Monday, August 03, 2009

Why We Stimulate Cars & Banks

No matter where I go, it seems as if everyone is complaining about something. Sometimes it's the weather. Sometimes it's relationships. Somewhere along the line, complaining seems to have replaced baseball as our national pastime. If you're a reader of this blog, you may recall that I'm on record that this recession, the deepest economic ditch since the Great Depression, will not last nearly as long as any of the talking heads have predicted. There are a number of reasons for this.

First, the conditions under which we find ourselves are profoundly different than any other economic setback this country has ever experienced. The speed of communications today renders many of the problems -- and their solutions -- practically obsolete. This time around, everything is happening for different reasons.

In years past, for example, restoration of trust and faith in the financial market would have taken years. Months to develop recovery programs, months to approve them, months to announce them and months to execute with no guarantee of success or failure.

When Franklin Delano Roosevelt took office, the quickest means of announcing recovery programs was radio -- and not everyone had one. The next quickest was print -- and not everyone read them. While it's true that bad news travels fast, prior to the Digital Age, all news traveled slowly, which meant reaction times -- in fact, reactions themselves -- occurred and behaved according to totally different algorithms. As late as the 1980's, most stock trades were performed by real humans. Slow humans. And the slower they were, the more time there was for doubt and risk.

Today, one click sends the order that joins millions of others in nanoseconds, not days. We know the reactions to a political or financial program within minutes of its announcement. We see the results of capital infusions within hours. Things move faster than they ever have.

And that's the main reason why this recession is going to evaporate a lot faster than your cable news talking head would have you believe.

A second reason why this recession is like no other is that its root cause isn't a mystery. There's only one reason for the markets collapsing: a shortage of cash. When there's no cash, nobody can borrow. When nobody can borrow, nobody can pay. When nobody can pay, people lose their jobs. The solution is as simple as the problem: Someone has to lend the system money to prime the pump with the cash that makes things work. The only entity that can do that is the government, who is also the only entity able to create and administer the recovery programs we have.

Which leaves me wondering why everyone is complaining so much. Sure, it's easy to dismiss the efforts required of economic recovery with a cavalier remark. But you never hear any of the whiners come up with a plan as entertaining as their soundbytes, a favorite of which seems to be "Why are the banks and car companies getting the money?"

The answer is pretty basic: Because that's where the money does the most good, for the most people in the least amount of time.

The fundamental reason why the recovery is going to work a lot faster than you'd expect is that the Obama administration correctly understands that it takes money to make money. If you believe that America -- and the world's -- economy is driven by finance, you have to empower the professionals to distribute it to the enterprises that require it. That means you pay the professionals whatever they need to get the money into the system as efficiently as possible. Yes, these are many of the same creeps and criminals that brought the system down the first time. But think about it: who else would you have doing the job, the government? A postal worker? A second lieutenant from the Marines? In times of crises, you don't bring in neophytes. You bring in professionals who know how to get the job done -- and know you're watching their every move.

So the first chunk of money has to go to the guys whose job it is to get the money out there. And that's why the banks are getting $385 billion (at last count).

Of course, that doesn't stop the malcontents from crying about the auto industry. Why should they be rescued? Also a simple answer: Cars require a whole bunch of people and equipment to make the business go.

Think about just one part of your car: the lowly seat belt. A factory has to weave the belt material. Someone has to design the strap, and sample the various weave patterns which they then have to test for strength. They have to import raw materials. Someone has to select the proper fibers and then submit it for safety testing. A different company has to design the buckle, complete with blueprints. They not only have to import raw materials, they have to fabricate the machinery for production to press the metal components for the buckle. that buckle gets tested, too. Someone has to pay the labor to attach the buckles to the straps. Someone has to inspect the assembly. Someone has to clean the parts and pack the proper number of proper lengths of belts into the proper shipping containers, while someone else has to make sure the shipment is forwarded to the proper place at the proper time. And so on.

And this is just for the friggin' seat belt. The same thing happens for gas pedals, door locks, side mirrors, shift knobs and everything else you can see -- and not see -- in and on the car you drive. Cars have thousands of components and assemblies, whose production is often contracted out to thousands of smaller businesses throughout the world that employ millions of people. There are paint manufacturers, lubricant suppliers, fasteners, coils and filter vendors. The list is almost as endless as the names of the employees on these companies' payrolls.
Virtually no other industry, at least to my knowledge, employs so many people in so many ways as does the auto industry. And I haven't even gotten to the aftermarket folks. Remember all those steering wheel covers and custom spinners with the sixteen inch rims? Well, small companies have to manufacture and assemble all the parts for those, too.

If you're going to prime the economy's pump, you've got to get the money out there fast, where it will do the most good. That means banks and cars.

And if you think I'm kidding, check the chart out for yourself. Look at the stock prices for Citibank, Bank of America and just about every other major financial survivor since the depth of the recession in February, 2009. Notice a pattern? Wake up, you whiners. Jump on the wagon and ride this one to the recovery. It's going to be here sooner than you think.


Blogger said...

Good point, Rob.
Still, the whole notion of Cash for Clunkers made me think of some other programs that might help too.
I am sure there are some I forgot.

Minneapolis, MN

9:14 AM  

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