Rosponse to Gabby Dollinger's, Life Goes On???

It has been made official, the United States is in a recession. Not that the writing wasn't already on the wall but, this became very obvious when it was reported that 533,000 jobs were cut in the month of November. Based on the estimates December will be lesser, but still expected to lose another 450,000 jobs. All of this is unfortunate, but is a natural part of a recession.

Classmate Gabby Dollinger posted a blog titled, "Life Goes On???" In her post Gabby states that she is upset with large companies being bailed out while the average American can't find a job. She also expresses concern with the companies receiving money from the bailout and still laying off workers. At first glance this does seem odd, but the bailout of the financial institutions was not to save jobs. It was done merely to free up the credit markets. The credit markets are the key to business expansion and economical growth. If businesses no longer have the ability borrow they can't grow or stay afloat in these tough times. The second part of the equation for these companies who received the bailout is expenditure controls. The companies now have money to lend, but they have to cut operating expenses. This means laying off contract and permanent employees and cut back on other unnecessary spending.

Each recession has different factors and the current has several. I believe the more factors, the harsher the recession. Our current recession is believed to have been conceived back in 2007.
The fed injected tons of cash into the system, while keeping interest rates low, ultimately causing inflation to rise. Then combine inflation with relaxed borrowing policies, a weak dollar, high oil prices and war. Sounds like a recipe for failure. You are lending money that is losing value to lots of people who shouldn't be lent to.

Gabby briefly touches on the auto industry stating that the automakers would be in better shape if they cut unnecessary spending and built quality, affordable vehicles. I agree there is no excuse for wasting billions of dollars. Auto manufacturers have known for years that there business plans needed to change. They have always had a history of throwing away money, but have not worried about change while they were turning profits. Now their backs are against the wall and they have to beg Uncle Sam for money and promise to change their ways. Gabby stated that we should stop worrying about companies that will probably fail and start thinking about the American people. If we do exactly this and let the big three fail as well as countless financial institutions we will see unemployment rates at unimaginable numbers. the 533,000 lost jobs will look like a tiny number in comparison. As a country we can not afford for them to fail.

The recession we are in is a serious matter, but one that isn't going to go away quickly with a bailout or stimulus package. It takes time to free up credit markets, and regain investor confidence. Business have to do their part as well cutting wasteful spending. In time the markets will come back, banks will lend again, and oil prices will probably go up. For the time being enjoy the cheap gas and buy stocks, vehicles, and other goods while they are cheap.

Is saving the Big 3 a good idea?

There is finally a bill on the table, but is it still a good idea to save the Big 3? About a month ago I believed so, but will a cash infusion just prolong the death of these giants? On one hand I am concerned about the millions of jobs that will be lost, but we can't continue to pour money into companies that are unwilling to make a real effort at change.

The CNN Money article, House passes Detroit bailout explains what is included in $14 billion auto bailout. The auto bailout which has only been passed by the house thus far, is a strings attached quick fix till the future Obama administration can finalize a permanent solution. GM has stated that they need 4 billion or they will be bankrupt by the end of 2008 and an additional 6 billion to get the through Q1 2009. Chrysler has stated that they will need 4 billion to get them through Q1 2009. Ford has opted not to take part in the bailout. Ford seems to be in better cash shape then its competitors due to financing it has secured the past few years. By accepting the bailout the companies are agreeing to certain terms and controls.

• Limits on executive pay
• "Prohibitions for so called golden parachutes and requirements that automakers get rid of their corporate aircraft"
• No dividend payouts while loans are outstanding
• "The government would receive warrants-the right to buy stake in companies at a certain price-equal to 20% of the loans value"
• The bill provides a presidential appointee, also know as a "car czar" who will oversee the companies restructuring efforts. If the "car czar"finds that the companies have not made progress on cutting costs the loans will be recalled within 30 days, ultimately forcing the companies into bankruptcy.

This bailout seems like a quick fix, a band aid to slow the bleeding. I am normally against government and the business sector mixing, but due to the credit crunch there may not be any other options. The auto industry has begged for this bailout and due to their inability to control cash I think there should be extremely strict controls and requirements included in this bailout. The writing has been on the wall for quite some time. Competitors like Toyota and Honda who build quality, fuel efficient vehicles and manage cash a lot better have been gaining serious ground on the Big 3 for the past decade. Since there are only two options the government has to decide which one is best. Let the companies fail and see millions of Americans lose there jobs or pump cash into poorly operated companies and try to baby sit them. With our country already in an official recession if we choose not to help the Big 3 we may very well spin this recession into the next depression.