Obama and the Economy

One would hope, since the election, President elect Obama has been spending a significant amount of time studying fiscal and social economic theory, along with its practises and impact on the US economy.

Once the selection of his cabinet has been completed, his next priority must be to put into place policies which will help to restore the confidence of the American citizen. It is questionable that a stimulus package, formatted along the same lines as the first, would be successful not only in meeting expectations but with its desired impact.

The American consumer does not have the level of comfort or confidence that is necessary to allow them to spend money, in turn jump starting the economy. It appears that the average American used the proceeds of the first package to pay down debt or banked the cheque for a rainier day.

It is not the responsibility of the government to utilize part of the $700 billion, which is earmarked for the rescue of the financial institutions, to bail out domestic corporations. If companies such as GM cannot obtain either debt or equity financing from the private sector, there is just reason.

Listening to the media forecast severe job loss along with other doomsday prognostications as a result of an insolvency filing of GM fosters fear in the average American. Many hold a deep psychological and emotional attachment to GM, an American icon, who, this year is celebrating its centennial. How would a government bailout be structured? Loan or equity or both. What happens, in a few months when the $25 billion isn’t sufficient? The government is not geared up to be in the finance business.

The American automobile industry has been in a downward spiral for over a decade. They have not as yet addressed or defined the real problems.

The talk about appointing an automotive Czar for the car industry doesn’t make sense. Does he/she merge GM, Ford and Chrysler and then rule with government financing creating a monopoly? What about the other car companies who are manufacturing in the US, using American labour? How does the government make things equitable?

Chapter 11 could ultimately save jobs. Labour, legacy costs and inefficiency have led to an uncompetitive product. With GM’s shares in the vicinity of $3, the shareholders have already lost a very significant portion of their investment. The suppliers to GM have been closely monitoring and reviewing their credit risk and exposures. If trade credit is being extended to GM, it is being done so on a well defined basis, with acceptable risk to the vendor.

Chapter 11 enables decisions to be made by the trustee and new management in conjunction with a strong creditors committee. This will help to give them much needed time to review all areas of the company and implement appropriate action plans. Leases and contractual obligations (both vendor and employee) can be re-negotiated with more favourable terms.

There will be layoffs, potential facility closings and the possibility of shuttering or selling divisions. If that is what ultimately saves the company and a stronger and perhaps smaller General Motors emerges, then they will not only be more competitive, but will probably have generated positive public support, which might translate into purchases. If done properly, the automobile consumer will not run from GM cars but to them.

The tightening of credit in the markets may impede the ability of GM and others to procure DIP financing. Perhaps the alternative to a government bailout might be to allow GM and the others in the auto industry to go into Chapter 11 and have the government guarantee part of the DIP financing. This is still a dangerous route to take as it sets a precedent.

It is imperative that the government and media stop referring to the next two months as a lame duck period. The consumer does not need to hear this every time they turn on the television or radio. It frightens the average person.

Yes, there is only one president of the United States at a time. Yet, as the next two months are so critical to retailers, manufacturers and their supply chains, this might be an opportune time to have an immediate joint prime time address with both the President and the President elect. A bipartisan breaking of paradigms and an opportune time to explain to the people what the government is doing during this transition period, where they want to go with the new administration and how they are going to get there.

Perhaps, as an idealistic Canadian, I may not be seeing the entire picture but a strong America is important to the world.

By: Myra Dodick,
Sent: 01:48 PM Sun Nov.16.2008 - US