Thursday, December 11, 2008

Automaker Bailout Bill and the Ford Gambit

It has been raining nonstop here for two days. The temps may drop enough tonight to get freezing rain! While it makes the trees look pretty, iced branches and roads tend to make a real mess of things. I have 4 days of vacation to take before December 22nd, so perhaps I will exercise one tomorrow.

Loyal reader G reports that he had a job interview. Let us all give a hope that G gets an early Christmas present. Good luck sir!

Home Equity Extraction and the Front Loading of Demand
Over at Calculated Risk today the always great CR had a great chart that I will reprint here with full credit of course:

Complete post and much larger graph can be seen here.

The steady downtrend is evident since 1987 and the vicious acceleration is obvious during this bubble bust era since 2006.

What this reminds me of is another core concept here at Economic Disconnect and that is the idea of front loading demand. By this I mean that the high consumption rates seen since the year 2000 were not financed with real wages and real wage increases, but with various vehicles of debt. While one may think of credit cards, the real culprit was Home Equity Lines of Credit (HELOC) and other home mortgage equity withdrawal plans. Many people used escalating home values as "savings" that were never anything more than paper profits never realized. The Calculated Risk chart shows this well.

This is why the FED, the Treasury, and the Keynesian thinkers are wrong with their policy ideas. Trying to recapture a consumption (or demand) rate approaching that of the 2002-2006 time period is a lost cause. That amount of spending was false and illusionary to begin with, and any attempt to restore an illusion usually fails. Expecting government spending to take the place of false demand is circular in logic. Instead of attempting to recapture the "Glory Days" (hat tip Springsteen) of profligate spending, leading economists should try and make estimates for things like home prices relative to income and new car sales (exclude 2002-2006 era for both) and figure out how best to cushion the blow from the drop in spending. If "everything reverts to the mean" the quicker we get there, the better.

Automaker Bailout Bill and the Ford Gambit
The latest reports indicate that the votes in the Senate that are needed to pass the automaker bailout bill are not to be had. So as of now there is now bill to be voted on. While I have hope this will be the course of action, we did see this exact show during the TARP debate. First the Republicans said "No Way" but a couple of days later they were all aboard the TARP train. This could very well happen again.

The item I wanted to focus on (Ford pun intended) was the Ford Motor Company opting out of participation in the bailout proceedings. Ford has stated that they are not as bad off as General Motors and Chrysler, and that they can survive on their own. While I am not in a way of knowing the validity of that claim, I like their moxy.

I happen to think this move could work out extremely well for Ford. The move is what I would call "The Ford Gambit". In the game of Chess a gambit is a play where one player will sacrifice a game piece (called material) in order to gain an advantage in some way. The advantage is usually either more board space or increased piece mobility so a coordinated attack on the opposing King can be made quickly.

In this way Ford is sacrificing material (bailout funds), but what is the advantage? Keeping with the Chess analogy I think Ford could acquire space in the sense that they will not be handcuffed like their competitors. Ford will be able to make their own decisions, for good or bad, without the car czar looking over their shoulder. I think Ford could gain mobility in the sense that they can appeal to the US public as the only one that did not take a handout from the taxpayer. This is a key attack point. It is not hard to think of a radio ad or a narrated television ad that goes something like this:
"Ford Motor Company has long been a leader in US automobile manufacturing. While the entire industry has fallen on hard times, we at Ford want the American public to know that we stand behind our products and our warranties without the help from an already stressed taxpayer. Ford has long built the best selling truck on Earth, the F-150, which has served as the American workhorse over the years. Ford has also introduced new age vehicles for the new consumer including the Ford Focus, Ford Fusion, and the Ford Edge all of which are rated competitively across the industry. We at Ford do not want a handout, but we would appreciate your consideration when buying a vehicle. As always, Ford is tough."

Now just have some good music with the ad and show Ford workers working on the cars and I can imagine car buyers will be more than willing to give the Ford boys a chance. No handout, just a chance.

I may be wrong and Ford may be up to something else entirely. I can see how this could make sense looked at this way.

Full Disclosure: Economic Disconnect has NO position in ANY stocks of the companies mentioned here.

Have a good night.


Anonymous said...


I was thinking the same thing about Ford. I wouldn't bank at any of the major banks as they are on my boycott list as is GE and American express along with a host of other bailout bandits.
I still think the bailout will go threw but if it doesn't look out below.

Lisa said...

Wow, excellent "commercial!" Send it to Ford's PR department immediately!

Good luck to G on the job interview :)

Mberenis said...

Grrrrrrrrrreat blog!!!
When was the last time you looked at government grants? With the bailout, there is more money than ever. Don't miss out.

My Grant Blog

watchtower said...

Makes me want to go out and buy a Mustang.

G, best of luck with your job prospect.

watchtower said...

Hmmmm no Friday Night Rock Blogging, could the ice storm that hit Massachusetts be the reason?
If so I hope you and your family are staying warm GYSC.
We went through a bad ice storm last February around here and I can tell you it is no fun being without power for days on end.

GawainsGhost said...

Well, I drive a Ford truck. I bought it 16 years ago and have driven it over 200,000 miles. It's been a good truck, although I did have to rebuild the engine and have had to spend thousands of dollars on repairs and maintenance over the years (FORD = Fix Or Repair Daily). But it still runs, so I'll keep driving it until it falls apart.

That said, I'm in the mood for a new car. For my money, the Mazda RX-8 is the way to go. Zoom Zoom Zoom. My father had one of the original RX-7s many years ago, and it was one of the best cars he ever owned. I actually got to take my date to the prom out in it, and I have to say it was one hell of a ride (the car, not the girl).

On a side note, as far as HELOCs go, I can't tell you how many repossessed homes I've had to deal with over the last five years that were foreclosed on due to home equity loans. This to me is the pinnacle of stupidity. You want to borrow against and pay interest on your savings, then lose everything? How stupid do you have to be?

That's even worse than the idiots who took out 100% LTVs and rolled over closing costs. You want to move into a house with negative equity and pay interest on your down payment and closing costs for thirty years? That's pretty stupid. But it's nothing compared to building equity over a decade and squandering it all.

However, I try to remain positive. I think the decade of decadence has taught a lot of people the error of their ways. You simply cannot borrow your way to prosperity. Financial independence is all about minimizing expenses, maximizing savings and investing in assets. Liabilities are the road to ruin.

Anonymous said...


I lost power about 2am this morning in the middle of a raging blizzard. it's 3 degrees here with and windchill of -31. They got it back on this am at 7. But I sure was thinking about you last night. We got hit with a ice storm 2 years ago and I feel for those people. That sucked.
This is going to be one cold winter, the last 3 years we didn't have snow until the last week of November or the first week of December, this year we have had several since the middle of October.


watchtower said...

Take care Kevin, I'm glad your power came back on, and if there are any "Linemen" out there reading this you have my utmost respect and thanks for the job you do!