by Gilles d'Aymery
"I see nothing ... in the present situation that is either menacing or warrants pessimism. During the winter months there may be some slackness or unemployment but hardly more than at this season each year. I have every confidence that there will be a revival of activity in the spring, and that during the coming year the country will make steady progress."
—Treasury Secretary Andrew W. Mellon, December 31, 1929, in a statement issued while he was yachting off Nassau, the Bahamas, on his winter vacation (cited in "A Storm Unforeseen, Always About to Pass," The New York Times, October 12, 2008).
(Swans - November 17, 2008) THE FUTURE IS BRIGHT the experts assure us, hoi polloi. (By the way, Class, you are aware that one should not write or say the hoi polloi, don't you? -- I'm afraid I've made the mistake a few times... Hoi polloi is Greek for "the masses," the common herd, the rabble. Hoi and the mean the same thing. So, when you say "the hoi polloi" you are actually saying "the the masses"!) The worst is (almost) over. As McCain, another "expert," said, "the fundamentals of the economy are strong." Or, to paraphrase the Harvard Economic Society in November 1929: "A severe depression like that of 1920-21 [actualized today as 1929-39] is outside the range of probability. We are not facing protracted liquidation." Life is a hopeful journey. We'll be back on track in the second quarter of 2009, or the second semester, or, at the very latest, in 2010, cross my expert heart. Time to buy stock, we are at an all-time low, says the Oracle of Omaha.
OKAY, WHERE TO START? Fannie Mae reported a loss of $29 billion in the third quarter. Freddie Mac just announced a loss of $25.3 billion in the same period. A.I.G. got another $40 billion infusion from the US government (that's $150 billion overall, and counting -- it won't stop there). Circuit City has filed for Chapter 11. So has Mervyn's, the department store chain. Levitz is on its deathbed. Scores of stores are being closed by Home Depot, Ann Taylor, Foot Locker, CompUSA, Costco, Gap and Banana Republic, Eddie Bauer, Linens 'n Things, and tens of other chains are following suit. In October alone, according to the Bureau of Labor Statistics of the US Department of Labor, "nonfarm payroll employment fell by 240,000," following "declines of 127,000 in August and 284,000 in September, as revised. Employment has fallen by 1.2 million in the first 10 months of 2008; over half of the decrease has occurred in the past 3 months." Retail sales fell 2.8 percent in just one month (October). California, with a shortfall of about $12 billion, is expected to run out of cash next spring -- ditto of New York. Expand the horizon: The European Union is officially in recession with Germany, the economic engine of the Euro Zone, down 0.5 percent; Italy, Spain, Britain, France following suit. Iceland is bankrupt. China just passed a close to $600 billion economic stimulus (at least they do not have to borrow the money). The list goes on. The whirlwinds are engulfing the entire world. Have I missed a few cases worth mentioning?
YOU BETCHA, I HAVE. Not just Brazil, or the Congo, or the entire African continent for that matter; even the Organization for Economic Cooperation and Development forecasts that the GDP for its 30 member countries will contract in 2009. Or the fact that US imports are down 5.6 % (good), but US exports are down even further -- 6% (bad). Or the federal government budget deficit that has ballooned to $237.2 billion in October 2008 (it was $56.8 billion in October 2007), meaning that the budget deficit for FY2009 could well surpass one trillion dollars. (Government receipts were down 7.5 percent from October 2007.) Or again the latest United Nations Environment Programme report about climatic changes and Atmospheric Brown Clouds, which does not bode well for future generations -- everything is linked, you know, or at least you should know by now. But my favorite story on that long list is undoubtedly the US carmakers. They are, to put it bluntly and simply, BANKRUPT! Is there anything you do not understand in the word B A N K R U P T? On November 10, Deutsche Bank AG downgraded the shares of GM and cut the price target to zero. That's indeed what GM is worth: Zero. And so are Ford and Chrysler, which, in the latter case, demonstrates that the folks at Daimler AG proved to be prescient and smart when they took their losses in May 2007, and shoved Chrysler into the hands of a US private equity fund -- a "private equity fund" that is now begging the government to bail it out... Free-market capitalism at work!
IT IS NOW FASHIONABLE to lay heavy criticism on the mismanagement by the automakers' executives. I certainly have excoriated them for a long time, but the responsibility extends to other parties. The oil companies, the trade unions (UAW), and Congress, especially the entire delegation from Michigan led by John Dingell (House) and Carl Levin (Senate) and that from Ohio that repeatedly blocked new CAFE standards. While fuel efficiency has not improved in 20 years, vehicle weight has increased by 25 percent and engine horsepower almost doubled. Here is an example:
Many of today's most popular sedans offer better performance than even the archetypical muscle cars of the late 1960s and early 1970s. Take the 1968 Pontiac GTO and 2007 Toyota Camry V6, for example. Despite the fact that the Camry's engine is roughly half the size of the GTO's, the Camry weighs about the same as the GTO, and has faster acceleration and standing quarter-mile times.
In one respect, this can be viewed as a testament to the technical prowess of today's automotive engineers. Yet it is also an unfortunate commentary on decision making within the automotive industry over the past few decades. Rather than focusing engineering achievements on ways to improve overall fuel economy, the industry chose to focus on power and speed while holding fuel economy constant. Compared with 20 years ago, today's average passenger car is 550 pounds heavier, has 78 percent more horsepower, and has 27 percent better acceleration (a 3.5-second shorter zero-to-sixty time, on average). (Source: Catalyst, Fall 2008.)
JUST IN CASE you mistakenly imagine that Catalyst is a radical publication, it's a small magazine published twice a year by the Union of Concerned Scientists. I suppose libertarian dittoheads will argue that's what the consumers wanted and Detroit was only responding to the demand. That's the case made by conservatives such as Newt Gingrich, who when he was House speaker constantly refused to increase gas taxes and tighten fuel standards under the pretense that voters would not support such measures. For Gingrich, the American people are not like Japanese or Europeans. "Our culture favors driving long distances in powerful vehicles and the car as a social expression," he recently said.
MYTHS ARE HARD TO DIE. Like the long-held belief that bigger cars are safer, which is factually incorrect -- the U.S. has more automobile deaths per capita than the Europeans or the Japanese do, and those deaths do not occur in long distance driving (Interstate) but in their large majority in local and rural driving. The myth that Americans prefer and demand fast-car behemoths with a lot of power, an image that has been cultivated and perpetrated by the automakers and Hollywood, is just that, a myth -- nothing more, nothing less. Americans in my experience are like all people gullible, but they are also quite practical. How to explain that in a matter of months, due to the rise in the price of gasoline, and even before the so-called credit crunch, car shoppers began to ask for smaller, fuel efficient vehicles and left the Big Three in an ocean of red ink? How to explain that in the 1970s, after the first oil shock, they reacted in the same fashion and that from 1974 to the late 1980s fuel efficiency almost doubled from 13.8 miles per gallon to 27.5 miles? There is no specific, exceptional gene in the American DNA. Actually, Americans remain one of the most, possibly the most diversified people on earth -- like my dogs and cats, a country made of mutts from all imaginable backgrounds. Yes, there is the 25 to 30 percent that remain kind-of white supremacists, top of the food chain die-hards, who swear by the evangelical mantra and don't give a damn about the rest of us. Let's drive as we, and only we, see fit, hell be damned, they contend. But America is not about them. The country is driven by the 70 percent that tend to bend to actualities.
DIGRESSION: People and states are defined by the punditocracy as either red or blue. Red means Republicans and blue Democrats. What an interesting inverted color scheme. Conservative Republicans keep saying that Democrats are liberals, which in their own twisted minds means leftists, commies, and the Devil -- that is RED. Yet, they (Republicans) are dubbed members -- and followers -- of the "red" states. Somewhere, one needs keep in mind Gelett Burgess's aphorism: "To appreciate nonsense requires a serious interest in life." End of digression.
ASK YOURSELF whether Advertising and PR (propaganda) would exist if it did not work. For the past quarter of a century the American people has been inundated with a relentless barrage of automobile ads vaunting the merits of bigger is better, more power, more speed, more of everything, accompanied with feel-good messages -- "you've worked hard, you deserve it," "the sky's the limit," "you can have it all," etc. While, we've been knowing since the 1950s that our increased consumption of oil (see, "Energy Resources And Our Future," by Admiral Hyman G. Rickover, May 14, 1957) would lead to disaster, the oil companies kept their foot on the accelerator full speed ahead, assuring the public that resources were limitless, that there was no reason to worry. These are the same industries (automakers, energy firms) who kept denying the negative effects of green gas emissions on the environment -- and funding bogus studies to denigrate scientific research. The few voices of reason were facing immense obstacles to be heard as the print and TV media, their budgets and profits wholly dependent on the huge advertising spending from automakers and the oil industry, would pretty much censor all potentially negative or critical stories against these giant corporations. In short, the public was spoon-fed/force-fed a lot of baloney, and having no counter information and the little that popped up to the surface was so easily discredited as being out of the mainstream, too "radical," it shouldn't surprise anybody that in its majority the American people took the bait and swallowed it with abandon.
THE REASON FOR THIS DEBACLE can be summarized in the motto that has prevailed for that long 25-year period, "greed is good." These corporations privileged short-term profits and shortchanged long-term socioeconomic, energy, national, and strategic interests. Small, efficient cars were so shunned by consumers that a couple of years ago Chevrolet dealers would throw in a free Aveo (a small gas-efficient Chevy that was sitting on their lots unsold) with the purchase of any one of their most luxurious SUVs. To add insult to injury Congress compounded the damages by allowing full tax deductibility for these big trucks and SUVs. Even a Hummer could be tax-deductible (I'm not sure whether this tax incentive remains on the books, but in effect it made me and other taxpayers pay for all these excesses -- irresponsible consumers, obscene executives' remunerations, enormous social costs...)
BAIL THEM OUT OR NOT? As infuriating as this entire mess, which was utterly predictable and preventable and was predicted but not prevented, has turned out to be, to let them fail (bankruptcy filing) would turn into not only a national but an international disaster. Millions of jobs are at risk within the country and abroad. It would run havoc through the entire economy, one that is already in dire straights. But such bailout should be taken within a much wider context. Here are a few ideas: First, and concomitant to the financial aid package, the government (both federal and state) and the industry (energy and automakers) must launch a huge education program -- a PR campaign through advertising -- alerting the public of the necessity to change, to move from a "bigger is better" to a "small is beautiful" frame of references. Management need not be replaced, but since they will now be our servants, they'll have to: 1) Power down the engines and lower the weight of their vehicles to gain fuel efficiency and reach a CAFE standard of 40 miles per gallon within 5 years. 2) Stop sponsoring all the racing events around the country (sorry, NASCAR moms and pops and other racing aficionados, but this sport has become an anachronism in our age of limited resources and environmental challenges). 3) Begin to immediately develop public transportation with natural gas propelled buses and electric light rail or tramways in urban areas (those all-electric public transportations that the same automakers killed almost a century ago). 4) Streamline the number of models and brands within each carmaker. 5) Limit the wages of CEOs and senior executives to a maximum of 15 or 20 times that of the lowest-paid workers, a recommendation made by JP Morgan one century ago. In addition the government must put in place a gas tax that would smooth out if not fully eliminate the wide gyrations in prices and provide research funding for transportation of the future -- and close all tax loopholes in favor of SUVs and big pickup trucks.
THE CHANCES to see such a plan take place are remote. Too bad, because it does not require a genius to understand its common sense. Maybe a true genius will have to come up with a magical solution, but I suspect that Jonathan Swift was right on mark when he said that "When a true genius appears, you can know him by this sign: that all the dunces are in a confederacy against him." Business as usual will carry the day, which means the burden will mostly fall on the workers in terms of wages and benefits. Which bring me back to New York and California, two states that are facing considerable budget shortfalls.
WHERE IDEOLOGY trumps rationality and is a bipartisan pas de deux: New York Governor David A. Paterson, a Democrat, confronted with a looming deficit, wants to save $2 billion by April 2009 and over $5 billion in the next 16 months. His approach: Make substantial cuts in state funding of education and health care, sharply reducing Medicare reimbursements and eliminate the annual inflation adjustment; increase tuition in state universities; ask the state's 200,000 workers to renegotiate their contracts -- or face layoffs; lower the payment of health insurance for state's retirees from 90 percent to 50 percent; and other measures that are so friendly to business that the Business Council of New York State applauded the plan. For his part, California Governor Arnold Schwarzenegger, a Republican, expecting state's revenues to plummet by over 11 billion this year and possibly $24 billion by the summer of 2010, wants to raise $4.7 billion in taxes through a temporary 1 1/2-cent sales tax hike (the most regressive tax of all) and to cut $4.5 billion in cuts to education, health care, and financial aid for the poor. In both states the people who will most suffer are those folks standing at the bottom of the ladder.
WHAT YOU DO NOT HEAR, whether from Albany or Sacramento, or Washington for that matter, are propositions from our states and government elected officials to start sharing the pain by cutting their own salaries by say 30 percent, cut the retirement benefits of their retirees -- especially the wealthy ones like Al Gore, Bill Clinton, et al., and increase their personal shares of the health care premiums paid at tax payers' expenses. So, one can expect that business as usual will still reign in this new era of change we can believe in.
AND BALDIE keeps improvising by playing hanky panky with the $700 billion bailout program, which was urgently needed to buy back toxic debts, but has instead been used to bail the banksters, A.I.G., etc. Now, forget the toxic debts, he wants to invest $50 billion into a new loan facility to be run by the Federal Reserve (a private entity, remember) to help credit cards companies and those who issue student loans and finance car purchases. In other words he wants consumers who are already burdened with debt in the estimated amount of $14 trillion, to take on more debt to save the economy. Way to go, Baldie, way to go!
. . . . .
C'est la vie...
And so it goes...
La vie, friends, is a cheap commodity, but worth maintaining when one can. Supporting the life line won't hurt you much, but it'll make a heck of a difference for Swans.