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General Motors Bankruptcy

June 3, 2009 in Business by Greg | 6 comments

General Motors Corp. filed for bankruptcy and became the second-largest bankruptcy in U.S. history. According to the Wall Street Journal:

President Obama defended his decision to take a majority stake in GM, saying it was unavoidable and temporary. “We are acting as reluctant shareholders,” he said in a televised address.1

2006 GM TEN Event - Stacy Keibler The story went on to state:

Some Republican lawmakers called the move another sign of the administration’s deepening incursion into the private sector. And the risk remains high that the administration or Congress could meddle in the company’s day-to-day affairs, an experience familiar to banks that took government bailout cash last fall.

Since it was reported that General Motors approached the government about a possible bailout2, this scenario reminded me of the following quote about how business leaders often seek government to intervene for the so-called “public good”:

Businessmen have done more than their full share to foster the active regulatory state from its very inception. Consider William Simon’s recent description of the relation of business and government as he witnessed it during his tenure as Secretary of the Treasury in the 1970’s:

“I watched with incredulity as businessmen ran to the government in every crisis, whining for handouts or protection from the very competition that has made this system so productive. I saw Texas ranchers, hit by drought, demanding government-guaranteed loans; giant milk cooperatives lobbying for higher price supports; major airlines fighting deregulation to preserve their monopoly status; giant companies like Lockheed seeking federal assistance to rescue them from sheer inefficiency; bankers, like David Rockefeller, demanding government bailouts to protect them from their ill-conceived investments; network executives, like William Paley of CBS, fighting to preserve regulatory restrictions and to block the emergence of competitive cable and pay TV. And always, such gentlemen proclaimed their devotion to free enterprise and their opposition to the arbitrary intervention into our economic life by the state. Except, of course, for their own case, which was always unique and which was justified by their immense concern for the public interest.”

One wonders whether anyone – with the possible exception of a few right-wing ideologues – any longer supports the free-market system as an inviolable desideratum; whether anyone is willing to bear its costs in order to preserve its benefits. Talk is cheap, and accordingly business people often talk as if they favor capitalism. But the blatant hypocrisy of their rhetoric suggest that it is either a political device, deliberately employed as part of a “public relations” strategy, or a mindless reflex inherited from the past and readily abandoned when it seems incompatible with short-run gain.3

What’s your view point?

Should the U.S. government continue to intervene in free-enterprise?

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Sources:

  1. King, Neil, Jr. and Sharon Terlep. “GM Collapses Into Government’s Arms”. 2 June 2009. The Wall Street Journal 3 June 2009.↩
  2. Rasmussen, Scott. “Americans Have Voted ‘No’ on GM Bailout From Day One.” 1 June 2009. Rasmussen Reports. 3 June 2009.↩
  3. Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. Oxford: Oxford University Press, 1987. 243.↩

House of Cards

April 3, 2009 in Business by Greg | 5 comments

The House of Cards is a CNBC documentary about the greatest financial crisis in the United States since the Great Depression. If you didn’t get a chance to see this program, the trailer is below.

As mentioned in the post Milton Friedman on Greed, this is part of a new series of posts dealing with the free market system.

In this program, correspondent David Faber:

House of Cards . . . reveals how a financial house of cards was slowly built following the 9/11 attacks. As the U.S. government tried to revive the economy by repeatedly dropping interest rates, families lunged at the opportunity to refinance their mortgages. Faber introduces viewers to mortgage lenders like Daniel Sadek who drastically reduced borrowers’ credit requirements and raked in personal profits of $5 million a month.

Wall Street began to consume risky mortgages and turn them into products they could sell to hungry foreign investors. Banker Michael Francis tells Faber that no matter how risky the package, during the peak of the lending frenzy any mortgage-backed security could find a home on Wall Street.

Exploring just how far the effect of the credit crisis extended, Faber travels to Narvik, Norway, a town far above the Arctic Circle that was convinced it could solve its budget problems by investing in Wall Street’s wares. Mayor Karen Kuvaas and Narvik’s other town leaders hoped to become “great heroes” by reaping the income from financial ventures they believed were safe.1

I especially enjoyed Alan Greenspan’s comments. In this video he “defends decisions he made that critics say laid the groundwork for the crisis. Greenspan also admits that even he did not understand the details of the more complex securities on the market.”2

In 2004, in the midst of the housing boom, President George Bush had a chance to do a little bragging in his State of the Union Address.“This economy is strong and growing stronger,” he said, to applause in the House chamber. “New home construction (is at) the highest in almost 20 years. Homeownership rates (are at) the highest ever.” Just one month later, then-Federal Reserve Chairman Alan Greenspan encouraged the mortgage industry to come up with new kinds of loans — so even more people could buy homes. “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,” Greenspan recommended in a speech to the Credit Union National Association.3

Those are rather telling statements from the former Chairman of the Board of Governors of the Federal Reserve System. How much confidence should we have in our elected leaders – let alone their appointments? If you’ve been reading this blog, then you already know that there are quite a few appointed economists with pseudo-knowledge. Perhaps that’s how they got appointed in the first place. . .

Enjoy the teaser to the House of Cards!

YouTube Preview Image

Sources:

  1. Dauble, Jennifer. “CNBC Original Documentary ‘House of Cards’ Uncovers the Reasons Behind the Greatest Financial Collapse Since the Great Depression”. 2 February 2009. CNBC. 3 April 2009.↩
  2. Ibid.↩
  3. Jacoby, James and Jill Landes. “CNBC Special Report: House of Cards“. 13 February 2009. MSNBC. 3 April 2009.↩

Milton Friedman on Greed

March 19, 2009 in Business by Greg | 2 comments

I found the video that follows of Milton Friedman on greed at The Foundation for Economic Education blog the other day. Freidman is best known as the 1976 Nobel Memorial Prize in Economic Sciences “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.”1

Milton Friedman After graduating from the University of Chicago in 1935 with an M.A. in economics, and a year long fellowship at Columbia University, Friedman worked in Washington, D.C. at the National Resources Committee during the height of the great depression. During this period and the subsequent WWII years, Friedman was heavily influenced by the work of John Maynard Keynes. Writing with his wife Rose, Friedman stated in his autobiography, “I had completely forgotten how thoroughly Keynesian I then was.”2

As an example, “in 1942 he advocated a Keynesian policy of taxation” and helped invent the payroll withholding tax system in the United States.3 Sixty years after its introduction during the height of WWII, Friedman regretted the role he played in implementing this plan and said, “I wish there were some way of abolishing withholding.”4

Following the war, Friedman joined the faculty at the University of Chicago where he helped create a community of economists collectively known as the Chicago School of Economics. In addition to the Nobel Memorial Prize he won in 1976, Milton Friedman is also best know for reviving interest in the quantity theory of money.

Read the rest of this entry »

  1. “Economics 1976”. Nobel Prize. 17 March 2009.↩
  2. Friedman, Milton and Rose. Two Lucky People. Chicago: University of Chicago Press, 1998. 113.↩
  3. “Milton Friedman”. Wikipedia.org. 19 March 2009.↩
  4. Doherty, Brian. “Best of Both Worlds”. June 1995. Reason Online. 19 March 2009.↩