It’s Déjà Vu All Over Again

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The latest news on the American auto industry brings back bad memories of Obama’s crooked crony nationalization of GM and Chrysler. We may well be seeing the setup of another round of bailouts in our dysfunctional domestic auto industry.

Start with a recent report on the nervousness in the industry during the run-up to the Federal Reserve decision on whether to move off the Fed’s seemingly endless zero-interest rate policy. The auto industry has been selling a lot of cars for cheap money; as the report notes, the apparent revival of the domestic auto industry has been facilitated by an explosion of auto loans. Earlier this year, the combined auto debt of US households hit an all-time high of over $1 trillion. The artificially low interest rates, along with the drop in gasoline taxes (brought about by the miracle of fracking) worked like Viagra to swell the American libido for new cars. The sales of domestic cars will likely exceed 17 million units for the year — a level not seen since 2001.

GM alone has recorded more than $25 billion in profits over the last five and a half years, and Chrysler has recorded 65 months of sales growth. All this is the aphrodisiacal effect of 0% interest rates on auto loans. One couple quoted in the report said they just bought their first car in 20 years, enticed by the 0% financing, though they chose a 1.95% rate loan because of a $3,000 rebate (which they apparently used to cover their down payment). This is a common perception now: the University of Michigan’s most recent household survey showed that 28% of the households surveyed pronounced it a great time to buy a car because of the low rates.

We may well be seeing the setup of another round of bailouts in our dysfunctional domestic auto industry.

Moreover, customers are using the low easy money to buy more expensive cars. This has all the signs of a government-induced easy credit asset bubble: buy expensive cars you otherwise can’t afford, since the government has made it clear that it prefers borrowers who recklessly spend to savers who prudently forego immediate gratification. That is about as sound an economic theory as it is a moral one! Can we spell “moral hazard,” boys and girls?

However, as the report observes, easy credit brings the risk of easy defaults. And that risk has been growing like a virus: in 2013, 10.3% of auto loan applications were declined as not being credit worthy; this year, the proportion was a risible 3.3% — a drop of two-thirds!

Easy money is translating into longer loans on more expensive vehicles. Last month, the average length of an auto loan was over 68 months — six months more than it was a decade ago — a rise of nearly 10%. The size of the average auto loan is now $29,000, an increase of 15% over five years, while the average down payment amount has only increased by 10%, meaning that the loans are backed by relatively smaller down payments.

Earlier this year, the combined auto debt of US households hit an all-time high of over $1 trillion.

More bubbly still is the fact that subprime auto loans — i.e., loans to people with poor credit histories — now constitute one-fifth of all auto loans, with the total balance outstanding on subprime loans rising over the past five years to a whopping $176 billion. Many of these loans, please note, were originated by finance companies with ties to the automakers. Subprime auto loans, like subprime mortgages before the mortgage meltdown, are being bundled as securities and sold on Wall Street to people who buy them because they have higher interest rates.

Sound familiar?

Now consider another recent report, this one about the latest capers of the UAW — the main instigators of the American auto industry’s problems, and the greatest beneficiaries of Obama’s corrupt socialization of GM and Chrysler. In that deal, the GM and Chrysler bondholders and the taxpayers were totally shafted in favor of the UAW. The only real concession was the institution of a two-tier wage scale, by which existing autoworkers kept their outrageous salaries, while new hires were to come in at a lower rate — roughly $9 an hour (or about $19,000 a year) less. This irks the new hires, who often do the same work as the “upper tier” workers.

And here it gets interesting. Recently, under Rick Snyder’s enlightened governorship, Michigan — historically a state totally dominated by the unions — chose to become a right-to-work state. Thus, many UAW members — formerly coerced into supporting a mob of rentseekers — are now free to leave the union plantation. Some of the newer members, tired of being at the low end of the scale because of the UAW contract, and tired of seeing the UAW mismanage their dues, are indicating that they intend to do just that.

Subprime auto loans, like subprime mortgages before the mortgage meltdown, are being bundled as securities and sold on Wall Street.

This has led the UAW to maneuver the weakest of the three domestic automakers, Chrysler — oops! Fiat Chrysler — into signing a new contract, a contract much more favorable to the UAW. Under this new deal, after some period of time (not yet revealed), the current cap of under $20 an hour for new hires will rise to about $25 an hour (that is, new autoworkers will start out at $52,000 a year!). The two-tier system will be phased out. In keeping with its past modus operandi, the UAW will get GM and Ford to agree to the sweetened contract.

The big picture is clear. The weakest of the domestic automakers, which has on two prior occasions had to be bailed out by the federal government, at massive costs to the taxpayer, has just agreed to go back to overpaying the unionized workforce. It can do this because of the “red hot” pace of sales.

But the hot sales are inflated by the Fed’s easy money policy, and the surge of subprime loans; and sooner or later, the Fed will have to start raising interest rates. Thus, sooner or later, the nation, which has been enduring a slow, painfully shallow recovery, will slide back into recession. Then we will see the inevitable plunge in car sales, with the domestic automakers again locked into ludicrously high wage rates.

The weakest of the domestic automakers, which has on two prior occasions had to be bailed out at massive costs to the taxpayer, has just agreed to go back to overpaying the unionized workforce.

And then it will be what that great American philosopher Yogi Berra — sadly departed, this September — called “Déjà vu all over again!” We will probably see Chrysler (and even GM) go into the red once more. We will hear, once more, about the piteous plight of the company, about how sad it would be for all those overpaid employees to be laid off, and about how “compassion” — always defined by the progressive elites as spending other people’s money to buy votes for the advocates of big government — dictates another bailout of a joke of a company.




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GM: The Other Shoe Drops

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After having run ads in Michigan boasting of its “success” in rescuing GM and Chrysler, the Obama administration won rather narrowly in the general election. It now feels safe enough to let the other shoe drop: it has just announced that it will start selling off its remaining stock in Government Motors. It will sell 200 million shares immediately and the remaining 300 million over the next 12 to 15 months.

All of this allows us to assess the costs of the Great American Carmaker Nationalization Game. And the price is high, indeed, at least to the US taxpayer.

Start with the direct costs. The 200 million shares will be sold by Uncle Sap back to Greedy Motors for about $27.50 per share. Let’s charitably suppose — though it is not at all clear that this supposition is realistic — that the other 300 million shares will also fetch the same price. That returns to the taxpayer about $13.75 billion, out of the $30 billion the US is owed, so the loss is about $16.25 billion.

But wait. The sale of Chrysler stock last year netted a loss to the taxpayer of at least $1.3 billion. That brings the total loss to $17.5 billion.

But wait again. In the corrupt bankruptcy engineered by the Obama administration, the new GM was illicitly allowed to carry forward a tax writeoff of at least $15 billion. So that brings the total to $32.5 billion.

Those are only the direct costs to the taxpayers. Let’s follow Bastiat’s advice to look for costs that are not salient.

Fist, the very fact that bankruptcy law was corrupted and the top position of the secured lenders put aside in favor of the UAW (big Obama financial backers) doubtless led to at least some investors becoming reluctant to loan to business out of uncertainty whether the administration would stiff them, too. How much business activity this crony deal deterred we can only guess at.

Second, Ford Motor Company, which did not get crony bankruptcy treatment, is now at a disadvantage, because its profits will be taxed, while GM, with that tidy tax writeoff, will face no such disadvantage for quite a while.

As if to rub the taxpayers’ noses in the fiscal dirt, the UAW has grandly announced that its members will be getting $7,000 profit-sharing checks this year. This is on top of all the loot the UAW already pocketed. What are the chances the true patriots at the UAW will use their bonuses to make whole the secured creditors, much less the taxpayers? Absolutely zero — the UAW is only too happy to rip off fellow citizens.

One can understand why a corrupt administration should have waited until after the election to let the other shoe drop. It would have been difficult to explain the massive losses during the campaign. Harder to understand is why people put up with these things.




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Crony Car Capitalism Capper

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Obama’s reelection hardly negates the fact that his regime is one of the most corrupt in American history. This fact is by now obvious to all but the most partisan Obamistas. Crony green energy deals, crony college deals, crony car industry deals — the list is long.

But among the most egregious was the rigged bankruptcy of GM and Chrysler, in which the legitimate secured creditors were cheated out of what they were due under settled law in favor of the UAW — which had conveniently contributed tens of millions of dollars to Obama’s coffers. The UAW was to begin with the biggest reason that American auto companies became basket cases, and it received massive amounts of stock in both companies. It was then allowed to liquidate its stock before the taxpayers were allowed to liquidate theirs. The taxpayers ate billions of bucks in losses.

All this dirty business was done to protect grossly inefficient, overpaid, greedy auto union workers, most of whose jobs would likely have been saved (albeit at lower compensation) in a regular bankruptcy.

Finally we learned what has to be the ultimate joke. In the corrupt crony bankruptcy, Chrysler — after being bailed out with billions of taxpayer dollars — was essentially given away free to an Italian car company, Fiat. Fiat used the opportunity to expand its presence in America. And the most recent news is that Fiat will likely move some of the Jeep operations to China, and the rest of the Jeep and Chrysler operations to Italy.

As the report explains, “To counter the severe slump in European sales, [Fiat] is considering building Chrysler models in Italy, including Jeeps, for export to North America. The Italian government is evaluating tax rebates on export goods to help Fiat.”

So the Italian taxpayers will pay the highly unionized Italian auto workers to make cars at a cheap subsidized price — to put American auto workers out of work, and ensure that the American taxpayers get the ultimate hosing.

The stench from this corrupt deal grows in intensity every day, with each new permutation of the putrid process.

Is it too much to hope that the House of Representatives will mount a serious investigation into the whole crony crowd responsible for this abortion? I mean (to name names) Obama, “auto czar” Steve Rattner, the management team of GM and Chrysler, including Sergio Marchionne (CEO of Fiat), and especially all the leaders of the UAW?

Alas, it probably is too much to hope. The crime of the century will likely be swept under the carpet of history.




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The Latest EV News

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I like to stay informed on the latest developments in electric vehicles (EVs)—in other words, with the amazing idea of trying to resurrect a technology that died a century ago, with the advent of the internal combustion engine. EVs are a retro-idea so captivating to our genius president that he has been willing to lavish billions of taxpayer money on funding EV makers. It’s easy to play at being a venture capitalist when you’re using other people’s capital.

A new Wall Street Journal article reports that Azure Dynamics, a Canadian company that, in partnership with Ford, makes electric vans for sale in Europe and America, has stopped production of its e-vans and filed for bankruptcy. It did this in spite of receiving millions of dollars in federal grant money, including a recent $5.4 million grant to work on a new electric inverter.

Azure hit the wall after making a miserable 508 e-vans (and retrofitting 1,500 Ford vans to make them hybrids) this year, and only 800 last year.

Ford is now worried about who will service the damn things, and 120 of the company’s 160 workers are looking for work.

The WSJ piece also notes that recent sales of Nissan’s EV (the Leaf) and GM’s EV (the Volt) have been lousy. Fisker Automotive has had two recent recalls and is jonesing for another government loan. Its battery supplier, A123 Systems, has just issued a recall of its products, and is looking for suckers—pardon me, investors — to come up with $55 million to cover the recall.

Earlier this year, Bright Automotive went dim — it filed for bankruptcy when it could not get any more federal subsidies. Last year, EV maker Think Global failed miserably, leaving Indiana with a nice, empty factory. Think Globally, fail locally — what a great business model!




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Government-Grown Lemons

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A flurry of recent reports brings us up to date on GM — now known as Government Motors, after its nationalization by the Regime. The news is less than inspiring.

First is the report that GM is recalling nearly 4,300 Chevrolet Sonics — because they may be missing their brake pads! The incredible news is that workers at the Orion Township, Michigan assembly plant left off inner or outer brake pads on many of the Sonics manufactured there.

The funny thing is that the same Regime Secretary of Transportation Ray LaHood who told Americans to avoid Toyotas in a bogus brake scare is totally silent about this real brake fiasco.

Then there's the news that came out on the “legendary” Chevy Volt — you know, the EV green machine car of our future. For one thing, it appears that the damn things are costing American taxpayers about $250,000 for every vehicle sold. This to subsidize a car purchased by people whose average income is $170,000 a year.

That’s the estimate provided by James Hohman, economist at the Mackinac Center for Public Policy. He analyzed the 18 government deals that were involved in setting up the Volt line — all the loan subsidies, taxpayer-funded rebates, tax credits, and government grants at the federal and state levels that were arranged for this car. The thing is indisputably green in one sense: it takes taxpayer dollars to keep it alive.

Hohman's estimate does not, by the way, include the bailout money that has been shoveled at GM as a company. Nor does it include municipal support.

The deals Hohman reviewed included $690 million of support by the state of Michigan and $2.3 billion in federal support. That’s a total of $3 billion in for the 6,000 Volts actually sold. As Hohman puts it, “This might be the most government-supported car since the Trabant” (the infamous piece of junk manufactured by East Germany).

Worse, it turns out that GM is calling back all Chevy Volts because of a fire hazard. Seeing several Volts catch fire after crash tests showed that electrical shorts in the battery can ignite the coolant, GM is going to try to fix the problem by strengthening the battery compartment. Just in time!

But the Volt isn’t the only EV that is prone to battery-induced fires. Fisker Automotive has announced that it is recalling its entire line of luxury plug-in hybrids (which sell for over $100,000 each!) because of fire hazards.

I mention the Fisker, because even though it builds its cars in Finland, it received $529 million in American taxpayer-backed loan guarantees. The Regime assured us that the American taxpayer would be paying to provide American jobs, but that was just another lie.




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