Posted by
CyberMom on Tuesday, November 18, 2008 12:00:00 AM
Well, I've listened to the talk show hosts, Laura Ingram, Sean Hannity, Glenn Beck, Dennis Miller, Bill O'Reilly and almost all of the news stations (CNN... if you call that news... NBC, ABC, CBS, et.al.); and nobody is discussing the 'real' failure of the bailout. [Of course, living on the West Coast, one doesn't get to actually hear these talk shows 'live,' to call in, and they never make email accessible in order to avoid the umpteen billion they would receive on a daily basis! And, I DO apologize to those who have discussed the REAL reason this that bailout, which have existed historically and worked, didn't work!!] To understand the failure, you must first understand the historical relationship between the Government and business. In an article by
Gary Bolding, he writes, "The early champion of government involvement in the economy was our first Secretary of Treasury, Alexander Hamilton. Hamilton thought that the way to strengthen the government and economy was to gain the support of the moneyed classes." Government and big business through the National Banking system, designed to support one another was started long ago; and government bailouts soon followed.
Stretching back to the early days of American Motors, the government has offered its assistance to corporations in times of a crisis. As Nelson D. Schwartz with the International Herald Tribue wrote, and istockanalysis.com noted on their website, the bailout of Fannie Mae and Freddie Mac are only the latest in a very long line of Government 'rescues,' designed to help the economy. Whether it was Lockheed or the Penn Stock Railroad by Nixon, or Chrysler by Carter, the government has a history of using consumer tax dollars to save dying companies. Let's examine 'why' they do this:
Historically, when a corporation fails, the economy suffers. Unemployment rises, purchases are down and a cacading effect can be felt. While it has never occurred on the same scale as the depression of the 1920's, there has been a consumer and media-driven panic that it will happen again. Thanks to major disasters such as the Watts Riots, the San Francisco quake and the New York blackout, people live in fear that the impoverished will seek to steal whatever they can when our backs are turned. People fear that the unscrupulous will run rampit, beyond their usual tyrades during major disasters with desperation being an added driver to the criminal vehicle. While there is logic in this, it is a point of failure in our economy that has lead us to the bailout disaster we're in now. But, there was a logic to these historical bailouts. How these bailouts worked is this:
Invest money into a dying corporation, allow them to afford to keep their staff, allow them to produce product at no cost and flood the market with their product at a decreased price, thus, help those who couldn't otherwise afford the product to become long-term customers, the company makes more money than before, there are more successful companies and individuals (thus more tax revenue for the government), and everybody lives happily ever after (another point of logic is that the government doesn't have to increase welfare for the unemployed and the FDIC doesn't take a hit from a bank losses). For those who can't see this yet, let me put it this way (and I'll use fictitious, but simple numbers to keep it simple, because I'm a simple minded person; and we'll pick on GM because they're actually a good company and I can hope they have a sense of humor...):
CREATING THE CRISIS
GM sells 100,000 cars at $100 a piece in one year: Their profit = $10,000,000.00. (Not a bad haul)
Their costs end up being around 70% of that profit: $$7,000,000.00: Their pre-tax net profit =: $3,000,000.00 (still, not shabby)
The government requires 20% [or $2,000,000] of their profit (from that $10 million mind you...): Their total net profit: $1,000,000.00 (still.. it's profit.. right? - note, I'm being REALLY nice about the taxes right now....)
Now GM has: $1,000,000.00 to start out the next year with.
Year 2 - GM wants to produce 150,000 cars, knowing that the demand/population is up - but remember what it cost before? ($7 million for those of you not paying attention). Now they only have $1 million to do this on... so... they borrow from the bank: $10 million (to give them a little extra working capital, as their expenses will be higher, they may need a new plant, etc.) - and the banks are charging them an interest rate of 8% ($800,000).
Now - do all the math:
Income: $17,000,000 (to account for inflation, higher sales tags, etc.)
Expenses: $13,000,000 (to account for inflation, cost of living increases, etc.)
Borrowed Money Expenses: $1,000,000 (by the time we look at inflation, compounding interest, etc.)
Cost of new building (for the increased production): $5,000,000 (but they'd only pay off $2,000,000 of that this year)
Net profit before taxes: $2,000,000
Government Taxes (22% with inflation, higher sales/staff/property/etc. and out of the original $17 mil): $3,740,000
Net loss after taxes: $1.74 million.
Now - an accountant/analyst will look at this and tell you it's all wrong and go into the looooong, boring details of why. Of course, the reality is - this is the way business grows - it takes a risk, knowing that it may take a loss, but knowing that soon enough, that $5 million dollar building will be paid off, they'll be able to triple production and the amounts will balance out.
But, something happens.....
The national debt grows... interests rates are hiked, investment interest rates are lowered, the minimum wages are forcibly increased, special interest groups start making all sorts of new requirements that cost money - and lose jobs - less jobs, higher costs, production is down. Now the business is suffering, and their borrowing rate increases until they are in a crisis! Let's look at the end consumer side:
At first, the cars cost $14,000 (by the time it reaches the car lot).... so people are buying
The second year, they may have gone up to $15,500... and while it's higher, the banks are still lending, people are still buying, and there's more people - so more consumers means the prices can stay down (this is the success in America, not my wallet, anti-greed principal).
By the third year, in order to meet the net loss, the car manufacturer jacks up the price - and consequently, so do the car lots: $20,000.00
Wow... that's a HUGE increase. Less people can afford new cars, they stick to their old cars or used car lots begin cropping up like wildfire, and while an increased population is supporting continued sales - a high demand object (which should naturally encourage higher production and profit for the manufacturer), is now a no longer affordable object - and everyone, all the way back to the manufacturer is hurt - and now we leave the success in America principal, and as wallets tighten - the greed factor kicks in. Prices... increase.
But, that's not all. Here's the REAL kicker. The government, in their effort to increase the size of their wallets starts making rules. More, and more, they make - more rules. You can't drive without a seatbelt - $150. You can't have a cell phone with you while driving - $150. You can't drive West on Tuesday because Friday the sun rises in the East (or whatever other rules they come up with to make YOUR life better, everyone's life safer - because we all know, that if the government doesn't hold our hands, we're going to be incapable of feeding ourselves) - the government changes the rules. But, they justify it, you see. More accidents mean MORE government services, ie. ambulances, police, sheriff, state police, helicopters, new cop cars, new city cleaning crews, more road departments, a raise for Congress and a partridge in a pear tree!! So, they hire 4 new cops to sit in cars with a speed gun, using gasoline, and after all expenses are counted, creating an expense of $150,000 in a year, PER officer (to save the increase in population of 20,000 people, of course costs $600,000.00 - being again, REALLY, really nice about what they really cost us!). But, in order to afford that - and the raise for Congress - is going to increase taxes. It increases the manufacturer's taxes and the consumer's taxes - and now, there are less cars being purchased...
So - here we are: The crisis point!
TRADITIONAL GOVERNMENT BUSINESS BAILOUTS
In the past, when this type of situation occurs (of course, perpetuated by increased taxes - government, increased interest rates - government, anti driving rules - government, increased costs to manufacturers, salesmen, etc. - greedy business owners, false belief that we can get loans and feel safe about it - gullible American public - and so on and so on) - the Government steps forth to help the company.
(remember before we head into the next section - that 'the Government,' does not make money - this is YOUR money - the consumer):
So, in this bogus scenario, GM is ready to declare bankruptcy. The government sees that they are in debt by $100,000,000.00; that it will take $200,000,000.00 to produce the amount of cars they need to meet next year's original projections (plus), at no cost to the company and that this will keep the employees employed, get the banks and lenders paid off to prevent a crisis for the lending institutions, and allow the cars to be sold for 40% less than what they were the previous year.
So, GM now builds 500,000 cars at no cost. They would have put them on the market for $15,000 a piece - but, due to the bailout, they put them on the market for $10,000 a piece. No big deal - they're making ALL profit. There will be enough money left over to afford production for 2 more years at no cost, invest in a new building to increase production and technology - and keep the costs to the end consmers, down!
The car salesmen are told they the cars must sell for 40% less than last year. Well, last year, they were already charging $25,000 per car and were going to make $8,000 a piece. But, this year, they can't sell them for more than $15,000.00, and will make their $5,000 a piece. The banks are paid off and told to lend more money for car loans and encourage car loans - so they do. And, what happens?
Half a million cars sell for $15,000 a piece. People who couldn't afford them, now can. People who needed them for work, companies that needed them for productivity and entrepeneurs who want to offer new services, ALL get to buy cars, increasing the tax payer base for the government (in the hopes it will help, in the long-term, off-set what they gave to the manufacturer out of our pocket). Next year, GM will produce 600,000 cars, meeting the demand, the car manufacturers will still sell the cars cheaply, the car salesmen will jack up the prices a little, but not much, to still keep them affordable - and there is the circle of profit (versus the circle of life). The principals are simple:
More product at a lower price means more consumers, more income, more taxes and improved economics
Extending lines of credit means more opportunity, more risktakers - but also more successful venturers.
THE FAILURE OF THE NEW BAILOUT PROGRAM
THE HISTORY LEADING US UP TO IT
With more taxpayers at a higher income rate, we don't need to increase taxes. With more productivity from the car companies, businesses can afford to hire more people. And, it works, right?
Uh - oh - here comes the reason 'why' you hear the radio and television talk show hosts CONSTANTLY warning YOU - the consumer, against the government 'trying,' to 'fix,' things. Here comes the logic behind that argument that you're TRYING to pretend doesn't exist:
The government DOES increase taxes. What? Wait? Why? Aren't there already more taxes being paid? Won't there be more taxpayers in the next year? Well, yes, there will. And, yes, the above plan works for a very, very long time, because the banks are spreading the wealth amongst the people by offering loans and investing in people. But, then we get credit agencies like Equifax, Checksystems and other government and private organizations designed to help save the businesses BY HURTING THE PEOPLE. But, wait - isn't it difficult to 'predict' a failure in someone's credit or spending using a blanket technique? Oh no.... of course not. You can apply the same, one-type principal to 180 million... MILLION working Americans, and it will be the same for all of them.... NOT! But, they did it.
And, guess what else? The government sees the new money coming in - and - yup, you guessed it... "$CaChing!" New raises for Congress (because we know that they don't have to work any more than those members of Congress who were in place 50 years ago.... wait... that doesn't make sense?) The various government agencies who contract with them at 'prime,' rates (for those who don't know - it's like buying the $100 hammer vs. the $20 hammer, but in real business, no conspiracy stuff), get to take their share. Taxation increases because the government sees this - and suddenly, the consumer can't afford the product. The manufacturers realize the potential of increased production, but thanks to cost of living increases, rather have that potential come from less workers - more unemployment and more welfare.. woohoo! The banks and lenders, seeing this trend, and with their credit companies now in place, tighten their belts, invest in a specific few and leave the rest out. Now we get a HUGE separation in classes between the rich and the poor with no end in sight, a more dismal outlook on life and the economy begins to fail. Remember, the unemployment, high prices and other factors aren't only in GM now, they've extended into other businesses and every part of the economy hurts. (this is the simplest of the big picture)
A PLAN OF ACTION - FOR $700 BILLION DOLLARS
So, the government sees what's happened and says: Big business, why for did you hire that CEO at umpteen billion dollars? They say - because you helped screw us. The government says: That can't be, we're doing fine. The businesses and people mumble: yeah, because you're taking OUR money and... oh yeah, helping to SCREW us. The government says, here, I've got an idea:
Let's take $700 billion dollars of our money (wait... hold on... did you catch that? "Our" money? No - not one member of the US Government gave up 'their' paycheck for this - WE did), and let's do the traditional bailout, but since the whole of the economy has suffered, let's do it on a grandiose scale!! And, here comes the failure! Let us look now, at a REAL life example; AIG:
AIG is a worldwide insurance company (world.. not nation... but we're going to save her alone), which, if it fails, will cause a huge increase in welfare demands on the government (no, I didn't say loss of jobs, because I'm giving this to you from the government's point of view so you can try to understand their lunacy, which 'we' accept as normal); put people's pockets at risk so that they won't spend and won't pay taxes and make the banks and lending institutions take more of the tax money for themselves!!
So - AIG is bailed out. What is that successful plan which worked before?
More product, lower costs, continued employment of staff, extending lines of credit, right?
But, that's not... exactly... what happens. AIG's debts, you see, have been sucked up by the greedy, corporate staff. AIG's expenses aren't reliant on a product, but a service, and they can't really be held accountable to 'production' costs. So, here's what happens: AIG pays their corporate staff more. People are laid off and AIG looks to cheaper methods of handling their services. Of course, the lawyers they MUST employ to handle the lawsuits (thanks to - the government - for creating that disaster), now demand more money. AIG has 2 choices:
1. take an insurance policy for $800 for 6 months, make it $500 for 6 months and make it available to more people OR
2. take an insurance policy that is now $800 for 6 months, keep it that way and don't extend credit.
(yes, these are again, fictitious, sample numbers to illustrate the point.. sheesh!)
In choice number 2 (which is what AIG is doing right now), they will get their usual 10,000 people, for $8,000,000.00 - which, with the bailout, would put them in a fair financial condition for next year.
In choice number 1, AIG would increase their consumer base by 10,000 people, for $10,000,000 people. That's only a $2 million difference - but, now there are more consumers, they've extended credit and their consumer base will continue to double for the next 4 years until that $2,000,000 becomes an added $8,000,000 and they will be pulling in $16,000,000.00 per year.
But, AIG didn't follow the government bailout formula for success. They didn't listen, and they didn't care - because the government didn't care. The government was far too preoccupied with special interest and self interest to follow the formula, although inherintly deficient due to continued governmental actions, that would have helped get our economy back on track for quite some time.
And, that folks - is WHY the bailout, didn't ... and won't.... work. At this point, it's free money for someone's pocket, not for keeping the consumers growing, not for supporting employment and not for the people. How awesome is that?
[And, as a final note, don't forget - that the government's continuing, even in the face of doing this bail out wrong, to make Legislation and decisions that will hurt us anyway! We're paying $1 trillion per year to prisons, jails and law enforcement - and yet, nobody seems to be too happy with it, except for law enforcement!! We're not getting the health system under control by starting at the source of the problems, we're increasing law and legislation to control peoples' individual lives, and yet - in this article we've already seen, that all that does is create such dramatic problems, that $700 billion WON'T fix it! That is MORE than the entire tax income for 2008, which means in 2009 - taxes will have to DOUBLE - and with the unemployment rate growing and the economy suffering - unless WE the people, stand up and rebel, take up against beauracracy and take away the Government's rights to limit our right to fight (ie. we PAY for the Attorney General in every state - and in every state, that VERY expensive office alone, is designed to protect the government from the people - go figure how THAT works??) - this will not last another year - when our debt is then quadrupled beyond repai. Just think about it.]