Sunday, December 14, 2008

Money For Nothing - Part 3

I've ranted about "money for nothing" several times before. If, by chance, you missed it, or you just want the sheer joy of experiencing it again, you can read it here, here and here. But last week, it actually was literally true: The U.S. government auctioned $32 billion in four-week T-bills at 0% interest Tuesday, the lowest auction rate ever. In the after-market, the price rose, and people bought T-bills at a negative rate of interest, apparently extraordinarily gleeful to lock in their losses.
This insanity is a result of the fear that investors have of taking any risk at all. For nothing is seen to be safer than T-bills, which will be repaid in their entirety with new, crisp, freshly printed, dollar bills. If the government needs some more dollar bills, it simply prints more of them. No limit. No questions.  Pretty clever, eh? (as our Northern neighbors might say).
Well, all this leaves me completely baffled. Normally when a government runs its currency printing presses overtime, the inflation rate soars and suddenly wheelbarrows are required to haul around all the paper needed to purchase a loaf of bread. But it seems that every country in the world is hyperactively churning out paper money. Nobody's money is worth more than the next. You don't bail out of the dollar for Yen, Euros or Pounds because they're devaluing too. Even the Chinese are printing and spending like mad.
So, what does this all mean? Apparently, that there's no limit to the size of the government stimulus (sounds erotic, doesn't it?) programs that suddenly are now possible. Both namby-pamby Democrats and hard-hearted Republicans can hardly contain their excitement.
The U.S. has made commitments so far of upwards of $8 trillion in an attempt to halt the economic slide. Is there an upper limit? Beats me. Even the Bush Administration is now saying they are ready to pump untold billions into the moribund US Big Three auto companies before the Obama Administration gets their wack at doling out more of the cash.
By the way, Detroit seem to be pretty scared of using the word "bankruptcy". What's all this nonsense about getting the government to negotiate with the "stakeholders to share the pain" so they can avoid bankruptcy? Sharing the pain is just what a bankruptcy judge does in a chapter 11 filing. The difference is that the judge is doing the pain sharing pursuant to the current law, while the government actions being proposed don't pass my smell test for legality at all. They're more akin to simple extortion that's probably unconstitutional anyway (The Fifth Amendment). 

Anyway, back to the topic, in bankruptcy the auto companies continue their day to day operations. They, along with all their employees, don't disappear overnight. It's pure hogwash to say that people won't buy cars if the manufacturer is in bankruptcy. Anyone who has been paying any attention at all to the pleading on bended knee in Washington knows by now that the Big Three are in serious financial doo-doo. 

And, if you'll allow me just one more "by the way," I heard a great line which referred to the $8 billion General Motors paid last year for retirees' and current workers' medical bills. The talking head on CNBC said: "General Motors is a health care company that just happens to make cars."
I also recently read an  economist's apparently serious proposal to revive the housing market (remember, this is what the whole mess is about) that struck me as something Lenin would adore. He proposed that the government just buy everyone's existing mortgage and refinance it at a 1% interest rate. The government would also offer new mortgages to new buyers at the same rate. 

While we're at it, how about if the government solved the auto companies' problems by offering auto loans at 1% interest to anyone who had or could obtain a driver's license? Why stop there? How about 1% loans to buy computers and networking gear so Silicon Valley doesn't implode? You get the idea. Since the money is for nothing, nothing is off limits. Just propose it and it is no object.