Posts Tagged ‘credit crisis’
The US Senate is set to pass a so-called “bailout bill” that amounts to $838 billion. To give that some sort of perspective, you’d have to spend a million dollars a day for two thousand, two hundred and ninety-five years to spend an equivalent amount. Of course, that doesn’t include the interest which will accrue on that staggering debt.
How will this gigantic tab be paid? It’ll by paid by the US taxpayer: $6,2,36 per taxpayer, to be precise. That, of course, is on top of the $13,500 each taxpayer is already on the hook for via the original TARP money, the bailout of AIG, Lehman, et al. New total: $19,736 for each and every taxpayer, on average, plus interest.
There’s an additional downside: money invested in the government bonds to subsidize this massive spending is, of course, money which will not be otherwise invested in the economy for such things as actually spurring economic growth: for every dollar invested in a government bond, there’s one less dollar available for private companies looking to grow and expand.
The total amount borrowed for “bailout” spending to date? $2,651,797,108,408.
What would you do if you had the ability to legally avoid an 87% tax hike? Would you avoid the tax hike? Not surprisingly, many investors are answering in the affirmative.
As we previously reported, President Obama campaigned on a promise to increase the capital gains tax from its current 15% to, ultimately, 28% (an increase of 87%). He later called a 33% increase in this tax, from 15% to 20%, “modest”. Investors took heed, and the “Obama effect” on the markets has been evident ever since election day (see chart).
The Globe and Mail reports¹ the total cost of a so-called bailout of the “Big Three” by the Canadian government, which has committed to 20% of the US government bailout, to ultimately cost Canadians between $15 billion and $25 billion.
What’s that mean for the individual Canadian taxpayer?
According to Statistics Canada, there were 9,275,765 full-year, full-time earners as of 2005². That’s a pretty good proxy for the number of income taxpayers. So, let’s take the conservative figure of a bailout cost of $15 billion. That puts each full-year, full-time worker in Canada on the hook for $1,617.
Of course, if you personally believe in supporting the “Big Three”, there’s nothing preventing you from voluntarily using $1,617 of your income to either buy their products or their shares. Unfortunately, the government’s bailout proposal removes that choice from the taxpayer and forces the issue, whether any individual agrees with spending $1,617 of their income to support three private companies or not (and would perhaps prefer to spend $1,617 of their hard-earned money to bail themselves out instead)…
Here’s a copy of Roll Call 690 – Auto Industry Financing and Restructuring Act. This lists how every member of the House voted on the bailout legislation.
I run a rather large company. We are currently on the threshold of bankruptcy due to the “credit crisis”. This bankruptcy would cause numerous job losses, so as you can imagine, we need help.
Here’s a bit of background on our operations:
We produce a product the general public doesn’t much care for. They can find a better product from our competitors, often at a much better price.
We also pay our employees considerably more than the competition does; about 80% more, in fact.
About a third of all our sales are to our own employees, at heavily discounted prices. Since they’re paying considerably less than the general public, their decision to purchase our products distorts the competitive pressures which would normally exist and which would force us to produce products that the general public would buy.
We’ve faced substantial competition for many years now – decades, actually. But we believe in a consistent business model, to the exclusion of profitability, agile adaptibility and long-term success and viability.
We’re not exactly at the forefront of innovation, but we promise to get there. Maybe. We’ll see.
Our competitors – evil, foreign-based companies – have been moving their plants to the United States. We have countered this invasion by moving our jobs to foreign countries. There, we can overpay our workers too.
Our success is critical to the US economy. After all, just look to history and you’ll see America once had a booming horse and buggy industry. They were allowed to fail when superior competition emerged. The economy has clearly never been the same since.
We need taxpayer money, and lots of it – at the current rate we’re burning through our cash, we’ll be broke soon. We need to be able to burn through taxpayer cash too. And, frankly, if the taxpayers won’t buy our products, we think we should nonetheless take their money. I’m sure you’ll agree that’s reasonable.
As you can see from the points I’ve outlined above, there is clearly nothing wrong with our business model – the robust way in which we do business should not be measured by profitability or long-term viability; nor should the fact no lending institution or investors will lend us money to continue our business as it currently is run be taken to reflect poorly on our management decision and overall strategy. It’s just this “credit-crisis” thing that’s causing us a whole lot of grief. Without that thorn in our side, we’d no doubt be a viable, healthy company.
If you give us the money we are seeking, we’re sure it’ll all turn around – the staggering loss of market share we’ve experienced over the course of the past couple of decades is quite obviously an anomoly which will blow over in due course. Hopefully soon. Hopefully very soon.
Thank you in advance for this bailout. You’ve made the difference between all our workers being laid off and most of our workers being laid off.
One of Three
Since the day Barack Obama was elected President of the United States, the Dow Jones Industrial Average (DJIA) has been on a deep slide. The Dow closed election day at 9,625.28, then began a nearly daily descent, until it reached 7,552.29 at the closing bell on November 20. That’s a decline of 21.54% in just twelve days, and represents trillions of dollars taken out of the capital markets.
No big surprise there, given that President-elect Obama has promised to increase the Capital Gains tax by 33% (that’s just to start; his stated ultimate goal is a roughly 87% increase in the tax on your investment gains), move the US to a protectionist trade policy and increase regulation.
The markets, however, appear to be starting to shake off the “Obama Effect”: beginning November 21 and continuing for the next five consecutive days, the DJIA has been making up ground, closing November 28 at 8,829.04. That’s more than halfway back to pre-Obama levels.
Could President-elect Obama’s recent comments that he is reconsidering his tax hikes and even contemplating allowing the Bush tax cuts to continue be responsible for some capital returning to the market?
The US Federal Reserve has committed yet more money to the so-called “bailout” of the US economy – this despite no hard evidence that credit markets are, in fact, tightening (as we reported here). $800,000,000,000. more.
According to Bloomberg¹, $600 bn will be used to purchase toxic assets of Freddie, Fannie et al., the very entities without whose existence the housing slump could not have occurred.
Another $200 bn will go to “support” consumer and small-business loans.
What does that mean for the beleaguered US taxpayers? Well, as we previously wrote, the original $700 bn TARP package, coupled with the attempted bailouts of Bear Stearns and AIG, already had taxpayers on the hook for $7,546 each. This adds another $5,954 to each taxpayer’s obligation, for a grand total (to date) of a staggering $13,500.
That’s a bill which, of course, will come due for taxpayer at some later date. There are no reports of any discussions on that part of the equation…