DO NO HARM!

We should demand that our politicians take the same hippocratic oath when they get elected that physicians take before practicing medicine. More talk is coming out of Washington about taxing the banks that are "too big to fail", adding more stimulus funds to create jobs, creating a national health plan to provide almost universal coverage for all, and pushing for "Buy American" provisions in new spending bills. With a Democratic majority in Congress and a Republican party that is unable to articulate their own agenda, Washington is undermining the economy by trying to strong arm what has always been a market driven economy!

• When a market driven economy needs confidence, our government sows confusion.
• When it needs access to capital, our government threatens the very providers of that capital.
• When it needs favorable interest rates to finance expansion, it's deficit spending is creating future inflation that will trigger higher rates.
• When it needs assistance to export it's products, the government uses trade as a political weapon.
• When it needs continuity in tax policy, the government passes legislation increasing our debt ceiling which will lead to higher taxes.

Yes, we have gone through a very severe recession and we all have suffered. There is plenty of blame to go around and books will be written trying to pin point the culprits that got us here. The truth is that we are all guilty though unchecked greed, lack of effective regulation of our financial markets, and lack of transparency in many of the toxic instruments traded in in our financial markets. The only party not guilty of fraud, deception and greed is the market driven economy and one can argue that the plunge in our economy was the wake up call needed to pass effective legislation that will prevent this from happening again.

If the government wants to know from a small businessman what needs to be done to stimulate the economy and create jobs let me offer this:

1. Pass legislation governing the financial markets to eliminate the lack of transparency in derivative trading.
2. Consolidate the oversight responsibility to one agency and give them the power to regulate and punish offenders. And most important hold them accountable for their actions.
3. Pass health care reform without the public option because having something is still better than what we have now. This is not a blank check because there will be many needed changes to come that will hopefully drive down the costs of health care in the future. This needs to be done with a sharp eye on the costs to the taxpayer.
4. Leave tax policy as it is and recover all the stimulus money that has not been spent yet. There is no need for that reckless spending other than to curry votes for lawmakers.
5. Cut back on an overly ambitious agenda and wind the war down in the Middle East. Bring our troops home and use the savings to boost our homeland security.

Government spending does not stimulate the economy. It drives the deficit higher, raises taxes and eats into the disposable income of the consumer, the investment capital of the entrepeneur, and the shareholder value of those companies where we have placed our savings in hope for a brighter future.

In short - fix what's broken and keep your hands off the rest!

The effect of the Chrysler Bankruptcy

We have just seen the first major US car manufacturer enter a "structured bankruptcy" orchestrated by the federal government. While I support the bankruptcy for Chrysler since the private owners weren't committed enough to step up to the plate and put in their own capital, the whole issue raises a number of troubling concerns which I would like to address here.

1. What role, if any, does the federal government have in choosing the winners and losers in a free market economy?
2. Is it fair for the federal government to take sides in a dispute between bondholders, shareholders, and the employees of a company?
3. What right does the federal government have in committing taxpayer money to rescue a failing company by investing money in that company?
4. What gives the right to the federal government to make special accomodations for a foreign company to take ownership of a US company?

These questions have been played out in a number of different scenarios in the last 100 days, all of which point to a new activist government that is willing to bend the laws to achieve their goals.

What started out as a banking crisis that stopped the flow of credit to businesses and consumers has morphed into a blank check to do whatever the government decides is in their (Obama's) best interest. The initial response to the banking crisis from Hank Paulson and the Bush administration was to provide TARP funding to remove the toxic assets from the bank's balance sheets in order to free them to make loans. This was never done due to an argument that there wasn't enough funds available to cover the amount of bad assets ( a number which was never stated clearly). Well, some funds were dispersed, loans were made and now the banks want to repay the money to the treasury and they are reporting strong earnings in the first quarter. Obviously, if you can borrow money from the Treasury at 0 % interest and you loan it out at 6 %, you're bound to make money!! As if that was not bad enough, we have the Fed lending money to AIG to bail them out of credit default swaps that they underwrote for banks - foreign banks!! We have US taxpayer money going to Switzerland to bail out UBS for insurance policies written by AIG!!

No - The government is stepping beyond their authority to make decisions like this.

Next we have Obama taking the bully pulpit to castigate the bondholders of Chrysler for not taking pennies on the dollar for money lent to Chrysler while the government gives a better deal to the unions that put the auto industry in the mess they find themselves in! Bondholders are secured creditors with as much right to a return of capital as any other secured party. This is bending the bankruptcy laws without due process. We can only hope that the Trustee pays due attention to the laws of our country when he makes his decision.

No - The government cannot bend the laws to fit their purposes!

The government does have a need to support failing companies when their failure results in substantial job losses not only at that company but in the extended network of companies linked to them. These interventions should be limited to loans, not equity. The government does not have a proven record of good business management and this can only lead to politization of the operations of these companies.

No - Loan, don't own!!

The last point is needless to argue. Let the foreign entity take the risks of entering this business as the money will be repatriated to the foreign country.

If you feel the same way, please respond to this blog. We need to make our voices heard!!

Manufacturing Matters - especially in the USA!!!

Survival stategy for the auto industry

2/13/09 How do we rescue the domestic automotive industry?
The domestic automotive industry is the single largest private sector employer in the United States if you consider the direct employment at GM, Ford Motor Company and Chrysler LLC, the Tier 1, 2 and 3 suppliers and the dealer network. It goes without saying that these companies are critical to the economic survival of our country and cannot be allowed to go bankrupt.
The critical steps needed to ensure the survival and the future health of these companies require painful adjustment for both the shareholders, the dealer network, and the employees of these companies. I would recommend the following steps to be taken as soon as possible:
1. Drastically reduce the size of the companies to fit the realities of the market. It makes no sense for GM, Ford, and Chrysler to continue costly rebate programs to maintain an unrealistic share of a shrinking market. Reduce their product offerings by eliminating brands that are marginal at best. There is no reason for GM to offer identical models under the Chevrolet, Buick, GMC, Pontiac and Cadillac labels nor for Ford to have a Mercury and Ford brand. This would also sharply reduce the number of dealers in the US and improve the profitability of the dealers.
2. Eliminate all parts manufacturing operations at these companies and focus on the design, assembly and marketing of their products. The design and assembly would still include engine and/or some components of the powertrain manufacturing as this should be viewed as the differentiator between the Big 3 and the New Domestics. There is a large supply base of Tier 1, 2, and 3 suppliers who can partner with the Big 3 in the design of critical elements of their products.
3. Enter into a new paradigm in their relationships with their suppliers. Recognize that the industry is truly a global industry and partner with those suppliers in a position to support their efforts worldwide. Collaborate in the design of critical components with these suppliers and give them long term contracts. This will be painful for the supply base as it will lead to a consolidation of the suppliers but this in turn will lead to healthier companies. Fewer companies and increasing dependence on them will lead to higher prices but this could be mitigated by economies of scale for these suppliers. It would also enable the drastic reduction needed in the staffing of the Big 3 companies.
4. Enter into a new relationship with the UAW. These companies as well as their supplier base, will face critical shortages of skilled workers in the very near future as the working population age and retire. We need to make the factory floor an attractive place to work and encourage young people to pursue jobs in engineering and manufacturing. The UAW could partner with other stakeholder representatives such as the HTMA, NAM, SME and the AMT – The Association for Manufacturing Technology to encourage, educate, and facilitate the entry of new blood into this industry. I believe that existing labor agreements have resulted in near parity between wages at the Big 3 and the New Domestics but the current wage scales are meaningless when compared to the age differential between the workers at their different facilities.
5. Ask for government assistance in transferring the legacy obligations of these companies to their retirees from their balance sheets to the government’s balance sheet. Legacy costs resulting from contracts entered into in better years have left an unrealistic burden on these companies that do not contribute anything to their mission of designing and building products that meet the future needs of the market. New contracts with the UAW should reflect the realities of the market and include provisions for participation in health care and retirement planning by the employees as well as the employers.

Other than the last item, these actions could be done without substantial government intervention. Most of the savings would come from the downsizing of these companies and the sale of some assets such as discrete manufacturing plants. Elimination of brands and focusing on a more realistic share of the market would lead to increased profitability. Shifting of some design and manufacturing of components to a smaller supplier base will improve the profitability of the suppliers as well.
Finally, we should all stop bad mouthing the industry for the sins of the past! Nobody can undo the mistakes of the past but we should focus on the advances made in the last few years. The US is the most affordable market for cars and trucks in the world and this has been accomplished by significant productivity gains made at these companies. The employees of these companies have made significant advances in the design of new powertrain components resulting in improved fuel efficiency across the board. We are blessed with talented people that can take these companies forward to meet the demands of the future. Let them do their job and let the market decide if they have been successful.

Ron Schildge
2/13/09

Economic Stimulus Plan - Good or Bad?

Congress has just approved a stimulus plan that will add another $ 850 Billion or so on top of our oversized national debt. Rather than go into the details of the plan which is filled with "earmarks", "pork", and other questionable spending items, I would like to address the question as to whether we need this stimulus plan or not.

What went wrong in September, 2008? It appeared that the economy was on an even keel and was in a position to survive the meltdown of the housing industry and the collapse of the credit markets with respect to mortgage defaults. What happened was a total collapse of the credit markets! Fear and the demand to mark bank assets down to market value drove the banks to write down their overly leveraged assets to pennies on the dollar! This wiped out balance sheets of banks that provided the credit needed to grow our economy. Without credit, many companies that relied on commercial paper to fund their day to day operations were forced to cut back spending. Consumers faced with downgraded credit ratings curbed their spending which furthermore put the economy in a tailspin.

The government is the only institution that has the resources and the will to step in and try to right the ship. I believe that their initial response which was to take over the "toxic" assets at the banks was the right answer at the time. If done early enough, it would have put a floor on the valuation of the mortgage based assets and prevented the spread of fear that destroyed otherwise "good" assets. For whatever reason, Sec. of the Treasury Paulson dropped the ball and chose to pump money into these banks directly without any transparency or accountability.

Now we are faced with an even greater crisis that is costing more to finance and in doing so will only further increase our national debt. What are the possible consequences:

- Nationalization of our banking system.

- Government ownership of a large share of our automotive industry - not just the "Big 3" but their suppliers as well!

- Heightened inflation as we are forced to raise our interest rates to attract foreign capital to fund our deficits.

I say that it is time to cut government spending and put our focus back on the real problem that caused this mess. Fix the housing sector!!! Put together a bill that allows the GES entities to take over the mortgages from the banks at discounted prices. Let them restructure these loans so as to keep the owners from defaulting. Offer a tax credit for new home buyers. And then, offer to buy back some of the other bad debt from selected banks through a reverse auction process.

Spending on infrastructure is good but takes too long to create jobs. We need to restore confidence in our economy and we need to do it now! There is no alternative to government involvement at this time but let's not as taxpayers give them a blank check. Demand from your congressmen and women accountability. In future blogs, I'll give you some sample letters that you can send to Washington. Let's fix the economy now and do it right!