He Who Has The Gold, Makes The Rules

The Big Three US automakers will shut their factories starting this month.

Without $14 Billion in government bailout they can’t keep going.

Literally millions of jobs are on the line here – and it’s worse than that.

Far worse.

The collapse of Wall Street was bad enough - but the investment and banking industry will recover sooner or later. With or without government help the market will recover. And if history is any guide, like any forest that burns, the recovered market will be larger and stronger without all the smoldering deadwood.

A lot of former investment brokers and bankers are out of a job. Even if you allow that some of them got exactly what they deserved, a far larger number didn’t – they were just cogs in a machine that’s still tearing itself apart. But here’s the thing, most of those people are educated, and even if they don’t return to banking when the industry recovers, they will still be able to find a way to make a decent living sooner or later. Will those jobs come with million dollar bonuses and complementary rides in the company helicopter? Maybe not, and a rather large number of those people who rode the whirlybird to a weekend home in the Hamptons are going to have to make some serious downgrades in lifestyle, but they will survive. Most of them. If they have the willingness to do what is necessary. Hell, they might even end up happier and more fulfilled for it – probably not, but hey far stranger things have happened.

I have serious doubts that the bailout will do much to stop what’s happening in the banking industry. $700 Billion seems like a lot, but compared to the trillions in play on Wall Street, it’s really like trying to stop a forest fire with a garden hose. That doesn’t mean we shouldn’t try, it’s human nature to tilt at windmills – and sometimes you can put out a forest fire with a garden hose. Yes, you can. The trick is to aim the hose as soon as the first wisp of smoke comes drifting up – not to stand around toasting your marshmallow until the whole damned forest is a hellish conflagration.

And that takes us to the auto industry.

The auto industry bailout is different in one significant way. Wall Street isn’t going anywhere, it may be smaller, it may be more lean, but it isn’t going away and it will continue to grow. The auto industry? When is goes, it goes. Once the factories are shut down, once the supply chains are gone, once the dealerships are bankrupt – it’s over. The industry is gone. Look around, see any textile mills? Electronics manufactures? Steel mills? Same deal here.

We’ve known for a long time, all of my life in fact, that the oil is going to run out. This year, next year, a decade from now, a century. Whatever. Sooner or later we’re going to have find a different source of motive power for our civilization, or go the way of Rome. Now, a hell of a lot of people seem to think that until the oil does indeed run out, well, we’ll have plenty. The pumps will keep pumping, the tankers will keep tanking, the refineries will keep refining – all at full capacity – until the last barrel is sucked from the sand of Saudi Arabia. And until that happens the price, the demand, and the politics will remain pretty much the same. We know the low fuel level light is on, but we just keep driving 70 miles per hour until the tank runs dry. This attitude shows an astounding lack of understanding when it comes to the laws of supply and demand in general, and scarce commodity/critical commodity macro economics in particular. Maybe we should be worried less about whether or not the schools are teaching about Rachel’s Two Mommies and start making sure people have a reasonable understanding of basic economics – but I digress. The warning signs, the little wisps of smoke, have been around us for thirty years now. Embargos, price hikes, lack of capacity, increasing difficulty of supply, conflict, outright war – all of these things are indicators.

Now, those executives who run the auto industry do have an understanding of economics, they just don’t give a damn – as long as they’ve got a fiddle they’re going to keep playing while Rome burns around them. They also understand the basic rules of supply and demand – and have bent those rules to the breaking point in an effort to manipulate demand into something they could supply at maximum profit. Now, before you start screaming and sending me email, I’m all about capitalism and I don’t think it’s any kind of crime to maximize profits. Profit is what makes the wheels of business turn. But there comes a point where the pursuit of profit becomes all consuming greed, and that all consuming pursuit of maximum immediate return will destroy you in the long run. And that’s what’s happened in the auto industry (and Wall Street, for that matter). Unlike the old days, CEO’s don’t own the companies. Modern CEO’s have no long-term interest in the company. They’ll run the place for a couple of years, long enough to reorganize a few things, liquidate a division or two, make a few acquisitions and pull in a twenty or thirty or fifty million bonus – and then move on to some other CEO position in another industry, or a million dollar motivational book deal and speaking gig. They don’t give a damn what happens to Ford, or GM, or Chrysler (or Lehman Brothers, or Merrill Lynch or…) ten or twenty years from now. That’s somebody else’s problem. And it shows.

Twenty years ago, there really wasn’t anything like the SUV. The Jeep Cherokee and Wagoneer, the Ford Bronco maybe, but those were working machines – bare bones, minimum amenities and accessories. Only hairy legged women and cowboys drove those things. Unless you were a construction worker, park ranger, or oil rig wildcatter on a remote site in Alaska, you probably never rode in one of those monstrously ugly Chevy Suburbans (which all seemed to come pre-rusted and with a missing window covered in plastic sheeting). The average commuter sure as hell wasn’t interested in 4x4 or cargo capacity. The young ones wanted sports cars – Cameros, Mustangs, Firebirds. The older ones wanted something safe, reliable, roomy. The problem was that the car companies didn’t make much profit on those types of vehicles. The profit margin was fairly narrow – as it always is. But then, some bright guy noticed that the profit margin on those Cherokees, Broncos, and Blazers was huge. Huge. See those machines didn’t cost nearly as much to manufacture as the Firebirds, Novas, and Pintos – remember they weren’t making a lot of them, they didn’t have fancy paint jobs, or chrome, or plush upholstery, at best they got an FM radio and a cigarette lighter – BUT they could be sold at twice the price of those fancy cars – and that difference was pure profit. In 1995 it wasn’t unusual for a car dealer to make ten grand on an SUV, when the profit on an average sale was more like $1500 to $2000. And once the industry realized that, everybody jumped on the bandwagon, exactly the same way everybody on Wall Street jumped on the mortgage bond idea. Everybody started making SUVs and convincing the public that in order get that anorexic centerfold in the bikini on the car commercial you needed one. Then they added chrome. Then they added stereo. And cruise control. And then entertainment systems. And they keep making them bigger. Until even Cadillac had a gargantuan, gold plated, limited edition luxury cruise ship on wheels – and dealers are back to making less than a grand of profit again, a lot less actually. This is a tenuous situation. One market sag, one poor investment, one bad quarter, one spike in material prices, one major strike – or a failure on Wall Street – and you’re bust. There is no margin.

Just like the investment market, and for many of the same reasons in microcosm, the auto industry is going belly up. Millions of jobs hang in the balance. But unlike the vast majority of former brokers, bankers, and investors – those auto factory workers aren’t well educated (look, we can talk around it or we can be blunt about it. And the truth is that most assembly line workers barely have a high school education. If it makes you mad to hear me say so, tough, getting offended won’t change the facts or solve the problems). They don’t have a hell of a lot of options. A lot of them have worked in the auto industry all of their lives, just like their folks before them, and their grandparents before that. That limits their options. Their union isn’t helping matters. For the UAW it’s all or nothing, no compromise, no concession – but when those factories do close (and some of them will, bailout or no), well, the union really isn’t going to be a hell of a lot of help. The UAW isn’t going to pay for a million mortgages, or a million pairs of braces, or put food on a million tables. What will happen is this – several million folks will suddenly be jobless. That’s several million not paying taxes, local taxes, federal taxes. That’s several million not paying union dues. That’s several million folks who will need tax-payer funded assistance. It’s likely that some towns based around the auto industry will become ghost towns – just like when the steel industry went belly up, or the textile industry, or when the mine played out, or, well you get the idea. Drive through Rome, New York sometime, or any other boarded up single industry cowtown, if you need an example of what I’m talking about. The ripple effects from a collapsed auto industry, combined with the disaster on Wall Street, could very well be the final straw – the push that sends us out of recession and into a full blown depression.

We’ve been surrounded by those wisps of smoke for a long, long time. We’ve stomped out a few brush fires here and there – and we’ve let others rage until they were out of control. It’s long past the point where a garden hose and a couple of squirt guns will have any effect. We’re going to need to get off our collective asses and break out the shovels, air tankers, pumper truckers, the 3” hoses and get dirty. We need to start cutting some fire breaks.

First, it should be fairly obvious that we have to bail out the industry. It’s in our best interest. We either pay those people to make cars, or we pay them not to make cars - i.e. we pay them to collect unemployment and welfare, we buy their houses when they default on the loans. We pay their medical bills when they lose their insurance and have to start taking their kids, all five million of them, to the local emergency room instead of to the doctor. And like that. Letting the industry go bust is cutting off our nose to spite our face.

Second, what may be less obvious is that we have an opportunity to fix the real reason for this economic crises, energy. After twenty years of cranking out increasingly larger SUVs, after twenty years of a dedicated information warfare campaign to make Americans want increasingly larger SUV’s, there’s a hell of a lot of inertia in the industry. Changing direction isn’t something that any CEO can undertake solo. One manufacturer takes a risk on smaller, more economic, more energy efficient vehicles and it’s career suicide. The stock holders aren’t willing to take a risk, especially a major risk, like that.

Congress wants to attach strings to the bailout package, but what they really keep talking about is paying it back. Usually they wouldn’t care, it’s not their money after all, but voters have recently demonstrated what happens when you piss them off. Congress wants some insurance they can use to placate the angry voters. The CEO’s aren’t happy about that. And neither is the Union. Give us the money and let us go back to building SUVs. Again, a remarkable lack of understanding of basic economics and the basic causal effects that precipitated this crisis in the first place: i.e. if the industry isn’t making a profit, and you loan them money, and they don’t change anything – they are very likely to remain unprofitable and therefore even more likely to never pay back the loan. And they are very likely to go out of business anyway, because is addition to their poor business plan they’re now saddled with a fifteen billion dollar debt on top of their other bills.

And that’s the lever, right there.

We’ve got all three of the American car manufactures, and by extension a large part of the energy industry, over the barrel right now.

That’s right.

We have them over a barrel, they don't have us.

Note the title of this post. We, the taxpayers, have the gold, therefore we make the rules.

And the rules should like something like this:

We’ll give you the money. That’s right, give. But:

1) No more short term CEOs. No more swoop in, pillage, and depart. We give you money and we buy a controlling interest, you sign for it personally. Take charge of your organization and more importantly take responsibility. If you pay us back, well, then you can do whatever you like. But until you do, you’re going to play by our rules.

2) The union needs to compromise. No, shut up. The union needs to compromise. If you’re my relative and you’re in financial trouble and I loan you money to help you out, money I really can’t spare, money that puts a hardship on me – well, you’d better be making some sacrifices too. In this case, the union can start by waiving union dues until the industry recovers. And the union needs to talk about negotiating a pay cut for the duration of the crises – yes, that’s right. In fact that pay cut should be exactly the amount of each worker’s union dues. You tell me what you’d rather have, a pay cut, or no job and no chance of finding a job because you’ve got no education and there’s a million other swinging dicks looking for unskilled jobs too? Yes, both options suck, but one sucks a hell of a lot less than the other. The union needs to get humble real damned quick. Because, frankly, if the industry goes bust – well, there aren’t going to be a hell of a lot of dues paying auto workers, are there? But here’s the thing, if the union waives its dues, and the negotiated pay cut for each worker is the amount of his or her union dues – then the worker see no change in take home pay. If the union has the best interest of labor in mind as they claim, well, they need to put their money where their mouth is.

3) No bonuses for executives. None. Once you pay back the bailout, you can do what you want. But until then no bonuses. No corporate jets. No corporate retreats. No company cars. Start selling those assets boys, you need to have a yard sale. Same as with the union, sacrifice is required. You make the big bucks, you make the bigger sacrifice.

4) Stockholders. Time to reinvest back into the industry. Until the loan is paid off, a percentage of your dividends belong to us. Put it back into the industry for retooling and reorganization.

5) No more SUVs. No more purely petro-fuel internal combustion power plants. No more nine miles per gallon and no exceptions. Everything coming off the assembly line gets 30+MPG for the next five years, then 40+MPG or the equivalent, then 50. Tough? Yep. Technologically challenging? Yep. Remember, we’re the country that got from zero to the moon in nine years. It can be done. Now’s the time and there will never be a better opportunity. Crank up America’s vaunted technological superiority and get to work. If we can build a Predator that can loiter for twenty hours over the battlefield, we can build a car that gets 35MPG (and I’m not talking that bullshit MPG rating that dealers give, I’m talking real MPG). Give a bonus, tax break, loan payment relief, whatever to the manufacturer that produces the highest product net energy efficiency for each year, i.e. not just the most efficient vehicles, but also making people want them. Make competition work for us, screw Dr. Demming and his competition is bad bullshit TQL business model. Again, it can be done – we’ve convinced people that putting a paper tube of burning leaves in their mouth is a good idea even if it kills them, we’ve convinced people that rocks are pets, we’ve convinced people that they need a four ton, 4x4, four door behemoth that gets nine miles per gallon. Zoom, zoom, baby, call marketing and figure it out.

6) The petroleum industry needs to pony up. Exxon made $36 billion in profit last year. But their wagon is coupled to the auto industry. Now even if the American auto industry goes bust, Americans won’t stop driving cars, they’ll just buy them from somebody else. However, sooner or later the oil is going to go away and it’ll be the energy companies pandering for a bailout. The auto industry and the oil industry are coupled at the hip, and the oil industry is solvent at the moment. It’s in their best interest to make some loans, refloat the car makers and start figuring out what the motive power of the future looks like. Then build it.

We either stand here and watch our country burn, or we can do something about it.

We’ve got the gold, we make the rules.

We give them the money, then they work for us.

We can retool, we can make our industry more efficient and competitive, we can make people want American made cars again, we can fix our energy problems, we can create new jobs in the supply industry for the new cars and in the energy sector.

Fifteen billion dollars ought to buy us something better than a bankruptcy postponement.

Fifteen billion dollars ought to buy us the future.