Blindfolded law professor swings and misses at the auto bailout pinata

University of Pennsylvania Law Professor David Skeel slams the government bailouts for GM and Chrysler by pointing out how they fell short of the implausible hypothetical utopian alternative resolution he envisaged in hindsight from his office on campus. 

Here is the article in the WSJ:  David Skeel: The Real Cost of the Auto Bailouts. 

Nor would both companies simply have collapsed if the government hadn't orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. The only serious question was GM's ability to obtain financing for its bankruptcy, given the credit market conditions in 2008. But even if financing were not available—and there's a very good chance it would have been—the government could have provided funds without also usurping the bankruptcy process.

Thats nuts. In March 2008, GM was bleeding $1 billion in cash every month and in August 2008 GM announced a $15.5 billion quartely loss. Future products were being delayed to keep the company on life support,  sales were far below the break even point, the whole economy was a train wreck, the housing crisis was blowing up, and customers were spooked by rumors of bankruptcy. GM's ability to obtain private financing for an organized bankruptcy at that time was beyond a serious question and closer to a pipe dream.  Here is a story from the pre-bailout era regarding GM's slim chances of securing the funding for reorganization.  CNNMoney: Why GM Can't Survive Bankruptcy

There is precedent for bankruptcy turnarounds. But those companies, filing under Chapter 11 of the bankruptcy code, were able to secure what is known as debtor-in-possession, or DIP, financing.  Lenders make such loans in part because bankruptcy law allow them to go to the front of the line of the company's creditors if the company is not able to stay in business. In turn, the bankrupt company uses the cash to make changes and return to profitability.

Without DIP financing, liquidation -- usually under bankruptcy Chapter 7 -- may be the only option left.   Experts in the field and even GM itself say that DIP financing might not be available for GM.

The only organization that had money to finance the bankruptcy was the US Government and that was only because they can print their own money.  They only got it through the legal system because they make the rules.  If the entire hot mess went into bankruptcy court under normal procedures it would have led to years of fighting over scraps and none of it would matter by the time they were done.  

Without the bailout packages, GM and Chrysler would have ended up in Chapter 7 liquidation.  So start the alternative reality there.  When you are done running that whole scenario down $14 billion will seem very small compared to what the losses would have been if the bailouts hadn't happened.

Reacting to the fall of the dollar, if the stories are true this time..

There is a lot of clamor around the net about the incipient fall of the US dollar and how the world's financial system will soon be rebuilt with a new global currency leaving the dollar in the scrap heap of history, decimating the American economy in its wake. As the story goes, global investors are now dumping US Treasury Bonds and this will soon cause interest rates to skyrocket in the USA which will lead to a fall-off-the-table effect to the value of the dollar and with it American purchasing power.

I'm a bit skeptical in that I have been hearing this same doomsday prediction for decades but I recognize this time it really could all be just around the corner. Nothing would surprise me anymore. Its not a secret that the US and global financial systems are essentially giant houses of cards built with IOU's.

The only thing that makes a currency have value is confidence that you will be able to exchange that piece of paper for something of value later. When public confidence in the future value of currency  wanes, people holding them will want to trade them for something of real value before its too late.   It can turn into a death spiral as lack of confidence leads to massive sell-offs and vice versa. 

To prevent or offset this scenario I think President Obama and the Congress need to enact some measures to restore confidence, and now would be good.  People need to see that there is a navigable plan out of the mess because all they are hearing now is that there isn't.  To have any chance at controlling the debt requires both less spending and increased tax revenue. 

A part of the plan to restore confidence has to include provisions to reduce oil prices.  I think we need to begin releasing some of our strategic petroleum reserves to cool off the speculative oil investment which is skyrocketing prices and squeezing our recovery. The whole point of taxpayers buying oil on the open market just to store it in caverns underground was for future national security reasons, and if impending economic collapse doesn't rate as a national security issue, I can't imagine what would. Secondly, we need to open up more licensing of US land and coast for regulated oil drilling.  Even though actual production from new sites might be months or years off, just the prospect of increasing supplies will help cool off demand for futures.

It would also help if there was a concerted National effort for conservation of gasoline (as if the $4 gasoline wasn't enough prodding).  For example there could be initiatives to reduce the US Mail to 3 days delivery per week, promote public schools to convert to 4-day weeks, direct road crews to time stoplights on major roads to ease traffic congestion, and promote general public awareness to do the little things like carpool when possible, keep the tires fully inflated and skip the drive-through and walk-in instead. Anything that enables us to use less oil will help build a glut in supply and eventually lower the market price which will help pump money into the economy and help rebuild consumer confidence, the most precious of all commodities.

And Americans can keep in mind we have some fundamental strengths in our economy. We are the world's largest producer and exporter of food and no matter what oil or gold may fetch on the open market, you can't eat them. We have by far the world's most capable military and defense systems. We have tremendous reserves of fresh water, preserved natural beauty and a wide range of natural resources. We have a stable political and legal system and highly developed utility infrastructure and transportation system. So as bad as the doomsday predictors make it out to be, where else in the world would be a better place to invest when it all comes tumbling down.
I hope the ones betting their fortunes on the demise of the US economy end up on the wrong side of history and their short-sells.  But first we need the partisans in Washington recognize how silly they look arguing over trifles when the perhaps the biggest challenge this Nation ever faced might be just around the corner.

When looking for culprits of the housing crisis, don't forget your local zoning board

I've read dozens of explanations for how the USA got into the massive housing crisis.  These explanations  are typically political in nature.  1)  The GOP deregulated banking leading to the banks writing mortgages for houses people couldn't really afford.  2) The Democrats forced the banks into loosening credit standards to enable mortgages for houses people couldn't really afford.

The fact is that the global economic downturn caused the double whammy of fewer qualified buyers and a flood of mortgages in default which combined to create a huge glut in the real estate market and we all know what happens to prices when there is a glut in supply.  Better described as "falling off the table" than declining.

I would like to add another suspect to the list of co-conspirators who helped steer us into the abyss.  That would be all the local city and township councils and zoning boards across the Country who forced home builders to abandon building neighborhoods of smaller sensible homes (you know, like the ones in all the older neighborhoods around town..) and meet large minimum requirements for lot and home sizes.  So while for generations a 1,000 square foot home on a 60' lot in a neighborhood represented the American Dream, modern America demanded the builders go no lower than 2500 square feet on 1/2 acre lots.

Of course, a cost-conscious home buyer could always buy a new modular home in a modular home park if they couldn't afford the $300,000 or so for the Township minimum standard house and lot, but then again, the same zoning boards that specified the mega-homes have never been very crazy about "trailer parks" and modular home developments either so that option may not even exist in a given community.  One part of the explanation is that schools are typically funded through local property taxes and property taxes are based on how much a home is worth.  To maximize property tax receipts while minimizing the number of children in the district, the basic strategy for the local boards was to force developers to build large, expensive homes that would fetch big property taxes and not bring so many children into the school district.  For the opposite reason they typically oppose the zoning and building of modular home communities;  the ratio of school-aged children to property tax potential is too high.

SO to sum it all up the big evil bankers on Wall Street with their Beltway-mandated loose credit applications conspired unknowingly with the hack politicians in cities and Townships across the USA to fill all those massive homes in sprawling subdivisions with dupes who really couldn't afford to be there long-term.  And as one development after another sold out, the local boards got more and more greedy for revenue and those massive homes just kept getting bigger and bigger.  Until someone sneezed on the house of cards.

So while we all play 52 card pickup for the next few decades, don't forget that the bumpkins on Township board helped build that house of cards.  It wasn't all evil greedy moneychangers far away.