GM, the Canadian Bailout, and the End of Free Market Risk

In the article, "Canadian Union Agrees to Sweeping Concessions With GM," author Sharon Terlep writes that leaders of the Canadian Auto Workers Union have given in to concessions demanded by GM management. In order for the company to receive bailout money from the Canadian government, or rather, the Canadian taxpayer, the government first demanded that concessions by the employees be met to immediately help lower the company's expenses. The workers will vote this coming week whether or not to accept the concessions.

Global: A term that's become as synonymous in the language of business as is the word "Change" amongst politicians' verbal dictionaries. The implications associated with conducting business globally are filled with enormous rewards, as well as increased competition and a greater importance for strategic financial management. GM demonstrates the wrath global exposure can have on a business. A once iconic business, GM now struggles daily to stave off bankruptcy due to a number of reasons including; government manipulated interest rates, lack of products desired by consumers, and an ever increasing presence by Toyota Motor Company.

While the risks for businesses competing in the global environment are numerous (too numerous to list here), rewards such as increased market share, increased net incomes, and ultimately increased stock valuations and wealth outweigh these risks. A new reward, however, has emerged more prominently than ever over the past year: The reward of taxpayer subsidies when large businesses are mismanaged and face bankruptcy.

Of course, the precursor to such a reward is that the company must exhibit a status of global monstrosity, also known as a mega-cap corporation. As we've seen with the likes of Bear Stern, AIG, Morgan Stanley, GM these companies have received $29 Billion, $170 Billion, $10 Billion, and $14.284 Billion, respectively. The list goes on; reaching the status of mega-cap reaps large rewards even when the value of such institutions evaporates nearly as quickly as the steam rising from my coffee (figures from Tracking the $700 Billion Bailout).

The logic goes that these companies must stay in business due to the excessive number of people that would lose their jobs and the devastation it would cause in the already suffering economy. Such an argument is quite true. Short term hardships and further devastation to the economy would most likely occur, but the alternative is no better, and in fact, worse in the long run.

While GM would displace thousands of workers, free market operations would buy up assets that had any remaining value. Any assets that no longer have value should not, and would not, be purchased. Money that governments give to these organizations is not money it has to freely give; rather it's money that it borrows from wealth savers at the expense of the taxpayer. As such, the capital used by the government is taken from areas of the economy that could use the money in a more productive manner and thus create jobs elsewhere at the benefit of the taxpayer.

What precedence do we as a nation and Canada set for future business operations when it's apparent that should the business put itself into a position of financial ruin, governments will step in using tax payer money to prop it up? Free market outcomes such as bankruptcy or insolvency are the ultimate checks and balances on a business' behavior. When those possibilities no longer exist, mitigating risk and being financially prudent become obsolete for companies viewed by politicians as essential for the betterment of "economic stability", even at the long-term expense of society.

Again, the major culprit of the economic environment we find ourselves in is never discussed: the FED's artificial lowering and continued manipulation of interest rates. Free market interest rates are an important barometer of an economy's health and the true availability of capital in the market created by savers. Had businesses been able to use the free market interest rate as a barometer, financial decision makers would have been able to make more rational short and long-term capital budgeting decisions.

There are many factors to capital budgeting and long-term decision-making other than current free market interest rates, as well as many factors to GM's descent; however, solid financial analyses using free market interest rates is an essential tool for businesses to understand the health of the economy and the long term stability of consumers. This certainly would have provided financial managers a more realistic understanding of the impending slowing economy, enabling them to put measures into place that would have helped insulate them from the ravages of a slowing economy.

Only when there's the absolute possibility of complete business failure, the total absence of government bailouts, and the end to interest rate manipulation by the FED can there be a business environment that fosters stable and prosperous economies. Otherwise, there's no reason to believe that at some point in the future, when GM hasn't adapted to consumer demand preferences or government officials again propose artificial economies that it won't come back for more "bailout" money.

Financial Crisis Brings Opportunity for G-20 to Go After Swiss Banks

In the continued escalation of the “global financial collapse,” governments and their politicians are looking far and wide to find scapegoats to blame and thus provide reason for increased regulatory control, i.e. increased government power. While in this process of “who-done-it?” the United States and it’s G-20 allies are also taking this opportunity to go after foreign nations that for decades have been at odds with tax policy; mainly Switzerland and it’s very private Swedish banking system.

In “Swiss to Review Banking Secrecy Laws” David Crawford describes a situation where the US government is looking to sue Swiss bank, UBS, to force the company to expose over 52,000 American depositors. Our government believes there are over $14.8 Billion worth of assets being held in the Swiss banking system. The article goes on to state that French President Nicolas Sarkozy said the G-20 meeting planned to take place in coming weeks could put Switzerland on a “planned blacklist of tax haven-nations.” Why would the US and its allies be so concerned with UBS and the Swiss banking system at a time when the world has its own banking problems to deal with? As the article states, the G-20 are planning to meet to discuss the financial crisis and create a “unified strategy to force tax haven nations to bring their banking secrecy laws in line with international standards.” Politicians have learned a first class lesson through the tactics used by the Bush administration, and even within the first 45 days of President Obama’s leadership; governments can accomplish anything they choose when there’s enough fear and panic created in the hearts of their citizens. It’s the timeless classic of taking advantage of the situation.

It’s well documented that since the Swiss created a law in 1934 that made divulging customer bank account details a criminal offense rather than a civil matter, world governments have been on the attack attempting to force Switzerland to give up names of foreign investors who they believe are evading taxes in their home countries. The question governments should be asking themselves is not how we can force the Swiss banking system to hand over account holders’ information, but rather, why are so many willing to invest in the foreign nations banking system to evade their own government’s tax system?

Of course, this is too simplistic of an approach to be looked into as that would mean admittance that tax codes, such as the one in the US, are too imposing upon those who earn a large amount of money, aka “the rich.” Which, according to our new President, are those couples who earn a combined income of $250,000 or more, or individuals who earn $200,000 or more. US citizens wish to keep more of the money they’ve earned rather than having to be forced to give it to their government that at a whim, can take it upon themselves to determine how much to penalize “the rich” for their success. President Obama’s new tax plan, which would increase taxes for the top earners in the country from 33% to 36% and 36% to 39.6%, as well as impose a 45% tax rate on couples estates valued at more than $7 million (Obama Seeks $1 Trillion Tax Increase in Budget Plan). Can you blame those who’ve worked hard to achieve the American dream for wanting to find a place to save more of their assets?

When you add in state income and sales taxes, these individuals end up paying approximately 45 to 55% of their income to the government. It’s only logical that people like doctors, entrepreneurs, business and sales executives, lawyers, dentists, and others who earn these levels of income earn these amounts and more given the level of dedication, risk, and hard work it takes to reach such status. Try imagining someone you don’t know asking you to hand over 4-6 months of your income to them because they feel they know how to better use that money than you do.

When the G-20 meets, there will be discussions about what to do with Switzerland and other foreign nations who have private banking systems. However, the real topic of discussion will be how to increasingly impose a global financial system to be used to stave off the possibility of having another worldly financial collapse. As they meet, enjoying their time together, discussing their ensuing political and governmental clout, the true culprit of our financial failure will be back in the US most likely writing another book shoring up his legacy and defending his actions, the ex-FED chairman, Alan Greenspan. As Bernard’s First Law of Money states: “When the people own the money, they control the government. When the government owns the money, it controls the people.”