The Big Three Ask For A Bailout: Round Two
The Big Three are ready to take their second stab at Congress with a new plan. Instead of uniting themselves, they will each provide separate presentations as to how each company will improve itself. They are attempting to lobby Congress for $25 Billion in federal aid.
I don’t think this strategy will work. Honestly, I feel that the Big Three are still in denial. Last week, they blamed the credit crisis and poor economy for their company failures, and this week they are stopping collaboration. I think their approach to the problem is only getting worse.
Not only do the companies continue to deny their weak business stradegies as the cause of their company failures, they still believe they can continue to produce American cars under three different names. America does not demand or need that many automakers anymore.
I think government should support the companies combining forces. I hope that the automakers do not receive the $25 Billion this week because it would be a waste. Their plan to continue on three separate paths simply will not work. The money will run out, and they will come knocking on Congress’s door once again. I hope Congress can see ast this weak plan and deny them the money. Collaboration is necessary here because the Big Three are no longer able to stand alone. Until I see a clear plan presented to Congress that recognizes and reflects upon some need for this collaboration, I will not be a supporter for an auto industry bailout.
Please Congress, don’t waste any more taxpayer money.
Student Loans: Needed But Hard To Come By
Many college students depend on student loans. As the credit crisis deepens, these loans are becoming more difficult to obtain. Why?
Qualification for a loan is usually determined by your credit score. Your credit score measures the likelihood that you will repay the debt as agreed. Banks simply cannot afford to lend money that will not be repaid right now, so they are unwilling to take much risk regarding who they lend to. While credit scores between 630 and 650 used to generally meet requirements to receive a loan, this is not really the case anymore. Now, speculators say a score over 700 may be necessary to receive a loan. This has left many students without loan money for next semester. Some are taking a semester or two off to try to wait out the credit crisis or improve their credit score.
So what makes up your credit score?
Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit Used 10%
Basically, many students are denied either on the basis of short payment history or significant debt already outstanding. This is unfortunate for the upperclassmen already several semesters in debt who is now denied a loan.
Working on your credit score with increase changes of receiving a loan. Make all credit card payments immediately. Don’t just make the minimum payment. Sometimes having two credit cards can help because this gives you more types of credit used. Also, a co-signer with good credit will help.
If you can’t get a loan, I would suggest working for a semester to pay for the following semester. With credit so tight, the markets may not ease up any time soon. But no college can deny your cash. Times are tough, but hang in there students.
Sorry Shopping Season?
Christmas season accounts for one third of sales for many large corporations such as Macy’s, Kohl’s and Gap. Unfortunately, the much-needed sales just aren’t likely to happen this year. Gallup Inc. estimated consumers would spend an average of $616 on Christmas gifts this year, a 29% decline from last year.
Consumers just don’t have drive or the means to shop. With unemployment so high, many people are doing all they can to just to get by. The dismal outlook on the economy as the recession grows also may be causing the conservative shopping trend this year. People are hanging on to their money more because they are unsure if times will get worse.
ShopperTrak estimates that there will be 9.9% fewer shoppers this season. So, stores are doing all they can to lure in consumers. Price cuts are everywhere, with some items as much as 70% off! Stores are opening earlier to hopefully increase sales. On key shopping days, like this past Black Friday, stores open earlier and offer large discounts to attract shoppers. Macy’s opened at 5 a.m., and Kohl’s opened at 4 a.m.!
The holly jolly season doesn’t seem so jolly as consumers fight for the best deals. This past Friday, eager to catch early-bird specials, a stampede of shoppers overtook a Wal-Mart worker. He was killed as crowds pushed the doors and trampled him. I realize that finding the best deals may be essential for many people to afford Christmas presents this year, but this act ignores what Christmas is all about. We need to be considerate of others and help each other through this rough time, not stomp on each other to make our way to the top. Selfish ambition is what got us into this financial crisis in the first place.
Stores are ambitious in this season by trying to offer the lowest prices. Price cuts lure in consumers, but may hurt overall profits. Stores need to be careful so that they are still making enough money to cover costs.
I think the government could help stores out by offering a single day where they do not have to give any tax money for the income made that day. This would allow stores to charge a lower price to lure in consumers but keep profits up. Convincing government of giving up this extra revenue may be out of the question, but it would be a nice Christmas gift for corporations and consumers alike.
Many shoppers are going to be on a limited budget this season, and many corporations are worried about profits. I think it would be a good idea for government to step in to help stimulates sales. I mean government is working on the banking industry, the auto industry, and the housing industry, why not corporate sales too?
I Can’t Rest With Citigroup On My Mind…
The recent re-Bailout of Citigroup brings several issues to light. First, how far will the government go to save the financial industry? Second, is there no regulation to the Bailout money’s use? Finally, if Citigroup is failing, who’s next?
It seems that government will go to any end to save Citigroup. Now they are receiving $306 billion after the former gift of $25 billion last month. Government is taking on 90% of Citigroup’s losses, as the bank is deemed to big to fail. But with continually falling share prices, is Citigroup even worth saving? Some economists argue that the job losses and failed bank would be detrimental to the economy, but trying to keep Citigroup alive may be detrimental to the national budget! I am not certain I agree with such a hefty bailout after the last bailout money diminished so quickly. But hey, I’m no professional economist.
Secondly, I am concerned that the Bailout money has no stipulations behind it and can be used completely at the discretion of the Treasury. I find it unnerving that such large amounts of tax payer money can be distributed freely to who and wherever.
Finally, Citigroup formerly had one of the highest capital ratios among banks. After reviewing its books, government discovered the true situation of the bank and its terribly toxic assets. I feel concerned that all banks may be in this situation. I think the financial crisis is bigger than we even know at this time. I don’t think the $700 billion in Bailout money is going to be enough to cover the losses incurred by our major banks or get us out of the situation. I think more banks are in trouble, and I don’t know how we will have enough money to fix the situation.
With Citigroup in mind, I feel concerned for the crisis of 2008. I wonder how many more banks will need government aid. I wonder how much more taxpayer money will be spent to aid the crisis. Finally, I wonder if we are about to enter another Great Depression.
Obama Shows His Face
Obama appeared before the public in a series of press conferences this November. He announced his economic team and continually stressed important issues he will face during his upcoming term as President.
Obama reiterates that he will get credit flowing, help to stop home foreclosures, help the auto industry and create/save jobs. These problems require some government spending. The credit crisis has banks desperate for much needed cash. Obama will lend to banks and continue the policies started by the Bush administration concerning the Bailout money. Much of the discretion as to how this money can be used is being left to Mr. Obama. Obama will also spend money to buy up bad mortgages, to provide relief to homeowners. He shows concern for the American automakers, but has not voiced a clear plan of action about how them. Finally, he will focus on improving our infrastructure -building roads and bridges, modernizing schools and clean energy, to bolster the market for jobs. With unemployment rising and the United States diminishing in prestige, the improvements to infrastructure will kill two birds with one stone.
Obama recognizes that tackling the current economic crisis will not be easy, and the results will not be immediate. In fact, he states “It may get worse before it gets better.” However, Obama insists he has faith in the resiliency of America and believes we can climb out of this mess. He assures the public that he will work to improve economic conditions with consideration for Main Street, or average Americans.
I like that Obama has appearances to help assure the public of his upcoming administration. The economic turmoil could cause people to panic, so I think Obama is helping to relieve some of these unsure feelings. He provides hope and assurance in a time when many Americans have lost savings, retirement, homes and jobs. I hope that he can match his soothing rhetoric to effective policy this coming January.
Fixing This Economic Mess: Spending vs. Saving
Stephen S. Roach, chairman of Morgan Stanley Asia, presented some interesting ideas on America’s economic past and future in his article “Dying of Consumption.” Roach attributes today’s recession to overblown spending and lack of saving in the last decade or so. Emphasizing the need for America to learn to save, Roach pointed out “crises are the ultimate in painful learning experiences.”
When houses appreciated and credit was easy to come by, many people borrowed money against their homes. There was a significant increase in money readily available and in the average American’s debt. Because this debt was backed by assets, Americans felt it was okay to continue spending rather than saving and simply pay back this money later. The article states, “As a share of disposable income, the personal saving rate fell from 5.7 percent in early 1995 to nearly zero from 2005 to 2007.” The excess spending raised GDP. The economy began to thrive and depend on high consumption. No one was saving or preparing for the future. Savings provide protection because they are a back up source of cash in case assets depreciate. Well, that’s what happened. Home values declined during the housing crisis, and many Americans realized they were in trouble. With declining home values, they no longer had the asset value to cover debt, causing wealth to decline. Naturally, what followed was a drop in consumer spending. Because the economy has come to rely heavily on this spending, the impact was severe.
Obama suggests tax cuts to help bolster consumer spending. This is one way to stimulate the economy, but would show we have not learned a lesson. Depending on consumer spending will not insure the economy’s stability. Saving should be encouraged as well. If Americans had saved more money when the economy was doing so well, they would have been less impacted by today’s recession.
Americans need to save to protect their future. I hope that Obama takes measures to encourage savings. Perhaps the benefits/appeals of retirement plans could be increased. Maybe savings should be mandatory. A solution to the economic recession should consider America’s future – which needs savings to begin today. Only considering the here and now – the “I want this now so I’m going to spend all my money” mentality – is what got us into this mess.
The Big Three: What can they do now?
What could the CEOs do to help their dying automotive businesses?
· Cut back on spending
· Raise some cash
· Eliminated unprofitable divisions
· Admit their mistakes
· Team up with each other
· Enhance the development of fuel efficient cars
The Big Three need to CREATE a plan, present it to government and do so in a timely manner.
· The first thing the automakers must do is cut back on spending. When the three CEOs arrived in Washington to discuss bailout prospects, they each came via private jets. This is evidence of wasteful spending. A round trip in a private jet costs around $20,000! Compared that to an $800 plane ticket! The three CEOs need to cut back costs in any and every way, beginning with their personal benefits. In order to receive help, they must prove to Congress that they are willing to work to do what is best for their companies, even at the price of self-sacrifice.
· Next, cash is desperately needed. GM, Chrysler, and Ford all must come up with a list of ideas to raise cash. Perhaps they could have auctions, fundraisers or other types of benefits. They should set up some plan of action to present to Congress.
· Eliminating unprofitable divisions is also important. GM produces eight types of cars, while Toyota, its main competitor, successfully produces only three. GM should choose its most profitable lines and eliminate the rest. This would cut down on costs of production and allow GM to focus on improving its remaining products.
· The Big Three need to fess up to their mistakes. Instead of blaming their corporate woes on the worldwide recession, they need to come forward and admit they made bad business choices. By telling Congress they know they were wrong, Congress will be more willing to help.
· Unfortunately, America doesn’t seem to need three independent automakers anymore. Demand for their products simply isn’t enough. So, one solution may be for the Big Three to team up. They might need to become one company. Each company brings some positive light to the table, so together they might be strong enough to survive. By sharing technology ideas and combining profitable lines of production, America might be able to save some of its domestic production. Convincing the Big Three to combine would not be an easy task, but it might be an easier solution than trying to keep all three companies alive separately.
· Finally, America must focus on enhancing its production of fuel efficient cars. The money saved by cutting expenses or by combining forces must go towards improving the automotive industry as a whole if it expects to survive. Foreign cars are getting more miles to the gallon and are better for the environment, so they are in higher demand. America must make some changes in order to keep up with foreign competition.
Bailout or Bankruptcy
What’s next for America’s 3 largest automakers? Bailout or Bankruptcy. Honestly, either decision tugs nasty consequences behind it, so America must choose the lesser of the evils. Let’s weigh the options.
Bailout:
“Oh it’s just $25 Billion,” cries the Big Three to Congress, “You guys gave the banks way more!” My facetious mockery is meant to identify the first problem of another bailout: another bailout. As one company receives aid, other companies feel they deserve help as well, perhaps with good reason. Who is government to decide what businesses fail and succeed? It is reasonable for one industry after another to seek help from government under the principle of equality: shouldn’t what is given to one be given to all? The automakers want their piece of the pie, naturally thinking they deserve a bailout after watching government save the banking industry. But when will the bailout requests end? Not any time soon unless Congress puts its foot down. Otherwise, more and more companies will continue to jump on this bailout bandwagon.
The Second Problem: Perpetual bailouts encourage failing companies to take the easy way out rather than take responsibility for bad business decisions. The automakers made the wrong investment choices. They spent too much money. They drove GM, Chrysler and Ford into bankruptcy as a result of these choices. Now they want government to pay. If government saves them, bad habits are rewarded, even reinforced. If this bailout happens, companies will continue to look to government as a savior during rough times instead of attempting to change their ways. The principle behind the bailout for the Big Three sends a horrifying message to America’s big businesses: “It’s okay if you make bad choices. You are too important to pay the consequences for your actions. Government will save you.” If government continues to save irresponsible companies, I believe the irresponsibility will only spread.
The Third Problem: The money won’t last. The American automotive industry is spending a couple billion more each month more than the revenue it brings in. If that rate continues, the bailout money would not even last a year! So after the money runs out, what can the Big Three do? Ask for more.
Despite the grim appearance of a bailout, bankruptcy doesn’t look any brighter….
Bankruptcy:
The first problem: unemployment. If the Big Three are allowed to go under, they will be forced to lay off an estimated 150,000–200,000 employees. Unsympathetic laizze-faire economists may argue that this is merely the consequence that must be paid as the market weeds out weak companies. They argue that in time these people could find work elsewhere. However, more than just sympathy needed for this potential mass of unemployed Americans, the burden this would place on the economy as a whole must be considered. Perhaps if our economy was thriving we could handle this dramatic increase in unemployment, but this is not the case. So many people are searching for jobs already. An increase in the growing unemployment rate will intensify competition for jobs, burdening already unemployed Americans even further. This means that more people will be unemployed and the average time until they can find a job will be extended. Because government pays unemployment benefits, this will cost the government significantly more money. Ultimately, either way government (actually taxpayers) must pay the bill for the automakers mistakes. I am unsure of which method works out to be less costly or if America can even afford to lose the Big Three.
The second problem: the future of business. If American automakers disappear, we will be sending even more money out the door. We will increase our dependence on foreign nations and lose some prestige by forfeiting a major source of domestic production. Keeping the Big Three may also be about keeping some of America’s name, not just keeping the best businesses.
Whether government gives the Big Three bailout money or they are forced to file for bankruptcy, the cost for America will be high. Giving the industry money does encourage bad business practices and makes it difficult for government to draw the line in its growing market intervention. However, a bailout might help sustain the automakers long enough for America to see her way out of a recession. Then the economy would be more stable and better able to handle the failure of these companies. The decision is tough, as high costs are on the line. For now, however, government does not seem to be leaning toward a bailout, as the automakers have shown little efforts in making a plan to change their business practices. Hopefully either the Big Three come up with a cohesive plan soon. If not, I hope the American economy can withstand the loss of three significant companies.
Spend, spend, spend!
Obama has a spend, spend, spend attitude! On CNN last night, I heard him say we need to “spend money now to stimulate the economy. Don’t worry about the deficit.” I agree that some spending is necessary now more than ever to help the economy. However, I hope the spending will be responsible unlike the recent bailout – or shall I say government give away. If Obama plans a stimulus package, I hope he at least attaches more regulatory policies to it than the bailout.
Obama calls for spending – money for homeowners, the auto industry and for lending purposes. I do not agree with the auto industry proposal, as I discussed in my last post. I believe that some money for homeowners may be necessary to move America out the mortgage crisis. The spending I agree with most is for lending. As corporations and banks are tied up in debt, they need help to gain liquidity. I think government can do this by lending the necessary funds to allow changes to be made in corporate structures.
I don’t like how Obama seems ready to hand out money in all directions. We can’t help everyone. Government cannot be expected to be a savior of all economic distress. Some businesses fail. Some people lose jobs. Government should aid those who are victims of economic problems – like the unemployed, but should not try to bailout every failing business. I think government’s role in the economy has become too great. Now every time a business has a downturn, they knock on government’s door and ask for money. Businesses need to work to pull out the recession on their own, or perhaps receive loans from government. I just don’t think the government should hand out free money. Free money demeans those who truly are successful and made good business choices.
So, I hope Obama will be more selective and careful with handouts than he seems like he will be. Obama should help encourage the market and strengthen good businesses, rather than bailing out all the bad ones for fear of more job losses. If we strengthen the economy as a whole and put money in the right places, employment will rise again even if a few businesses fail for now.
