Save Virginia From Any Federal Auto Bailout

Virginians need to be concerned about what the federal government will do to screw up the economy – like Hoover and FDR did. Bad ideas come from both sides of the aisles and in and out of state. This is a critique of some wrong-headed ones coming out of our Commonwealth. I’m sure there are many more here and across the country.

The federal government is supposed to regulate commerce – set standards – for commerce across state lines. It isn’t the federal government’s job to provide “a helping hand to businesses in need.” States can do as they please. But, it isn’t in the Constitution for the U.S. Congress “to create solutions that will both help industry stay afloat and protect taxpayer investment.”

See James Madison’s notes on the Constitutional Convention and the Federalist papers for original intent. See 20th Century Federal Court (including SCOTUS) decisions for contempt of intent and writing legislation from the bench.

Furthermore, it’s just bad business. Legislators will make presumptions like this one for the Automobile industry; “the most important piece of any recovery package to be considered by Congress is that the company in question be required to provide a viable restructuring plan. This plan must clearly demonstrate how a business would return to profitability in the long term.”

As if members of Congress will recognize which plans are viable. How can the Congress, which is incapable of running its own budgets in the black, know which plan demonstrates long term profitability? Who are these automotive industry experts serving as Congressional representatives and senators? What justifies any presumption of competence about what is best for business among politicians of every stripe?

Congress should stay out of the business of picking winners and losers in business – and dumping money on them. Even if Congress requires ‘a plan’ before they start throwing money.
Yet, elected politicians think “Another option that should be considered, either prior to or in conjunction with federal loans, is a program of private financing with federal guarantees. There is no doubt that shaky credit markets have adversely impacted the availability of credit, particularly for firms that are struggling for survival. However, Congress can create a program whereby the federal government provides insurance on private investment for businesses in need. This insurance would be funded by the participants with a modest FDIC-like fee and would cover up to 50 percent of the losses of new investment in the case of a default. Such a program would help to unlock large amounts of private financing, while simultaneously protecting taxpayers.”

Huh? How does paying 50 per cent of losses help taxpayers? That is the Fannie Mae and Freddie Mac model of putting full faith and guarantee of the U.S. treasury behind bad loans. This is precisely what started the financial bubble. It’s bursting created a financial crisis. So, let’s do it all over again for another industry. Sheer genius.

Finally, another way to throw money is through tax policy. Like, “Legislation allowing a $10,000 tax deduction on the purchase of a new car would certainly benefit the auto industry. So too would a bill that allows the deduction of the state and local sales taxes on new car purchases from federal income tax. Initiatives like these can easily be extended beyond the auto industry to help any number of ailing businesses, with little or no taxpayer exposure.”

This is way to get bigger campaign contributions from car dealerships and automotive suppliers. And it is a crock for tax policy. Only people who pay $10k in taxes could benefit. Ah, these are the same people who can give significant tax contributions.

If over half of Virginia’s families earn under $52k a year ( 2004: median family of four), they don’t pay $10k in federal taxes. So, the lower financial half of Virginia gets little to nothing. Thanks, Congress.

And, can the taxpayer use the $10k deduction to buy a Toyota? Consider that Toyota and one of the Big 3 U.S. manufacturers both sold about 9 million cars last year. Toyota made billions in profits and the Big 3 firm made billions in losses. Increased sales may not go to the companies with the structural problems in their business model, nor may they help. It’s feel good politics for telling voters you gave them a $10k knock off the price of a new car.

The better tax policy is to just cut corporate taxes. To the bone. How much could that help a GM with over $60 billion in liabilities?

Cut income taxes. That capital will create jobs for people who will buy cars. Cut spending so the Fed borrows less – and there is more money to loan in the economy.

What are these “any number of other ailing businesses who will get tax breaks from the Feds?” This is how the tax code grew to thousands of pages. Special deals for special interests. How political –politics as usual. How anti-Constitutional. What an open door to more corruption in government.

The good news is that the legislation introduced for these ideas will die under other party chairmanship of committees – unless there are the right Liberal co-sponsors.

Sound economic policy isn’t so complicated. Spend less than you take in. Cut the sham corporate taxes. Cut individual taxes.

Good governance isn’t so difficult to understand. Don’t use the Federal treasury as an un-Constitutional piggy bank. Don’t give pork to special interests.

If one believes that “without a doubt, the federal government has a duty to assist in the country’s economic recovery,” then the answer is to not be such a big part of the problem. No bail outs. No buying votes and support for behavior modification. No backing up bad loans. No selective tax reductions for special interests.

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29 responses to “Save Virginia From Any Federal Auto Bailout”

  1. Anonymous Avatar

    J.A. Bowden,
    Yes, I agree that bailouts are unpleasant and that it is indeed ironic that the Republican Bush Administration has taken major, major steps towards the Keynesian policies that neo-cons were supposed to loath. Plus, there’s a level of incompetence. When Treasury Secretary Paulson submitted his first draft for the $700 billion financial bailout, it was a spare two and a half pages long. Try getting a car loan with that.
    However, some of the points you are making are not new, such as the constitutionality of federal intervention in the private economic sector. Similar versions all happened in the 1930s during the Depression. The same arguments were made then. NRA was found to be unconstitutional for pretty much the same arguments you are making here. You ought to read “The Forgotten Man” by Amity Shlaes who is an acquaintance of mine. You’d like her because she’s bright, articulate and a hell of a lot more conservative than I am. Her book traces what she thinks didn’t work with the New Deal.
    Further, you have to consider that our econmy is extremely global in nature and that our constitution written in the 1700s when most Amerians were small farmers may not be very relevant. Government intervention has been key to resolving crisis of this type. Examples: Mexico, Thailand, Russia and Japan in the 1990s. It also has a multi-national character in that the IMF plays a key role. The U.S. government is not the only one doing bailouts — see what the European Union is doing plus various European nations such as the U.K. and Germany. Trade and communications are so intertwined that it really doesn’t matter what James Madison would have said two or thre cenuries ago.
    As far as your Toyota example, well that’s a major irony, too. A couple of years ago, I was talking to a source at the U.S. Chamber of Commerce in Washington and was told that they have to be careful in carrying too much water for the U.S. Big Three. Why? Because Toyota, Honda, Nissan, BMW and Mercedes all make cars in the U.S. and when you look at the parts content, they are largely American-made cars. They are not having the extreme woes of Detroit. They do not share the same responsibilities for retirees, have to deal with the same unions and make cars in lower cost areas, mostly in the South. They are having their troubles, to be sure, but nothing like the Big Three. A major factor here is simple mismanagement. Detroit has made bad product choices consistently. It is not flexible. It is pig-headed. And its executives are idiots. Imagine the three of them flying in three corporate jets to beg money from Congress. The hard and fast of it, Jim, is that these guys just don’t get it.
    That said, I am afraid that some kind of federal intervention will be needed. I don’t like it any more than you do. Making arguments about what Madison would have done doesn’t help because you are dealing with an economy that in many ways has grown far beyond the U.S. Constitution. As unpleaant as it may be, it is the reality.

    Peter Galuszka

  2. James Atticus Bowden Avatar
    James Atticus Bowden

    Iread the reviews of Amity Shlaes’ book.

    If the Constitution needs to catch up to the economy, then amend it.

    Reading a great book I may report on here – when I finish. The Ascent of Money by Niall Ferguson.

  3. Anonymous Avatar

    We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare,….

    That ought to cover the bailout.

  4. James Atticus Bowden Avatar
    James Atticus Bowden

    Anon: I can see what you don’t want to associate your name with your post.

    If you think the preamble covers a bailout of the auto industry, then welcome to the Big Government school of “Making it up as we go along.”

    Then too, clearly, insuring domestic tranquility provides for waterboarding jay walkers, etc.

  5. Anonymous Avatar

    How does waterboarding or jaywalking promote the General Welafare?

  6. Anonymous Avatar

    Before I forget, I think I need to comment on some of your analysis.

    First, having the feds guarantee loans has been done for years as an economic development factor.

    Secondly, I agree that Fannie Mae and Freddie Mac played a big role in the mess. But that smacks of not wanting to give less fortunate, lower income, and minorities a right to own a home. Too many conservatives are using that as a pat excuse for the mess. I will be happy, although not today, to explain why homeownership is good for all and does much for real estate value upswings and lower crime rates, etc. To stick the blame solely on them really misses the Big Point.

    Thirdly, what you are not stating and is the major cause of the meltdown is unregulated Wall Street gone wild. The blame is bipartisan – Clinton and Bush. What has happened is that money managers got into complex derivatives such as Collaterized Debt Obligations CDOs) based on shaky, subprime mortgages; Credit Defalt Swaps, weird payoff dealts; and synthetic bonds. No one could value this nutty stuff and it represents as much as $55 trillion (that’s a “t” not a “b”) in value that no one can ascertain.
    Why did this happen? Little or no regulation in advanced investing. In other words, Jim, government DOES have a role in protecting investors and fell down on the job.
    For a better read that this, check out Conde Naste’s Portfolio piece by Michael Lewis. It will scare the S–T out of you.
    Peter Galuszka

  7. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    How does a nation regulate something that is out of their control? CDO’s are a major component of globalization. America could no more regulate these investments than they could regulate blood diamonds. That’s why Congress talk about regulation is lip service pandering to the public. A world economy will only be regulated under the global framework.

    Meanwhile, the countdown continues. Tick…Tock… You ain’t seen nothing yet.

  8. Anonymous Avatar

    Darrell from Chesapeake.
    Ciao, Bella!

    Peter Galuszka

  9. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Ciao Bella? I didn’t know you cared 😉

    Here’s one for you. Une fille française. Bellissimo!

  10. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    What these experts keep leaving out is the third leg of this mortgage stool. All the pundits have repeatedly make foolish links during this crisis. They all say subprime, alt-a/optARM, and CRE. The most important is the one they over look. The vast majority of homeowners who have conventional mortgages, and are somehow deemed immune to the virus infecting the others.

    Once this economy really starts heading down, the ‘good’ homeowners will be defaulting at an even higher rate than the others. Do these experts really expect no problems when there are no jobs to pay even ‘good’ mortgages?

  11. James Atticus Bowden Avatar
    James Atticus Bowden

    PG: There is plenty of blame to go around. It is bi-partisan, but not 50:50.

    Homeownership is good. But, mortgage lenders didn’t do due diligence when they gave out risky loans. Fannie Mae and Freddi Mac were negligent, if not criminal, in backing up bad loans. And, yes the SEC failed in its regulatory role to keep financial institutions from building a quasi-Ponzi scheme in housing bonds.

    Darrell: The U.S economy could get through this in 18 months if the market ate the bad debts, resorted and moved on.

    It would be better if the governments at all levels cut spending and taxes.

  12. First – there is a difference between forbidding the practice of redlining – refusing to make a loan to a QUALIFIED Buyer in an area that the mortgage company does not want to loan money for – no matter how well qualified the buyer is…

    … and making loans to people who are clearly not qualified – in areas that are not only not redlined but "hot" housing markets with upscale properties that are 2 and 3 times more than the price for truly "affordable" housing.

    In other words – mortgage companies made bad loans because even bad loans defaulted would be "ok" as long as the property had gained in value even in as short a time as a few months.

    These kinds of loans attracted all manner of folks willing to speculate, because …the worst case scenario was for them to walk away from the loan and the mortgage companies did not care because the house would sell for more than the outstanding mortgage.

    What role did Government have in all of this besides the anti-redlinning rule?

    Did the Government "force" the mortgage companies to make bad loans as Sean Hannity swears almost every night?

    No. What the Government did was to insure the loans.

    And the mortgage companies figured out that if the government would insure the loans carte-Blanche that it was the simple equivalent of free money.

    People can argue (and will) about who was responsible for allowing Fannie & Freddie to run amok but clearly the current administration had options available to them to rein in these two and agreed, Congress could have done the same but let's be truthful here as to who had control of Congress and actually could have passed additional safeguards that would likely put the President in the position of agreeing with the stricter regulation or not.

    So – the truth is – that neither the President nor the folks who had a majority in Congress were inclined to regulate even when there were warnings.

    They had the opportunity to do so and they passed on it.

    Now, we do expect the tax & spend party to stay true to it's roots but it appears that the Pachyderms strayed completely from their fiscally conservative roots.

    and .. finally… who told the rating agencies to rate these securities as 'safe" in the first place.

    Did the government "force" the rating agencies to lie about the security of these clearly risky investments?

    Forget all of this and answer this.

    Should the Government be in the business of encouraging home ownership by insuring mortgages and incentivizing home ownership by subsidizing the interest by allowing it to be deducted from your taxes?

    If you think that the government SHOULD do the above, then you've stepped onto a slippery slope and now what you are saying is that it's really "okay" for "limited" government involvement in mortgages which, in my mind is a lot like being "limited" pregnant.

    Isn't it interesting that the same folks who want to kill government involvement in health care and pensions by telling people to use HSAs and investing Social Security in the stock market …are apparently just fine with government subsidizing for home ownership and insuring the mortgages?

    This is obviously water under the bridge at this point but some day – after all the blood letting has subsided.. we will get back to the point where we ought to be asking ourselves if the Government should be involved in home ownership or not and if so.. should it be insuring mortgages without strict standards about the credit worthiness of those receiving loans.

    I vote for:

    1. – Strict standards

    2. – no tax write-off

    3. – no discrimination with respect to qualified buyers

    Oh.. and the car deal…

    just one question:

    If a car company like GM goes bankrupt – WHO picks up the legacy retiree health care plans and pensions?

    bonus question:

    If the American taxpayers pick up the legacy costs – would the American manufactures then have a level competitive playing field with the 'transplant" manufacturers in the right-to-work states?

  13. Jim Bacon Avatar

    Virginia is not a big auto manufacturing state — not since Ford announced its plans to shut down the F-150 plant in Norfolk. But it does manufacture trucks in Pulaski, and there are numerous parts manufacturers in the I-81 corridor. It would be interesting to know how many of those plants are suppliers to the Big 3 Detroit companies, and how many supply foreign companies.

    On general principle, I’m highly skeptical of any effort to bail out Detroit. But it would be interesting to know where Virginia’s economic self interest lies.

  14. My concern is how much of the anti-bailout is really anti-union in disguise.

    In other words – if we subtract the legacy costs – can GM/Ford compete against the “transplant” companies in this country – like they currently do in Europe?

    And the stuff about not building what American’s want is bull feathers.

    Every single transplant company in the US builds big SUVs and yes.. they are getting killed when gasoline goes up the same exact way.

    Each company builds for each of their markets. right?

  15. Anonymous Avatar

    J.A. Bowden,
    I have noticed that conservatives seem to have developed an unspoken mantra thatt he financial meltdown is because Fannie and Freddie loaned money to irresponsible, low income minorities (I’m not saying you are saying this, just in general).
    They ignore the fact that many high-income white folk used mortgages to speculate in real estate by buying and flipping several houses at once.
    Plus, anti-regulation, free market conservatives are loath to recognize that some kind of securities oversight is needed. The “self-regulation” of the Bush adminisitration is a joke. But the right wingers put the lion’s share of the blame on Jamal or Jose making $14K and somehow getting a mortgage for an $800K house.
    I see my job here as to serve as a kind of “Truth Squad.”

    I shall have my say! So, make my day!


  16. James Atticus Bowden Avatar
    James Atticus Bowden

    PG: As often is the case, I think you go overboard on identity politis to group folks as white and minorities.

    I speak only for myself.

    As I wrote, there is plenty of blame to share.

    There is big difference in the outcomes between no regulation, low regulation, and high regulation in government. In every case the devil hides in the details. And, every decision makes winners and losers (as I taught in SS374: Public Administration). Every bureaucratics output as a political outcome.

    The concern of my post is to call attention to new ideas being floated that portend future failures and folly. Bad ideas from Virginia pols – which should be killed in their cradle by Conservatives – and others who support good governance.

  17. Anonymous Avatar

    And today, you canget a thirty year fixed rate loan as low as 4.5%.

    Expect even fiscal conservatives to consider refinanaing.


  18. Alter of Freedom Avatar
    Alter of Freedom

    Maybe we should be looking at the cost-benefit analysis being employed by those plants and new auto plants on the hroizon (I think the total was 18 in planning) throughout the Southeast as it relates to the brethern in the North Midwest. Is there not some very distinct cost of living standard and quality of life differences? Compare the housing values and cost of living say in Alabama, Georgia or even Virginia to Michigan, Ohio and others. Could you employ someone performing the same job for less in the Southeast but still be providing an above average income which creates stiff competition for those jobs or better yet what if these auto or other manufacturers determined to fill the voids in areas in Appalachia replacing jobs lost in the coal and steel industries? Would not these folks be trained cheaper than say union workers in the North. Another aspect is one concerning the VW operations for NOVA as well. Hardly an area which requires revitalization, but what were the reasons behind the plan to place operations there versus other areas?

  19. Anonymous Avatar

    Good point, Altar.

    then you could live more cheaply in Alabama and still not live as well, I suppose. Quality of life counts, too.

    Otherwise, you are correct. If you live in Staten Island vs Houstoun, withthe same salary you will have more spendable income left over at the end of the month in Houston.

    Even so, this may be an anomalous or extreme result:

    “On average, the study found that working families in the 28 metropolitan areas spend about 57 percent of their incomes on the combined costs of housing and transportation, with roughly 28 percent of income going for housing and 29 percent going for transportation. While the share of income devoted to housing or transportation varies from area to area, the combined costs of the two expenses are surprisingly constant. “



  20. Anonymous Avatar

    J.A. Bowden,

    What do you mean I go “overboard?” PaShaw. My points are like a torpedo running straight, true and normal.



    Direct motor vehicle employment: 7796
    indirect motor vehicle employment:: 42138
    Expenditure induced employment: 34.605
    total: 84.539

    The direct is mostly auto parts. indirect is suppliers to the suppliers. Have no idea what that really means (i.e is a coal worker a “supplier” because the coal is used for electricity?

    I don’t think dealers are listed, but that is going to be the largest sector in Virginia.

    I’d say we can expect more than 50% of the dealers to go away in the next two years. On the plus side, I think mechanics will do well as people patch up old cars.

    Some other hidden impacts: car sales tax will continue to go down, hurting the transport fund more.

    car tax revenue will also decrease as more expensive vehicles are not bought and less new cars overall.

  22. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Here ya go. Light reading for the weekend.

    Or Why We Aren’t Buying Cars Anytime Soon.


  23. yes – but there are millions of folks who have owned their homes for many years and whose mortgages are low compared to even the heavily reduced value.

    For them, it’s a lot like owning something that went way, way up in price and then dropped way back but since they never had any plans to sell in the first place – it is for all intents and purposes a ‘paper’ loss.

    The people that are affected are the folks that have had more recent transactions – or planned transactions or were using their home equity as a money source.

    The housing “boom” … the flood of new homes was to people to, under more traditional loan requirements, would have never qualified to start with.

    so.. we build many more homes than there was a real market for.

    essentially a ponzi scheme doomed to fail – the only unknown was …when it would.

    What I love about this is the folks who believed that unfettered, unregulated business is the highest form of pure capitalism and the less government involvement, the better.

    And reading about how the wealthy got hoodwinked by Madoff is a scream.

    “Heart wrenching” stories about monied folks who “trusted” their investment brokers and lost millions.

    I wonder how many folks out there now “believe” in the fundamental concept behind defined contribution 401Ks – now that we know that turning one’s money over to someone else to “invest” for you is a lot more riskier than we every thought as even “conservative” investment strategies turned out to have so much exposure that getting “blown away” has taken on a whole new meaning.

    And it’s totally rich.. how many folks are now looking to …guess who…the Government – you know.. big bad Government to “do something” about all of this….

    no one is looking at Wall Street or Big Business to make things right are they?


    Who can you trust now?

    Here’s a telling answer.

    People are putting their money into zero interest Government Securities.

    Zero interest. Wow!

    and hey.. what is all of this about credit freeze-ups?

    My credit card still works… bite my tongue… knock on wood….

  24. I am getting worried about this “spend everything to bail out everybody” movement. Propping up a banking system that was recently the envy of the world is one thing. Propping up car companies that haven’t made decent product in 30 years is another thing altogether. And, somewho, the deficit has been either forgotten or idolated. A classic bit of British philosophy seems to cover today’s attitude on Congress:

    Walking side by side with death
    The devil mocks their every step
    The snow drives back the foot that’s slow
    The dogs of doom are howling more
    They carry news that must get through
    To build a dream for me and you
    They choose the path that no one goes
    They hold no quarter,
    They ask no quarter,

  25. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    What's telling is this year's Christmas marketing sensation isn't some stupid stuffed animal or electronic gadget. It's a 12 ga. shotgun and five boxes of ammo.

    Look around. The only retail stores actually making money are gun stores. The MSM blames it on Obama and gun laws. I think the people are beginning to put their trust in Smith & Wesson.

    We are entering a very critical time that most nations only experience once or twice in their existence. What Groveton sees from a personal standpoint, the populace feels collectively and responds accordingly. You will know that the nation is in for a world of hurt if next year's Christmas sermon is hosted by groups such as Christian Identity.

  26. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake


    Coming soon to a city near you?

    We have at least one on the watch list here in TW.

  27. Anonymous Avatar

    “so.. we build many more homes than there was a real market for.”

    How manyhomes are sitting around empty?

    Whenthis is over they will all stillbe full, pretty much. The terms will be different but people will be in them. The market is still there, it is a question of price.


  28. to a certain extent – it’s price but that’s like saying that Cadillacs are over priced and they will soon fall in price to be what Chevrolets cost.

    What we have is way too many Cadillacs on the market…

    and the people that used to live in them – have not gone to rent much more modest digs…

    so .. who is going to buy these oversized.. upscale homes?

  29. Anonymous Avatar

    All I’m saying is that theywill not sit empty. They will be filled at whatever price they bring. The people whou buy them will be whoever can afford them at that price.

    The price of Cadillacs and Chevrolets will both move down, but the people that can afford Cadillacs will still be rich compared to those driving Chevrolets.

    We will have cut everyone’d net worth in half.The rich will still be rich, and the poor will still be poor. The poorest of the poor will be dead, because they haven’t got enough to cut half of.


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