The Feds Take on the Auto Industry

We’re delighted to see Mr. Obama in action…rolling up his sleeves and taking direct action to straighten out the U.S. auto business. In this world of collapsing asset values and depression, we needed a laugh.

Yes, dear reader…here at The Daily Reckoning, we feel positively blessed. We are getting to see things we never thought we’d see: crash, depression, socialism, nationalizations…things that we’d read about in the history books. Things so preposterous, absurd and imbecilic that we never thought they’d be repeated…at least not in our lifetimes. We never imagined we see them in the 21st century…in the United States of America!

We used to laugh at foreign countries. They protected their auto industries…and paid fortunes for inferior cars. They pretended that their government hacks could do a better job of running an economy than hacks working for private industry. Their central banks printed money to try to boost domestic consumption. They meddled in markets. They fiddled their currency. Ha. Ha.

Other nations have taken over their car industries. That’s what led to that marvelous breakthrough in automotive technology – the Trabant – for example. You remember the Trabant? We don’t remember much about it. Except that it was a car so wonderful you had to wait many years to buy it. But this was in East Germany before the Wall fell. You had to wait many years to buy anything. And then, when the opportunity came…and the Wall came down…you could then buy a real car.

What did you do with Trabant? We don’t know, but we remember reading stories about people who just left them on the street with the keys in the ignition…

But why shouldn’t the feds be in the car business? It’s right there in the U.S. Constitution, isn’t it? The “Car Clause,” as Byron King calls it: every American will have the “right to life, liberty and a four-door sedan.” Heck, it’s in the preamble too: “When in the course of human events, it becomes necessary to take over the automobile industry…”

Besides, the feds are already in the insurance business – big time. The U.S. government owns 80% of AIG. And we’ve seen what a great success they’re making of it. And they’ve been in the passenger train business for a long time too. Amtrak has a franchise on what should be one of the most lucrative traffic corridors in the world – from Boston to Washington, DC. Somehow, the company keeps losing money.

But now the feds are taking over autos too. Rick Wagoner was forced out of GM on Sunday so that Obama can put his own man behind the wheel.

Said Obama: “It is my hope that the steps I am announcing today will go a long way toward answering many of the questions people may have about the future of GM and Chrysler. But just in case there are still nagging doubts, let me say it as plainly as I can – if you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warranty will be safe. In fact, it will be safer than it’s ever been. Because starting today, the United States government will stand behind your warranty.”

How about that guarantee? Five years…fifty thousand miles…or until the Feds run out of money – whichever comes first.

The stock market didn’t seem to care for it. Wagoner was probably an incompetent suit. His strategy wasn’t working and the company seems headed to bankruptcy. But so what? In a free market economy, companies have the right to go broke, don’t they? Then, their capital assets can be taken up by other businesses and put to better use. That’s the way it’s supposed to work. But now, everyone seems to have lost faith in the “market’s self-healing power.” So they’ve invited the quacks with their magic elixirs and miracle potions to have a try.

The Dow fell 254 points yesterday. Oil fell below $50. And gold dropped $7.

Goldman Sachs has changed its tune on gold. Instead of going over $1,000 as it had previously forecast, it now says it expects the price to average $930 this year.

Homebuilder Lennar said it lost $155 million in the first quarter.

And thousands of demonstrators are preparing to give the G20 a piece of their minds.

“Don’t make the workers pay for the capitalists’ mistakes,” was on a poster we saw in Granada over the weekend. It’s probably the gist of the complainers’ gripe all over the world.

But that’s where it gets funny, doesn’t it? The protestors want the government to “do something.” But what can it do, but interfere with free markets…and shift the burden of the losses from those who deserve them to those who don’t?

More news from Addison in Charm City:

“They must know how it goes by now.” Writes Addison in today’s 5 Minute Forecast. “Change the rules, and the market tanks:


“We hit the finer points of the latest auto bailout yesterday. Now you see what the market had to think.

“Traders had a game plan for U.S. automakers (and all the industries that support them). The return to optimism over the last few weeks plus a ‘no news is good news’ vibe emanating from Detroit had bid up GM 100% from its recent low.

“Yesterday, after the government rewrote the playbook – again – GM crashed 30%.”

Each weekday, Addison and Ian bring readers the The 5 Min Forecast – an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments – in five minutes or less.

And now more thoughts, insights and musings:

“This past winter, it seemed like all those decades of what the Austrian economists call malinvestment finally found a place in the light of day,” says our intrepid correspondent, Byron King.

“But it’s not as if the whole tale were some sort of state secret, like the Venona files at the National Security Agency or something. Really, the nation’s industrial and productive decline was fairly clear all along if you knew what you were seeing. The problem has been hiding in plain sight since August 1971, when President Nixon killed any semblance of a gold-backed dollar.

“Or it’s kind of like Peak Oil. M. King Hubbert drew the fundamental Peak Oil graph back in the 1950s. Heck, I heard Hubbert give his speech in fall 1977. I saw Peak Oil in action back when I was working at Gulf Oil Co. in the late 1970s. It was no shock to me, at least, when the world’s crude oil output curve finally maxed out in 2006.

“What? Nobody told you that the crude curve maxed out? Hey, the world’s marginal oil output is now mostly natural gas liquids. It means that we’re blowing down the gas caps.

“It’s why I like resource and energy companies. Companies that bring real stuff to the surface. It’s why I’ll keep writing about energy and resources in a publication like Energy & Scarcity Investor.”

We were trying to imagine the car that General Motors/US Federal Government would come up with. Surely, it would have to be safe…and wheel chair accessible…and fuel-efficient. It would probably have to have warning lights telling you where to exit in case of emergency…and maybe some kind of GPS system for blind drivers.

The new government-run industry would probably have to abandon the assembly line; the idea would be to create as many jobs as possible. So workers would put the new cars together with old-fashioned screwdrivers and adjustable wrenches, stopping frequently for ‘get out the vote’ rallies and other consciousness-raising events. So, it would take months to produce a car…and you’d have to wait for a new one, just as they did in the old Soviet Union.

New cars could be designed by Congress like any other important piece of legislation. Onto a hefty chassis could be bolted hundreds of riders, amendments, exceptions and earmarks. Maybe a solar collector on the roof – made by a large campaign contributor in Atlanta? Maybe an extra steering wheel in case the driver has a sudden heart attack (helpfully suggested by a supplier of steering wheels…and put forward by his Senator). Maybe a smoke detector that automatically shuts down the engine if it senses the driver is having a cigarette, as earnestly proposed by the anti-smoking lobby.

And let’s not talk about paint color. Color is a sensitive topic in America. Probably all the cars would have to be either desert beige…or even camouflage pattern so as to be useful for military transport in case the country is invaded.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning