How to Destroy Incentive, Initiative, and Cripple our Economy for Years to Come Part1

A few days ago I wrote an article tracing the origin of the credit collapse our country and the rest of the world experienced over the past six months. As the owner of a small business, which specializes in information technology and software development, a good understanding of the economic climate and, in particular, the apatite for capital investment is essential in predicting prospects for business and profits for our company and others like us in the years to come.

Throughout my lifetime, and that of my parents, economic prospects and growth were always a direct function of the availability of money and credit, and the expectations of the participants in the local and [more recently] the global economy. If money was easy to obtain, and businessmen or farmers were optimistic about the future, and felt that they could make a good profit, they would invest in their businesses, and buy new equipment or technology to make more product, or to manufacture more efficiently. They did this because they were confident that their investments and the return on them would eventually flow through the bottom line of their businesses back to them.

Things are backwards now for several reasons. First, since the new administration came to power in the U.S, the government has taken over large swaths of the economy, much like the British labor governments of the ’70s. The automobile, banking, energy, and healthcare industries are cases in point.

What would you do, if you took over an automobile company, and like ‘The Producers’ you wanted to make sure it would fail?

First, you would stock the upper management with people who had no previous experience running a car company.  Check.

Then you would make sure it was strangled in regulations and accountable to no one but yourself. C heck

Then you would make sure it produced cars that were expensive, impractical, and that no one wanted. Check.

Then you would make sure that the unions, who, in large measure, were responsible for the company’s previous prohibitively expensive cost structure, would be given a strong voice in the day-to-day operations of the company. Check.

Then you would take the company through bankruptcy and allow the unions to take precedence over the bondholders. That way, you’d make sure that further issuance of debt would be prohibitively expensive. Check.

Speaking of bondholders, the government is steamrolling them in the case of GM to accept a lower order of precedence than the unions in the impending bankruptcy. It’s the little guy who’s getting screwed because the institutional holders of the bonds have already bought swaps which will pay off when GM enters bankruptcy. Smaller holders have no such insurance, naively believing that their bond covenant would protect them with priority as the company’s assets are liquidated. News just out suggests that 54% of the bondholders agreed to swap their stake for 10 % common stock in the reorganized company, plus warrants. This is a bad deal for the minority bondholders.  And already the Treasurer of the State of Indiana has threatened to exclude new bond purchases from other companies who have a union presence.

I’ll address the other government run industries in a moment. But I would like to note that I can’t find an example of a successful American company that has been run by either the government, or the unions. The proposed configuration is bad for both GM and Chrysler, but also for Ford, who must now compete with the two other companies with substantial government investment. Don’t forget: the government owns the board, and the game.

The U.S. government also has a substantial ownership in the financial industry. The original stimulus plan forced the nine largest banks to accept government money in return for preferred stock. Healthy as well as unhealthy banks had to accept the deal, under the guise of protecting the weaker banks from disclosure that would further weaken them. Goldman, Merrill, SmithBarney, Wachovia, and MorganStanley were among the top investment banks that were included in the deal along with Bank of America, WellsFargo, JPMorgan and Citigroup.

For many of these banks, it’s like being partners with the mob. The syndicate lends you money, but does not allow you to pay it back. Paybacks must be at the convenience of the government, along with the associated interest. And, by the way, compensation to the highest earners in the firms are subject to government approval. This, of course, leads to an exodus of talent to other, non government controlled firms, creating a ‘brain drain’ which is another name for fleeing of intellectual assets from these ‘beneficiaries’ of government largess.

Even today I have found that jumbo CDs bought from the ‘favored few’ were quoted at up to 100 basis points less that those offered at smaller S&Ls or Credit unions. There’s no security premium on these either, as each offers the same level of FDIC insurance in case of bankruptcy.

The government doesn’t own any energy companies per se, but creates an endless series of regulations which ties the industry in knots. For all the energy shortages in the past several years, one would think that the government would be encouraging exploration and drilling. Not the case. No new offshore leases have been granted for years. I n the past, the leases were sold in packages. The winning bidders would take their package and drill on the sites they thought would produce oil/gas. The rest would be abandoned as unprofitable. There are currently huge tracts of oil and gas deposits on the California, Gulf, and Atlantic coasts which contain huge amounts of deposits, but which are untouchable because the government refuses to allow drilling. The coast of California has been off limits for 30 years now, depriving that state of the revenue it needs to balance its budget now.  And in the meantime, China has made a deal with Cuba to drill for large oil deposits in the Strait of Florida.

The same is true for huge natural gas deposits in the ANWR region of Alaska, the midwest, not to mention the shale oil deposits available in Colorado.

Now there is a plan to impose a ‘cap and trade’ tax on energy production in this country, under the guise of improving the environment. That will assuredly bankrupt several Appalachian coal producing states, in addition to giving many of us a 50-100% increase in the cost of our electricity.