Browsing the blog archives for July, 2010.

GM to Acquire AmeriCredit

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General Motors announced on Thursday (July 22) that it would acquire AmeriCredit for $3.5 billion (details at http://online.wsj.com/article/SB10001424052748703467304575382810481110230.html).

GM hasn’t had its own lending arm since 2006 when it sold GMAC. Recall that GMAC pushed 72-month car loans to nonprime buyers and questionable mortgages before it got a $17 billion government bailout in 2008. It’s easier to sell cars when you can finance buyers whose credit makes it difficult to buy elsewhere, and GM knows this. But what happens when these buyers are underwater (the car is worth less than the balance of the loan) and can no longer make their payments?

I thought GM was going to reinvent itself by building better cars, not by trying to increase sales to people who can’t afford the payments. I thought the banks and credit card companies were evil by engaging in “predatory” practices that encouraged customers to incur high-interest debt they didn’t need. And I thought GM was going to use taxpayer money to stabilize the firm, not buy other companies. It’s worth noting that the U.S. Treasury owns 61% of GM but denies any involvement in the decision to acquire Americredit.

The bottom line is that GM is using taxpayer money to buy the country’s largest provider of car loans to consumers with bad credit. The big issue here is RISK EXPOSURE. GM sees an opportunity for financial gain, but will not shoulder all of the additional risk associated with the deal. We all know who will end up paying (again) if AmeriCredit experiences the same fate as GMAC. President Obama told us the other day that the era of bailouts is over. Somehow I’m just not convinced.

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Unfettered capitalism?

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I’ve quit counting the complaints I heard from the left about “unfettered capitalism” in the past couple of weeks. In an interview with Republican Whip Eric Cantor, a talking head inferred that “unfettered capitalism” underpins our current economic woes and the government should do something about it. To my dismay, Rep. Cantor did not challenge the premise, but seemed to suggest that Obama’s approach to reigning in capitalism was “massive” while the Republicans prefer a more “incremental” (his choice of words) approach. I just didn’t hear the clear, passionate defense of liberty and free markets I was hoping for.

References to “unfettered” or “unbridled” capitalism suggest that free markets are OK, but only to a point. Because reasonable people are supposed to reject anything in the extreme, using the term shifts the debate from whether or not government intervention is justified to how much is appropriate.  It’s like the proverbial question, “When did you stop beating your wife?” If you try to answer the question without challenging the premise, you’ve already lost the argument.

When I am confronted with the term, I demand an immediate definition. If there is a hesitation, I point out that “unfettered” literally means “unchained.” If capitalism is the foundation for economic development, then why would you want to chain it? The response I get inevitably includes a justification of limits on liberty and arguments for wealth redistribution, with most or all of the sacrifices borne by someone else, namely the evil capitalist. Government is presumed to be the fair and just arbiter, ensuring that unskilled workers “forced” to work for low wages end up getting what is rightfully theirs through manipulation of the tax code or other leftist schemes. In other words, my opponent finds himself defending the merits of socialism. I not only win the argument with relative ease, but I also have an opportunity to help by opponent see the folly of his worldview.

Moreover, capitalism in the U.S. is already heavily shackled, with severe restrictions on production, pricing, employment, minimum wages, unions and the like. Arguably the most regulated industry in the country is financial services. If one is looking for a quick culprit in the mortgage crisis, it seems logical to look at the government first, not the banks. Those on the left fail to see this.

As we get closer to election time, my concern is that Republican candidates—the ostensible defenders of liberty and freedom—are either unable or unwilling to defend liberty, free markets, and the Constitution. Libertarians have always claimed that the main difference between the two major parties is one of degree. They charge that Republicans may be less socialistic than the Democrats, but they still suffer from the same mindset.

I’ve part Libertarian and I think this argument is valid in many instance. I’m also seeing a similar defenseless pattern on other issues as well. For example, the use of the term “undocumented worker” suggests that an illegal immigrant is merely lacking the appropriate paperwork; if so, a “pathway to citizenship” only seems reasonable. Amnesty for illegals is simply wrong, and candidates who seek some sort or middle ground and refuse to acknowledge this either lack courage or conviction. I’m not sure which is worse.

The reality is there’s little room for negotiation with collectivists like the likes of Obama and Pelosi on most issues. I am hopeful that the Republicans will do well in November and that they will engage Obama in the kind of tooth-and-nail battles that are sorely needed. I still fear the prospects of mass compromise (i.e., semi-socialism) should Republicans regain the House. I hope I’m just paranoid.

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Inflation vs. Deflation

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The mainstream media has been proclaiming the beginnings of an Obama economic recovery for some time, but it just hasn’t materialized yet. There is an occasional hopeful sign, but the short term still looks mediocre at best, while the crisis in Europe has temporarily boosted the dollar. Some economists are warning that deflation might be around the corner. What would this mean for the economy and what happened to the long term fear of inflation?

In a classic sense, INFLATION occurs when the money supply expands and DEFLATION occurs when it contracts. More money in circulation means that each dollar is worth less, so inflation typically translates into higher prices, sooner or later. Today, the word INFLATION usually refers more specifically to PRICE INFLATION, but there is always a lag between expansion of the money supply and price increases. The money supply has expanded recently, which means that prices down the road will be higher than they otherwise would have been. This is a fact, although we don’t know when prices will rise and by how much. There are too many other variables at work.

Just as inflation today commonly refers to a general increase in prices, deflation refers to a general decline. Prices are a function of supply and demand, so a drop in consumption results in a drop in prices as suppliers compete more aggressively for fewer buyers. This is happening in some sectors today, causing many economists to warn that the general price level—the average price for a mix of goods and services—is beginning to decline, which means deflation.

Keynesian economists urge governments to manipulate the economy so that inflation occurs but remains low, perhaps around 3%. But their greatest fear is deflation. When prices are falling, they argue that consumers are more likely to hold on to their money in hopes of cheaper and better prices in the future. This would reduce demand even further and lead to greater unemployment, more deflation, and a downward spiral.

There is a kernel of truth to the argument, but is fails to consider adjustment mechanisms already built into the market. Knowing that milk might cost a little less next year won’t keep you from buying a gallon today. The cost of an exterminator’s visit might decline in the future, but you will probably call today if you have a serious bug problem. And computers have been getting both better and cheaper for decades. We expect that $1000 will buy a better system next year than it does today, but knowledge of this fact doesn’t cause us to defer our purchases indefinitely. Computers provide value, so waiting to purchase one can cost us as well.

Keynesians also fail to recognize that deferring consumption means more savings. This increases one’s future quality of life as well as the pool of capital available for expanding businesses to borrow. Besides, deflation increases the value of your savings by expanding the purchasing power of each dollar you have, so it’s good for savers. There is no reason to fear deflation.

What about inflation? The money supply has already expanded considerably, so prices must rise at some point—exactly when is anybody’s guess. I expect low growth for a while, with some price deflation (depending on how you measure it) possible in the short term. I still expect price inflation in the long term, especially when the economy begins to show real signs of recovery. Unfortunately, we’ve been set up for a bout with stagflation that will be difficult to avoid even if we have leadership in the 2010 and 2012 elections.

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