April 1st Roundup: GM And More

CNBC has come up with a new word: "Great Recession".

Nobody, of course, wants to use the "D" word, but the "D" word is exactly what we should be using, because its what we're entering - and in fact are likely already in.

All the commentators like to talk about "monetary policy" and how it "isn't working because the credit markets are dysfunctional."

Nobody mentions that the reason the credit markets are dysfunctional is that credit has been abused by consumers, industry and government alike.

1/3rd of all homes now have mortgages that exceed the value of the house.  This didn't happen by accident, it happened due to the collapse in traditional underwriting standards, which once again are:

• 20% down payment, in saved cash (not additional credit)
• 28% maximum "front end" ratio, that is, the entirety of your housing expenses to gross income
• 36% "back end" ratio maximum, that is, the entirety of your debt service, including housing and all other debt service such as credit cards and car payments + student loans, to gross income.

Nobody wants to go back to reasonable lending standards.  Why?  Because if you do, you exclude most buyers - not because of the housing price or the "front end" ratio, but because consumers have levered up everywhere else too, including student loans, credit cards and buying a new car every three years.

The hue and cry for such silliness as seller-financed down-payment "assistance" (which ought to be outlawed as intentionally misleading, as it serves to improperly prop up the reported sale price of the house, effectively "laundering" a seller concession) FHA 3.5% "down payments" (1/5th the reasonable requirement) along with other expressions of idiocy such as allowing AUS/TOTAL automated approvals that stretch debt-to-income ratios is proof positive that we're a nation that is stuck in debt up to our necks.

There is no durable and reasonable recovery that can happen until that debt is either paid down or defaulted.  Since we continue to refuse to tighten up standards for major capital purchases (including houses and cars) we will continue to march over the cliff, one step at a time, until the transfer of the defaulting and to-be-defaulted debt is transferred to a "government guarantee" reaches a critical mass.

At that point government funding evaporates from external sources and the "job cuts" all happen there, along with forced cuts in government largess programs - whether the administration wants them to or not.

President Obama and Congress simply refuse to deal with reality and his so-called "advisers" are in fact up to their necks in the policies that got us here.  As a consequence people like Larry Summers cannot be counted on to provide impartial or even honest analysis, as it is their very policy structures and suggestions from more than ten years ago that got us here in the first place!

Obama is now said to be favoring a "prepackaged" bankruptcy for GM, allowing Chrysler to go under.  It would be nice if we would see our President realize that this same mess exists in virtually every corner of our economy, but doing that requires skewering people who he considers "trusted advisers."

It is rather amusing to hear Senators like Mr. Shelby come out and tell us how bankruptcy is "best for the taxpayer" when it comes to GM (true) but they won't say the same thing about Bank America and Citibank.  Why not?  Fact is, a bankruptcy is the correct solution to too much debt and excess capacity no matter where it is, as it is the formal structure under our capitalist system by which excessive debt (supporting capacity that is in excess of requirements and thus unproductive) is cleared through debt-to-equity cramdowns, real concessions by all stakeholders (forced by a judge) and/or outright defaults.

These same Congressfolk also don't want to repeal the so-called "bankruptcy reform" law of a few years ago that made it nearly-impossible for income-earning Americans to discharge their debts over that same Constitutionally-provided process.  Indeed over the years Congress has extended the net of "impossible to discharge" debt ever further like a creeping prickerbush; child support awards, IRS debt and privately-written student loans.  More recently for those with above-median incomes all debt became effectively non-dischargable.

Never mind that these very same bankers have effectively secured themselves a pass from prosecution for outright fraud - which they then committed with wild abandon, embezzling trillions in total from citizens, municipalities and pension funds around the world, squirreling it away for their own benefit while chortling at their "bought and paid for" immunity from prosecution thinly disguised as "campaign contributions."

This of course is what the bankers want, but it is precisely backward in relationship to what America needs.  If we are to see our debt levels contract from 370% of GDP (up from 350% last year) and not provoke a GDP collapse (which will rocket that ratio higher) we must instead:

• Reverse the "bankruptcy reform" act.
• Repeal all restrictions on debt that can be discharged in bankruptcy.
• Force all firms and individuals who are unable to pay through bankruptcy.

In short the solution to insoluble debt is bankruptcy.  It is through bankruptcy that we clear that debt from the books, which is a necessary precondition to a re-balancing of the economic output of this nation to its ability to fund consumption with production, not "pulled forward" credit-driven false demand.

The UAW and organized labor in general, long thought to be the "favored" among President Obama and the Democrats through their speeches and claims, in fact were thrown under the bus.  It is simply remarkable that the UAW hasn't literally mobilized every labor union in the United States and coalesced their memberships into a march on Washington DC, laying (peaceful!) siege to the city and demanding that the same sort of "tough love" meted out for GM and Chrysler be applied to all the financial concerns that have instead received well north of a trillion dollars of largess, forcing the rescission of all previously-allocated "bailouts" and refusing to leave until a level playing field is achieved.  One must wonder if Gettlefinger and the union "brothers" really are brothers at all, or whether the last 20 years has made them, once the most-feared political constituency in America, yet another neutered political has-been incapable of anything beyond a bad parody of carnival barking.

Real economic growth and the stabilization of the job base, along with normalization of the credit markets will not and in fact cannot happen until this takes place.

We must as a nation choose - we can either choose a continued descent into chaos that literally threatens our way of life and political system, or we can choose to force those who made bad bets, whether they be improperly-underwritten loans, naked CDS written without capital or those who speculated in the purchase of their house to go through the bankruptcy process and thus remove from the system insoluble debt via the process of bankruptcy and default.

The latter choice is politically unpalatable but it beats the loss of social order, the collapse of our economy and credit markets and ultimately the collapse in government funding that can (and will, if allowed to descend to that level) result in the loss of our government and way of life.