Thursday, November 20, 2008

GM Bailout: When the Ship Sinks, Joe Six-Pack is to Blame

I have a new post up at Global Comment.

It seems each time the news turns to the financial sector there is a company or industry that’s failing. While economists examine what it means to the economy as whole, ordinary Americans sit in fear that tomorrow will bring a pink slip. While we have a tendency to speak about economics in abstract terms, it has a real world-effect on the average Joe Six-Pack that both Democrats and Republicans wooed ardently during election season.

The witch-hunt goes for a business or entity to blame for the current crises goes on. One of the culprits Anderson Cooper named as responsible for the meltdown was the American consumer. He reminded us of the large homes, financed shopping trips, auto loans and lack of saving. He suggested that it was the American desire for possessions, combined with an easy credit system, that played a huge role in this collapse.

What Anderson neglects to factor into his analysis is why the consumer lives on credit. It is not always a case of wanting to get the latest toy or cute new pair of shoes. Many homeowners have been forced to refinance their homes to pay for medical expenses or college tuition for their children. The availability of credit on demand has allowed companies to gain large profits without increasing the wage of the workers that labour to create their wealth.

With the ability to purchase what is needed with credit rather than cash, many did not see reason to stand behind their unions as they fought for gains. What is the necessity of organizing if your needs are technically being met? It wasn’t until the economic fallout that people have come to realize that credit does not offer a real safety net.

Finish Reading Here

15 comments:

Anonymous said...

That's easy for you to say. Canada weathered this crisis quite well considering they have solid foundations like good credit to begin with and 20% down. Zero, zero, zero culture hasn't hit you all yet. Have to refinance to pay for medical expenses or college mean the person should not be owning a home in the first place. Most college kids that own homes are rich anyway.

-Ben

Renee said...

@Ben every single person should "own" a home. The rental system is predatory and exists to privilege one class over another. You clearly did not understand this article. I am speaking for workers rights. For your information Canada is not weathering the storm we are about to enter our own recession. The bank of Canada had to readjust interest rates yet again.

Anonymous said...

Renee,

It's interesting that you say it in that way. The facts seems to clearly indicate the opposite. This crises was not started by renters, but actually it was the predatory behavior in sub-prime lending for mortgages on homes; not rentors. If one has to get a sub-prime loan at high rates, then clearly it is cheaper to rent.

As for Canada having to lower interest rates; you're still well off. Ours is nearing zero and the estimates for the toxic debt, CDO's, credit default swaps and bad papers is (some are hypothesizing) between 1-2 trillion dollars. Is the Canadian bank debt that high there?

-Ben

Renee said...

Ben
I didn't say that the crises was started by renter my comment about renters was in response to you saying that certain people should not own homes if they have to continually refinance. I am pointing out that you are advocating paying rent which is predatory.

A sub prime loan is not cheaper than rent if the interest rate keeps adjusting to the point where it is impossible for the home owner to make the mortgage payment.

The idea of having to pay for housing which a basic human need is wrong regardless of what circumstances it happens under.

I am further not stating that things in Canada are as bad in the US what I am stating is that it is an erroneous supposition that Canada is not undergoing its own economic retraction.

Ebony Intuition said...

"It is not always a case of wanting to get the latest toy or cute new pair of shoes. "

This how obtaining bad credit starts and to me this is one of the major reasons why. Buying something simple and then it turns into large or multi purchases on their C/C and then unable to pay the minium payment or pay off the bill.

I work at a major canadian bank, and I used to work in the credit card dept, and trust me a lot of purchases are made on things that are not needed.

"It wasn’t until the economic fallout that people have come to realize that credit does not offer a real safety net."

If that is the case then people haven't been doing their homework. When people apply for a credit card all the rules are placed in front of them, if they follow them correctly they won't have problems if they choose to bend the rules and not make their payments, then your credit will go down the drain.

Anonymous said...

Ebony,

AMEN.

Renee,

Your argument seems circular in nature. If paying for housing is wrong, then how do people get adequate homes? Would you advocate government housing? If so, someone would still have to pay for that. I don't how one or any for that matter can get out paying for housing in order to get to a situation where people don't have to pay. How do you accomplish this?

-Ben

Renee said...

Ben
It is not a circular argument had you been reading this blog you would have realized that I am a Marxist with post structural leanings. I don't believe in private property. I believe in communal ownership. Capitalism is predatory

Sarah J said...

Plenty of purchases might be made on things that are not necessary--that doesn't mean that credit card companies and home lenders are not predatory.

AR said...

What I don't get is what the nature of capitalism has to do with this situation. Companies that can't profit in a free market should be liquidated; the fact that we already bailed out Chrysler in 1979 shows that capitalism isn't what's happening here.

Maybe we should give it a try for once.

Renee said...

@Ar I am referring to the fact that capitalism sets up the workers against the owning class because property is not communally owned. In time of economic difficulty it is always the worker who is made to suffer while the owners continue to live in comfort. My issue with this is the clawback that the companies are going to demand of the UAW.

AR said...

My issue with this is the clawback that the companies are going to demand of the UAW.

All the more reason the companies should simply cease to exist, leaving their equipment to be bought up by others, and their employees to be hired by, oh, say, Toyota, which pays it's non-union workers more than UAW companies and still maintains profitability.

Personally, I oppose Chapter 11 bankruptcy. It sets up a horribly perverse incentive system; letting a company cancel debts while continuing operations is simply unacceptable.

AR said...

I had an interesting thought. GM has 266,000 employees, of which we can assume most are not corporate executives. I can't find historic values, but since they've been cutting workers for a while, this is probably a lower bound for at least the last 10 years. If 200,000 of those workers are "labor," and during those 10 years saved an average of $5,000 per year, which seems doable to me since it is about what I save, and I make far less than UAW wages, they'd collectively have $10 billion in savings by now.

So? Well, at the beginning of 2008, before the recent stock market crash, GM's market capitalization was $15 billion. For fairly modest savings over a fairly modest length of time, the workers of GM could collectively hold a significant fraction of GM itself, if that was all they put their savings into.

There do exist people who would match the description of Marx's proletariat, but UAW employees are not among them. If they don't own a significant share of the capital on which they work by now, it's because they don't want to.

In regards to why they wouldn't want to, though, remember that inflation-adjusted interest rates for people with good credit (which UAW workers can afford to be) have often been negative in recent years due to the Federal Reserve's efforts. Basically, the choice facing a person being offered credit on such terms is to pay a given amount now, or pay less, latter. Overuse of credit in such circumstances is not surprising.

With negative interest rates came negative overall savings rates, and since real savings is where capital comes from, America has been consuming capital for a while now, which can only mean a decline in overall standard of living. For comparison, India's's real savings rate is 33%, while China's is in the area of 50%,

I think that within our lifetimes, the global bourgeois will not be white, though they will speak English.

Anonymous said...

There is no way we should give a single cent of taxpayer money to a bunch of fat, lazy idiots who spent years purposely building crap vehicles. These are the same hypocrites who stand at podiums at business schools and laud the 'free market' system and 'laissez faire' capitalism, and then run to Washington like snivelling babies begging for a handout. Screw 'em! Let 'em fall! Let nature take it's course!! Who cares about the economy!! I have enough canned goods and fresh water to last me at least five years!

On the other hand, the auto unions are going to HAVE TO give significant ground to keep things going, if in fact it's even worth it to keep things going. It's innevitable that BOTH SIDES are going to have to hurt. This is going to pose a problem for Obama, who promised the unions the world and stars during his campaign. Let's see if he can get these people to deal. More than likely, Obama is a middle of the road New Democrat, and he really didn't mean any of the promises he made to the unions. Clinton made a lot of union promises too, and then he passed Nafta!

Now then . . .

The majority of the blame for our 'crisis' belongs to Wall Street re: the securitization of debt, the unregulated credit default swap market, and everything that goes with it. Wall Street has been running a huge Ponzi scheme for years now. The fault of the PUBLIC is that we bought into this game hook line and sinker.

There are no victims in this game: only volunteers.

While it's true that many homeowners have been forced to refinance their homes due to medical expenses, education, and the like, there has never been an epidemic of people doing this for these kind of reasons. The rate of taking out home equity loans due to hardship has not gone up in relation to GDP, stock market growth, or anything like that. Any claims that home equity loans increased over the past five to seven years because of economic hardship is purely anecdotal. Home equity loans exploded because people got greedy and our culture promotes a 'buy now, pay later' mentality, and that's what's hurting us.

Home refinancing was invented for three reasons: 1) For well-financed real-estate speculators who know what they are doing (not amateurs,) 2) For people with loads of equity in their homes who want to renovate, etc, and 3) People who need money to pay for unforeseen expenses like chemotherapy, etc.)

The simple fact that home equity loans rose so drastically absolutely means that a lot of people took out stupid loans. Before the bubble, there never really was a massive amount of home equity loans.

The bad thing is that now when people really do need these loans, they won't be able to get them!

AR said...
This comment has been removed by the author.
fan said...

The answer is to give the money to the taxpayers specifically for buying a new car from the big three. That way people get a car and then the companies get the money. Everyone wins.