Floods & Farmers: The Strange and Unexpected Impacts of Auto Bailouts
This is a revision of a very long comment at Emptywheel’s, which kicked off with my expressing wrath and contempt over the fact that a GM dealer in my area insisted on locating his showroom in a floodplain near a freeway exit.
Claiming that GM required him to have ‘freeway visibility’, he absolved himself of any responsibility for flooding impacts to downriver farmers or salmon spawning, and denied that any flood costs could be attributed to his actions.
This obstinate and unreasonable GM dealer is an example of how a Dodge Ram can end up damaging local agriculture producers; by locating in a floodplain, this GM dealer made me view the entire auto industry with absolute contempt.
But there are larger, bigger issues in play — and in thinking through the Bigger Picture, I began to see that protecting the opportunities for America’s auto producers to build more ‘green’ technology may hold the potential for other shifts in the ways they do business. Change often leads to unexpected outcomes, and building ‘green’ vehicles may produce other changes in the ways that dealers market, support, and service customers.
Here is one attempt at a hopeful view of what MIGHT result from a wisely written bailout of the Big 2.5, which would be good for the economy, and also good for my local riverways and floodplains.
Here are the fundamental issues in considering the merits or foolishness of bailing out the Big 2.5:
1. The Big 2.5 need to maintain control of their patents for emerging new technologies.
2. Maintaining control of their patents allows them to build on the momentum they’ve developed toward a new energy economy that is not based on heavy, inefficient oil consumption.
3.There are parties who desire the patents and bargain-basement, fire sale prices; these parties find ‘reasons’ to object to the Big 2.5 bailout — one of their primary methods being to conflate the Big 2.5 bailout with the Wall Street bailout. We should all guard against falling prey to this deceptive mistake.
First, we must ask: are these two bailouts ‘equivalent’?
How are they similar?
How are they different?
If the Big 2.5 bailout were to use the same logic as Wall Street, it would go like this:
1. Dealer A buys Auto A1: the price of the car plus interest is worth $30,000 to the dealer over five years.
2 To ensure that Dealer A gets all his money (plus interest) from the sale of A1, he goes out to the ‘insurance market’ to purchase a ‘financial product’ developed by Wall Street investment and insurance firms, in order to INSURE he gets his full $30,000. If the car buyer fails to repay the full amount, then Dealer A will count on getting his money from the contract he just bought on Wall Street.
3. Since a lot of people are willing to pay money in order to guarantee a certain return, the ‘market’ for insurance becomes very large, very fast — completely unregulated in our modern American ‘free market’ system.
3a. Under this system in which regulation does not exist, Dealer A is allowed to purchase ‘insurance’ on the $30,000 — and Wall Street will make it cheap for him to purchase! Dealer A is allowed to buy it at ratios of 30:1.
3b.Wall Street Roulette’ our automobile Dealer A puts down $1,000 — and this INSURES that he’ll get back $30,000.
3c. Meanwhile, other automobile dealers also want to ‘hedge’ their bets, so they each spend $1,000 PER CAR on the number of cars that they’ve sold in order to INSURE that they can get back their full $30,000 for each vehicle. This market is solely based on hedging bets that car buyers will fail to repay their loans.
3d. In a very short time, a lot of $1,000 amounts change hands; it only has to do that about 100,000 times and someone (say, AIG) is in debt to the tune of $3,000,000. Not to worry; AIG assumes that it can cover these bets: it figures that the odds everyone will come to collect at once are remote. It continues selling at ratios that not even Vegas offers.
3e. The dynamic continues: dealers ‘option’ the odds that if they spend $1,000, then they are ‘guaranteed’ a return of $30,000. None of this is regulated. So the insanity builds.
3f. In practically no time, dealers each spending $1,000 apiece to INSURE their $30,000 ‘contracts’ for autos heat this market up faster than a Finnish sauna on Mercury — it’s wild, it’s the heydays, it’s Bonus Time on Wall Street because so many $1,000 checks are changing hands, money flows like wine and the Good Times Will Last Forevah.
3g. So after about 1,000,000 of these exchanges in amounts of $1,000, AIG is ‘leveraged’ for something on the order of $30,000,000…. it’s basically a big math problem that people like to disguise with a lot of bullshit mumbo-jumbo about Free Markets.
3h. So let this ‘Free Marketering’ cook a little hotter, and a little longer… and whoopee!! In almost no time at all, you have leveraged $10,000,000 up to $300,000,000. But suddenly, some dealer out in Omaha, or in St Cloud, or in Denver wants to collect… and then another dealer wants to collect…clouds gather on the horizon; cue up the screechy violins and dim the lights…
3i. Someone says, “Fuuuuuuuckkkkkkk!” under their breath and probably wishes they had more good cocaine and great whiskey, cause guess what…? They’re about $290,000,000 short of the amount they’ve written contracts to cover.
Shit. Hits. Fan.
So then what? Well, if you are Wall Street, and you have a lot of friends in D.C, you belly up to your pals in the Capital and act like the entire US public: every man, woman, and child, is obligatedto bail out and underwrite your atrocious judgment, your flagrantly risky conduct.
The system will collapse! The markets — free, unregulated, and glorious as they were! — will collapse! The end is near!
Your corner office? Gone.
Now, I despise my local GM dealer — the jackass who’s screwing up my floodplain, my dairy farmers, and my environment. (And did I also point out that his foolishness is raising my taxes?)
But I’ll give him this much credit — that jackass still didn’t expect me and mine to bail out his sleazy, sorry ass at the ratio of 30:1.
And at least he sells a tangible good.
In public discussions of bailouts, why do some parties FALSELY equate Wall Street and the Big 2.5?
Who gains by this confusion?
Most likely gainers: the parties who’d like to buy up US patents at bargain-basement, Chapter 11 rock-bottom prices. Most likely losers: the American public. Because the US industry needs to retain control of those patents, which need to act as both incentive and fulcrum to move us toward a saner energy policy.
Let’s reexamine the ‘false equivalence’ we’ve been given — the false equation between Wall Street and the Big 2.5.
Just because two animals are ‘brown’ does not make them both grizzly bears.
One might be a puppy; the other might be a cougar.
Their ‘browness’ is one property that happens to be shared.
In no way, shape or form does that make them ‘the same’.
They are not.
Similarly, to say a bailout makes the Big 2.5 ‘the same’ as Wall Street is seriously flawed reasoning.
These are very different economic sectors.
Wall Street makes money from money — and, as we now see, from fraud, deceit, and corruption.
The Big 2.5 still make tangible goods.
All tangible goods are based on copyrighted, or patented intellectual property.
Control of that form of wealth — control of intellectual property such as patents — is a national security issue.
You do not hand your ass on a platter to people who aren’t as good as you are at developing novel, innovative solutions — NOT UNLESS you are explictly ‘Open Source’ or have some shared agreements.
Now, perhaps the Big 2.5 will move that direction, but for the present it is essential that the patents remain in US control, which means bailing out the sorry asses of the US auto companies — and setting strict conditions in doing so.
If car companies invest in building ‘greener’ vehicles, then that shift should drive other changes: more thought to sustainable practices in the ways that they market, show, service, and fit in local communities. If sustainable practices were part of the corporate culture, a showroom on acres of asphalt in a floodplain would not be supported, approved, encouraged, or tolerated. Because the ethos of paying attention to natural cycles and the constraints of nature would make it impossible for GM dealers to ignore their impacts on local environments.
That will be a refreshing change, and I’d sure rather put my money toward that outcome, than cover the hedges, options, swaps, and gambling of egotistical frauds.
Wall Street is history.
We need to invest in Big 2.5 to move forward, with a clear set of objectives aligned around the cost-effective principles embodied in the movement toward sustainable development.