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The Housing Crisis, the Auto Industry Crisis: Canvas Funds and the New Stimulus Package

I know the temptation to delve into the details but the details are the labyrinth in which the beast hides. It’s wise to stick with the auto industry at the highest level, because this beast is huge.
The first problem with the auto industry is that it is based on an assumption of unit sales of 17m/yr, when demand suddenly fell 40% lower, and for both environmental and energy reasons, allowing demand in that industry to hold at those levels is excellent. It is the best energy independence and environmental policy that could have happened.

If the volume stays at those levels (which unfortunately it won’t) that translates to a 40% reduction in reliance on oil and a 40% reduction in the worst pollution right away; and a 40% reduction in the long-term need for roads and bridges. (Which, by the way, should not be the main emphasis of the new stimulus package for exactly the above reason; rather, the emphasis should be on investments in technology and incentives for the clean energy sector and for other sectors that need technological improvements like information technology for medical records, encryption technology for national security, and infrastructure for schools, particularly urban schools and some, but not as much as what Obama has mentioned on the roads and bridges part. To move forward, we need improvements in the technology, particularly in hardware (in the broad sense of the word, not just computer hardware) technology that involves manufacturing and thus sustainable high-paying jobs, and the jobs should go to those sectors, not the same old ). The stimulus package should focus on the strategic areas that Obama talked about on the campaign trail, (clean energy, education, manufacturing jobs, and cutting health care costs; while $100 billion of the rest of the TARP funds should be in households), so the entire stimulus must be “two for”. The measure of the adequacy of targeted stimulus programs should not be so much about the immediate impact on employment (which should also be a factor, but not the main factor), but whether they reduce the need for future government spending (by at least 15%). per year in those areas), so that years 3 and 4 are years of deficit reductions (both federal and commercial) and significant reductions in government spending). If someone had a strategic plan that was worth at least a little more than the garbage, the stimulus package would be nothing more than bringing about 5% of the investments from years 3 and 4 to years 1 and 2 to provide a stimulus of 1 or 2 years and structurally reduce the necessary and planned investments-expenditures for years 3 and 4, by around 1% of current levels.

The answer to the first problem of the automotive industry is simple and direct. It implies a 30% cut in the principle value of all bond and warrant holders and placing them in second position behind the government, by decree of the Tsar, and therefore by law confirmed by Congress, a 20% cut in the workforce. of the industry, a 30% cut in the wages and benefits of new auto workers, a conversion of 30% of the liabilities of retirees and current workers into stocks, a 20% cut in the wages and bonuses of all employees (and may have one day off each week) until businesses are profitable, a 20% increase in the deductible portion of all medical-dental costs, a conversion of 30% of liabilities to suppliers into equity (in all cases capital at low current values ​​); a 20% cut in the number of dealerships, a 20% reduction in the number of products each sells, a 10% tax on cars and SUVs going under 25m/gal, a total executive compensation limit up to a maximum of 2m/year, a ban on the business use of private jets, a 50% cut in advertising budgets within which there would be a 30% increase in advertising for the most efficient vehicles and a 70% cut in the current common budget and preferred dividend yields. (And by the way, a mandate to energy companies that at least 30% of their stations have alternative fuel pumps by 2011; and an immediate lowering of sugar cane ethanol rates and a commitment from both manufacturers and of suppliers to increase their national content by 30%.

Since this is the best opportunity for the industry to move towards greater energy efficiency, 30% of the time of the new efficiency gains (hybrids, plug-in hybrids, natural gas, flex fuel, hydrogen and electric cars and trucks) must go accompanied by government investment which is in preferred convertibles that own 30% of the company and earn a 5% dividend yield. The investment must be approx. $75 billion ($25 billion already allocated for energy efficiency; $35 billion from TARP for this bailout and $15 billion to finance companies through the Fed’s commercial paper program). All investments must involve preferred stock ownership in both parent companies and 30% finance companies, except Chrysler which should be in 70% equity because it is a private company whose owners have money but refused to add money to bail it out and agreed to forgo any profit on the upside, meaning they would be happy to convert their debt into equity and keep 30% of the shares of a successful company. The government should also put a limitation on itself that it will sell all of its ownership in these companies within the next 10 years.

Only within the above dictates can the bottom-up plan of the industry and its individual companies make sense. I know that Congress cannot be coherent enough to produce such a simple and coherent orderly solution, perhaps the attached caesar is. These are simple and fair across the board, with each stakeholder taking a 30% “cut” to avoid losing much more (and maybe all) and get a chance to share in future business perks. (With a small bias toward labor and dealerships, which is the bias toward not losing too many jobs, particularly not at this stage.) If the above dictates are not given and a compromise by subject and group is attempted in detail, one is almost in the kind of terms and processes of a bankruptcy case, which is too long and will therefore force bankruptcy.

This plan achieves an immediate 30% reduction in oil dependency and a 30% reduction in transportation emissions, and a 30% reduction in road infrastructure needs with another 30% annually after that for several years; normally doing this would take at least a decade; Do not lose this chance.

It will also produce a very viable industry because demand will most likely only be 10-20% lower than the level of 17m/year in 2010 (in fact it may be as low as 17m/year), so in reality companies will be profitable in 2010 and very profitable after that, because Americans, if they get credit, will buy like crazy, especially if manufacturers actually use their advanced energy and cost efficient vehicles.

In a few months, after negotiating tariff reductions between democracies, at least a 20% tax on imported oil from OPEC and on Chinese imports (or on Yuan/$ conversions) will significantly help all national constituents of this and all industries and it is necessary to avoid going deeper into the hole, because all the deleveraging of individuals and industry is happening because of the dramatically increased leverage of the government, both federal and state and local, which needs these taxes and reductions in trade deficits to avoid becoming the next and the biggest bubble ever burst. As I explained in a previous article, the underlying liquidity and credit crisis is a huge monetary policy mistake, with interest rates still too high, and one that can be quickly fixed without forcing the government to leverage as much.

Since we are in solutions, we could also address the first problem, that is, the problem of the housing crisis with the fall in the value of the house and the delay in the demand for housing. It is, as always, a triple solution with a) monetary policy; reduce long-term (30-year) mortgage interest rates to less than 5%, for good credit, quickly through Federal Reserve action (buying Fannie May paper, financed by far fewer bill auctions of the short-term Treasury and many more auctions of 30-year notes) ), for the part of the global demand for housing; and the drop in the discount rate to .5% b) a “mod” loan program requirement for all banks, prior to any foreclosure, taking 90 days for all involved to commit to allowing banks to take collateral on home ownership and so on your appreciation, if the loan is more than 60 days delinquent, (for those who can and want to continue to stay in their home if payments were 20% or lower), ( This can also be the FDIC proposed and implemented plan); and a $100b TARP-funded foreclosure program in which the government buys 20% of the home’s equity from banks who, having gone through the above modification processes, will have to go into foreclosure of anyway because the owner is too upside down. or you have lost too much of your income. The government buys 20% of the capital of the banks at 80% of the value of the mortgage, that is, the banks automatically lose 20% once the government has to intervene, and the government, the banks that own it, are the lenders of these properties foreclosed and have a conversion. management company that rents these properties. (The Federal Government in this case would be assigning the money to the Municipalities and Cities that would implement this program). Thus the three components of the problem are dealt with directly, the interest rate for all demand; the “mod” for those who can keep lower payments but fewer ownership advantages; and for those who will have to exclude having at least one rental unit and a larger and therefore more affordable rental market.

These actions will cause the recovery of the real estate market for the second quarter of 2009.

Previous plans for the crisis in the auto industry and the housing industry start like this but do not stay like this. This is because these are the backup plans that go into effect until the industries (both auto and housing and could also require the financial industry to join them), from the bottom up, submit plans to Congress. have the relative consensus of all. stakeholders who believe fairer and better for all, before March 1, 2009, knowing that if they do not agree on something better, this is what will stay. (Of course, at that time Congress can work with or independently improve these plans to improve the details.) (And knowing that if they don’t agree to make this work now, they’ll all lose at least 90%, which is what the lawyers and judges can let them keep after they have their own party in bankruptcy, being the only winners, and in this case liquidations of many large, medium and small companies and a very severe recession that lasts until 2009 and maybe more).

Stop sinking the kitchen and get things focused as stated above, because so far Congress and its leadership are proving grossly inadequate and all the change so far is only in the type of BS being doled out.