Code green

Bill Maher (of Real Time with Bill Maher, HBO) asked an important question to his panel recently. He asked that how is the current Obama plan to buy toxic assets (also called the ‘cash for trash’ strategy) better than Bush’s? He is doing the same thing that Bush was doing, and somehow he is being given a clean chit no matter what.

Right now we are bailing out companies, some of whom do not deserve it. Obama has imposed severe restrictions on the auto companies, including asking a CEO to step down, and forcing them to form mergers. Why not have them file bankruptcy? There is enough bailing out right now: the banks might be too big to fail, as them falling down would dehydrate the market of finance, and businesses would choke, resulting in loss of commodities and jobs nationwide.

The auto-makers do not enjoy such a strong niche in the market according to me. They have been exploiting the low price of oil by building gas-guzzlers in the past, and they collapsed as a combination of two problems: the sudden increase in gas prices which forced buyers to turn to more economical Japanese and German cars. This resulted in a stagnation of sales which ran them into losses. Also companies like GM could not afford to pay health insurance premium for their workers. At one point, they were spending more on health insurance for their employees than they were spending on raw material for their cars! The employer-paid for health insurance system has many drawbacks, one of them being the increase in illegal employees simply because the employers can pay them less than minimum wage, ignore exploitation rules and deny them healthcare. But I digress. The auto makers have been exploiting their connections with the Republicans, not to mention the collusion between the Democrats and the auto worker unions. This is vote-bank politics. It is red, white and blue, instead of saffron, white, green and blue. Hence, we may not notice it as much.

The thing is, by bailing out US carmakers, you are favoring them over their Japanese, German, Italian and other counterparts. This goes against fair competition where the govt. is favoring one of the candidates with a safety net. Such a protection might result in the rapid dumping of shares of other auto companies which might increase the magnitude of the recession.

Some might regard my suggestion ludicrous, but one of the possible solutions is to encourage small businesses and increase job creation. Other projects like building more roads and subways are always a classic. As I have mentioned before, I have a huge problem with the govt. printing notes without any security against them. It is fine right now, but when the economy starts to recover, there will be so many dollars floating in the market that the value of the dollar will fall. A better way to get more cash is the equivalent of the Indian National Savings Certificate (NSC). The govt. could introduce an NSC plan and say that, should people invest, they could double their money in five years. They could give tax breaks on the amount invested, and impose penalties on early withdrawal of funds. This will pull in extra cash for the government to play with, but will not generate fake dollar bills. This will also encourage Americans to save some part of their paychecks. One must remember that the amount of assets is always limited, and this ruled applies to cash as well.

Another idea that might be more popular with my readers (but not a populist one) is to increase the number of H1 visas. Able, talented, educated and industrious people are waiting to get here and do well. They can improve productivity and create competition, which will force existing workers to do much better. No one should be in any sort of comfort zone at this juncture. When we spread the risk over the entire nation, it seems like less of a load on a fraction of that population which carries it now.

Usually the working class always takes care of the older retired generation, and thus all retirement bonuses could be justified. Now, however, the baby boom generation has retired, and America has a large number of people who are dependent on the working population to take care of them. Benefits like 401k and provident fund equivalents are fine, as they are a part of your salary anyway, but other benefits (and there are many) need to be trimmed. Recently, the Metropolitan Transport Authority (the people who run the subways and buses in NYC) announced a fare hike. This is fine; this would be our contribution to an organization that transports us through large distances for just $2, but is now struggling. But, do you know that an MTA employee can retire at 55 and start reaping retirement benefits as opposed to the regular 65 yr retirement age. So basically, taxpayers have to employ a new guy, pay him, and pay this retiree for an extra ten years than they would have to. The MTA is asking the general public to invest in it, to get some rolling cash. How would anyone want to invest in this when they find out that their hard-earned money is being given to early retirees and that there is no way to expect returns on any money that goes there?

Also, the govt. needs to explain to the people that now that the s**t has hit the fan, they need to cut down on the entitlements and grow up for once, or face a depression that would rival the 1930s. Again, this long post is my two cents. Better opinions are more than welcome.

13 thoughts on “Code green

  1. @crumpledpapersA sincere thanks! I would like your opinion on this issue too…something akin to your usual analogy style will be highly appreciated!

  2. it dint feel like reading a blog at all!felt like i was reading a very well written hi-fi editorial, usually found in newspapers im afraid of reading (ET,FT..)

  3. now wait, what is that you study?but yea i’m quite impressed with the extensive research on the auto industry esp since I’m in it.The NSC will never work as here ppl don’t trust banks and that explains the paltry interest rates on CDs you get.

  4. @buddyThanks@maxdavinciI study pharmaceutical sciences…the other major lobby along with the auto industry! I see what u mean abt NSC, but how about the federal govt. directly issuing them without going through a bank…of course the other problem is that the Federal Deposit Insurance Corporation (FDIC) which insures our bank deposits in case our bank goes belly-up also needs money now…so the clock has struck midnight right about now!

  5. Hahaha, the writer discussing the article with an H1B aspirant(or two) and a GM employee! Sorry, I had to point that out!Beautiful articulation, bharat! But all said and done, I don’t think they can be stopped from printing notes. At the rate the bail outs are happening and with cash for trash strategy, the dollar rate is going to hit a new low. Ayn Rand just turned in her grave. It is very very difficult to encourage savings like NSC in a free market economy where people earn for the day and absolutely have no concept called saving for the future/benefits. I laugh at the ads. And not just because of the corniness of the ad but the whole concept they use to drive the point home.

  6. very very well analyzed :)… some points really hit home..I strongly agree with the NSC type scheme implementation and more competition being required

  7. @gradwolfI see your point on the NSC but these are exceptional times and they call for some desperate measures…and if that means tightening the purse strings, then they should do this for once…and the other thing…am an H1 aspirant too, don’t forget that…also lemme know when you are in NYC again@chocoliciousgalThanks…do write in your opinions about this

  8. Actually something like NSCs should not be encouraged in such an economy according to me. The major concern in this economy is that there is no or very low cash flowing in the market. Making saving schemes is going to limit that amount even further. One of the main reasons the bail out plan was introduced was to introduce some extra cash to be flowing into the stagnant market. Government is cutting down taxes so that people will be able to spend more and bail out others in an almost cyclic manner. NSCs should have been an option before the recession hit so that people would have had cash to spend in this bad economy and help the industries to spring back.

  9. @ BuddyYou mean this isn’t a blog and an article for some famous mag?? 🙂@ LiberalMaybe he didn’t let them file for bankruptcy coz he had some stake in their shares. 😀Very very informative!

  10. I’d say the Fed. Govt. should dissolve the entire BoD of the Federal Reserve and take complete control of it to monitor the currency flow in the market at times like this. The BoD of the Fed. Reserve constitutes a major chunk of the big-wigs in the banking industry. That pretty much explains why banks are subject to favoritism from the govt., and hence the undeserved bail-outs and unnecessary liquidations. This might sound radical, but doing this can help regulate cash flow. The tax-cuts should also help, but the savings schemes probably won’t work here. The average American is at least 30,000 bucks in debt and saving-up is a phrase that does not exist in his/her vocabulary!PS: Apologies for being a space guzzler. Too long a comment! 😐

  11. Let me get this out of the way, ideally if I was Treasury Sec, I would say let the banks fail, let those who took risk, pay for it, moral-hazard-etc-etc. Certainly the Detroit automakers in a true capitalist society should be allowed to completely fail!
    But here is the thing; there are people’s lives involved. The discussion about this is probably moot anyway, because GM will likely go bankrupt. The banks – and their bailout are very troubling. But what we will hopefully get out of this is some iron-clad regulation –
    I agree on the value of dollar, it is going to go down for all the printing we are doing. The only consolation is, the rest of the world is far too dependent on the US economy (and consumption engine) – so we’ll likely hobble along. The next few months are going to be interesting to watch – the bankruptcy of GM, the letting go of Citi and (likely) BofA. Will anyone really buy those toxic assets or will they just languish on? There is certainly bailout fatigue in Congress (and the people). As they say, stay tuned ..

  12. good research..but it is a free market consumer-driven economy that cannot be compared with any other. the entire country lives on credit ( read others' money)..a balloon..what capitalism is all about..but it has reached a point of no return! a giant economy on which others depend too unfortunately! the degree may vary from each other…capitalism and its perils!!!

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