

Yep - GM is a bank with an attached car manufacturer. The problem is that these banks have borrowed short and lend long. The also lend too much for cars that are losing value faster than the loan gets repaid. The also have lots of leasing contracts an will have to take back cars from leasing contracts that then will be less worth than was anticipated.

Lots of mess there and GM is likely broke.

The German manufacturers opened real banks to fund their leasing/lending arms. BMW-Bank and Volkswagen-Bank offer typical S&L saving accounts here which pay a bit better interest than real S&Ls here. They might well be in trouble too, but as they have a much larger base to borrow from, the trouble might also be less.

Posted by: b | Oct 21 2008 13:13 utc | 3

Hello barflies and barflyesses,
Here's a uniquely European perspective by a research team - http://www.leap2020.eu/
Their scariest report recently is this one -
http://www.leap2020.eu/GEAB-N-28-is-available!-Global-systemic-crisis-Alert-Summer-2009-The-US-government-defaults-on-its-debt_a2250.html
Quote: "..
• The recent upward trend of the US Dollar is a direct and temporary consequence of the collapse of stock markets

• Thanks to its recent « political baptism », the Euro becomes a credible « safe haven » value and therefore provides a « crisis » alternative to the US dollar

• The US public debt is now swelling uncontrollably

• The ongoing collapse of US real economy prevents from finding an alternative solution to the country's defaulting

• « Strong inflation or hyper-inflation in the US in 2009? », that is the only question.

Studying the case of Iceland can give an idea of the upcoming stages of the crisis. That is what our team has been doing ever since the beginning of 2006. This country indeed provides a good illustration of what the US and the UK should be expecting. It can be considered – and that is what most Icelandic people do today – that the collapse of Iceland's financial system came from the fact that it was disproportionate to the size of the country's economy..."

One a more positive note:
http://www.gtri.gatech.edu/casestudy/3d-solar-cells-boost-efficiency
or a 12 year old's (literally) version -
http://cleantechnica.com/2008/09/17/12-year-old-boy-invents-new-type-of-solar-cell/

"It was the best of times, it was the worst of times.." (Dickens?)


Posted by: Sustain26 | Oct 21 2008 13:38 utc | 4

GM is a bank with an attached car manufacturer.

close enough. And BTW, that's not unique to GM: Ford & Chrysler pretty much in same boat. WRT unusable (eg: gashog) technology and production facilities, Chrysler's in worsh shape than GM.

The problem is that these banks have borrowed short and lend long. The also lend too much for cars that are losing value faster than the loan gets repaid. The also have lots of leasing contracts an will have to take back cars from leasing contracts that then will be less worth than was anticipated.

Yep.

Lots of mess there and GM is likely broke.

Yep. I'm increasingly coming to conculusion (not that anyone's calling to consult) we'd be better off just letting 'em die. The Jap/German/Swedish & Korean cars a just better, more effeciently made and operated... what's the point of feeding a diseased cash sump?

Posted by: jdmckay | Oct 21 2008 14:40 utc | 5

this actually should be in an ot thread so feel free to remove. it reminded me of the october 17th post "the imf is getting back into business." can any of you shed any light on what this means for europe and of course the rest of us?
http://calculatedrisk.blogspot.com/2008/10/report-imf-to-bailout-iceland.html

Posted by: charmicarmicat | Oct 21 2008 15:07 utc | 6

@charmicarmicat - The IMF bailout of Island will have no important impact on Europe. Maybe the austerity that comes with the IMF program will prompt the Icelanders to get rid of their neoliberal government that was very active in creating the mess.

The fall of the three banks have some implications in other financial companies in Europe. We just do not know yet who will be hit by this and how. I expect that some banks will need to do quite some write-offs and that may topple them too.

In the real economy the UK will get hit because these banks financed the buyouts of some retail chains that may not go down. Maybe ASKOD can say something about the banks in Denmark, Sweden, Norway and Finland. Those also had good relations withe Iceland.

Posted by: b | Oct 21 2008 16:37 utc | 7

A bit OT, but still within economic discussion:

Translated recent interview with Paul Virilio from Le Monde

Posted by: Obelix | Oct 21 2008 17:18 utc | 8

"It seems like the politicians are trying their best to repeat the errors made 80 years ago."

Errors? Depends on point of view ......

Posted by: Cloud | Oct 21 2008 17:37 utc | 9

cloud @9: yeah, if it appears members from both sides of isle are doing their best to ensure this crisis becomes a catastrophe, maybe it's because they really are doing their best to ensure this crisis becomes a catastrophe.

Posted by: Lizard | Oct 21 2008 17:49 utc | 10

@ Lizard #10: "both sides of isle"?? aisle? But surely it's really "both sides of the [Atlantic] pond"?

Posted by: Helena | Oct 21 2008 18:05 utc | 11

Lizard #10, Cloud #9, yes, yes, yes, Molly Blooms' yes.

Posted by: plushtown | Oct 21 2008 18:06 utc | 12

Helena # 11, yes.

Posted by: plushtown | Oct 21 2008 18:14 utc | 13

Helena: thanks for catching the slip. and yes, i'm sure all the relevant groups, like the G7, are trying to appear as incompetent as possible as the program for consolidation continues. our best bet may be to hope for a significant amount of in-fighting among the elite before the final shackles click shut.

Posted by: Lizard | Oct 21 2008 18:26 utc | 14

Lizard #14, personally think all top-level in-fighting not resulting in someone being http://www.theconspiracy.us/cati3/0020.html>suicided is for show only.

http://query.nytimes.com/gst/abstract.html?res=9C00E1D61439E733A25756C2A9619C946897D6CF>7/25/1909 NYT pdf Latter may indeed only be based on love/biology, as is of a younger brother. Former is of a man set to become family head.

Posted by: plushtown | Oct 21 2008 19:12 utc | 15

I can also well assume that GMAC was no more selective in granting car lonas than the junk-mortgage vendors were in handing out homeowners' loans.

My faith in Capitalism was shattered by the Chrysler bailout of the late 70's, this is America not only repeating the mistake, but throwing a bank bailout in on the deal.

Remember, the Germans bought Chrysler and then sold it short last year to cut their losses.

Posted by: ralphieboy | Oct 21 2008 19:27 utc | 16

« Strong inflation or hyper-inflation in the US in 2009? », that is the only question.

If there were really "hyperinflation" in the cards we should all be buying TIPS (which at the moment carry no premium to treasuries of the same maturity.... ie the market is pricing in zero inflation for ten year maturities.)

http://www.bloomberg.com/apps/news?pid=20601085&sid=aMpXfsT5hAgI&refer=europe

One measure of traders' outlook for inflation, the difference in yields on 30-year nominal bonds and Treasury Inflation Protected Securities, or TIPS, narrowed to 1.33 percentage points on Oct. 8, the lowest in almost a decade.

Posted by: vaudois | Oct 21 2008 23:24 utc | 17

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