The auto bailout

ESPN's Tuesday Morning Quarterback Gregg Easterbrook has some great discussions on the economy and bailouts spliced into his football column. My favorite part is at the end of the column regarding the government's negotiations with the auto companies.

Based on how poorly Washington has negotiated with General Motors and Chrysler, here's what it might sound like if Nancy Pelosi was buying a car:

DEALER: Yes sirree, I can let you have this cherry-red baby for $19,999.99! Plus undercoating and dealer prep.

PELOSI: I'll pay $50,000.

DEALER: For a limited time only, I can throw in remote-controlled eight-way power cupholders, for another $999.99.

PELOSI: I'll buy them at $75,000.

DEALER: Do you want the extended warranty?

PELOSI: No. But I'll pay another $25,000 for it.

DEALER: Aren't you worried something will go wrong?

PELOSI: If it does, I'll just send the bill to the taxpayer.

DEALER: So you are willing to pay $150,000 for a $20,000 car? I'll have to go ask my manager! (Disappears into back, pretends to talk to manager, returns.) Lady, you drive a hard bargain. He says that for $31 billion, we will give you absolutely nothing at all.

PELOSI: Sold.

Its funny and cynical and probably close to the truth. Earlier in his column, Gregg mentions it would have been better for the government to buy cars from GM and Chrysler, rather than just give them the money outright. Besides helping Detroit immensely, this is the kind of out of the box thinking that we desperately need.

How does this relate to investing? Well, over the past month, we've been looking at auto companies and their suppliers as potential short term investments; buy them low, hope for good news to drive stock up temporarily, and then sell. Obviously risky, but potentially very profitable. However I can't really see any of these stocks rising in a manner worth the risk, unless the bailout (or any major event) truly does something to improve the long-term fundamentals of the company. I could be wrong, but right now I will be looking elsewhere for short-term profits.

The Virtue of Selfishness: Defending Ayn Rand in Tough Times

Cadillac likes to pick on me and instigated another fight. This time he asked me to defend Ayn Rand style deregulation in light of the times. Here goes.

Every individual is responsible for their personal livelihood. The strong prosper, the weak fail. Government must stand aside for the will of its people.

I am not only responsible for myself but also for where I place my money. If I choose to place my money with an entity that is irresponsible and that entity subsequently fails, I deserve to fail with it because I am the bank’s regulator.

Come again, you say? I’m saying banks can’t fail unless we give them money and then turn a blind eye to where it's going. If my bank begins lending a neighbor money at 14 times his salary to buy a house, I should be asking hard questions or moving my money.

Some banks saw the fiscal irresponsibility of the housing bubble and largely eschewed such poor lending practices (Wells Fargo). Those good banks should benefit from relatively prudent money management while the spendthrifts (Bank of America, Citi) should fail along with all who supported them. (www.ajc.com/business/content/printedition/2008/08/22/wellsfargo.html)

Individuals are responsible for regulating banks through collective scrutiny and common sense not tainted by "irrational exhuberance" followed by "helicopter drops" of cash (...thanks Alan, Ben).

And a “bailout” in any form would be facially offensive to Rand. Why? Well, what are we doing with the bailout money right now? Are we supporting the good banks like Wells Fargo so that the banking system arises anew through strength, not greed and irresponsibility? Of course not, let's instead support the weakest, most irresponsible (Bank of America, Citi) so they can buy their friends at Merrill Lynch and we can have a fresh crisis all over again in a few decades.

I believe Ayn Rand would say irresponsible lending practices, not only by banks to individuals, but more importantly by individuals to banks, caused the current crisis. The irresponsible entities on both sides should simply fail permitting better banks in our country to rise strongly and facilitate a more lasting economic recovery where true regulation is guided by citizens, strength, and common sense and not by a lobbyist-infested government. --Schlitz