Worth the time.

A: Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

Q: As goes GM, so goes the nation?
A: The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again.

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue.

Q: Isn’t the process of restructuring under way in households and at corporations?

A: They are cutting costs to service the debt. But they haven’t yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.

—Ray Dalio, Chief Investment Officer, Bridgewater Associates in this weekend’s Barrons (full content limited to subscribers)

Ordinarily, when a business/industry fails from poor management and/or (in the case of the banks) overleveraging, what happens? Put aside the issue of what the business/industry is for a moment. Just ask yourself, what happens?

You know what happens intuitively, even if you’ve never opened an economics textbook. It is very simple. Entrepreneurs, seeing the mistakes made by those business/industry operators, rush in to start competing businesses to 1) take advantage of the weakened competition, and 2) operate the business better than the competition having the benefit of seeing their mistakes.

Under normal circumstances, this process happens in every industry. It is the normal cycle of capitalism.

But look at what is happening now. Are there any entrepreneurs setting out to start automotive manufacturing businesses? What about entrepreneurs setting out to charter new banks? You already know the answer to that. The question, then, is why?

Read it all.

The struggles of the Big Three automakers are sending shock waves through the philanthropic community: The three companies gave a combined $116 million in charitable donations last year.

Listen to it all from NPR.

“See the USA in your Chevrolet!” trilled Dinah Shore week after week on TV.

Can you still see the USA in your Chevrolet? Through a windscreen darkly.

General Motors now has a market valuation about a third of Bed, Bath & Beyond, and no one says your Swash 700 Elongated Biscuit Toilet Seat Bidet is too big to fail. GM has a market capitalization of about $2.4 billion. For purposes of comparison, Toyota’s market cap is $100 billion and change (the change being bigger than the whole of GM). General Motors, like the other two geezers of the Old Three, is a vast retirement home with a small money-losing auto subsidiary. The UAW is AARP in an Edsel: It has three times as many retirees and widows as “workers” (I use the term loosely). GM has 96,000 employees but provides health benefits to a million people.

Read it all.

President Bush has grudgingly allowed General Motors and Chrysler to drive away with the last few billion bucks in Treasury’s TARP till, which boasted $350 billion a mere 77 days ago.

How did it all slip away so fast?

Read it all.

The White House said on Thursday that an “orderly” bankruptcy was one option being considered to try to rescue General Motors and Chrysler, which are seeking billions of dollars to avoid a shutdown.

President Bush’s spokeswoman, Dana Perino, confirmed growing speculation within legal circles that the president and Treasury Secretary Henry M. Paulson Jr. were considering the step as part of an overall rescue package for the automobile industry.

The action would be unusual, and would require concessions by the United Automobile Workers union, suppliers, investment banks, the federal pension board, bondholders and other stakeholders in the two auto companies.

Ford Motor, which does not face an urgent need for capital, is not likely to be part of any rescue package.

Read it all.

One of Hong Kong’s most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of “know thy customers” and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

“Previously, there was America,” he said. “American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick.”

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds ”” which Moody’s or Standard & Poors rate AAA ”” and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Painful but important reading.

“We need a Czar Czar, to crack the whip on all the czars. ”¦ P.S.: Also a federal czar policy. Right now, czar decisions are made on an ad hoc, case-by-case basis, with no attempt at czar harmonization.”

Mickey Kaus

Shorter WSJ: Will the government use TARP funds to bail out the automakers? Maybe. Will it ask Congress to release the second tranche of TARP funds? Don’t know. If it did, would there be ugly scenes in Congress? Don’t know. Will the government require the automakers to declare bankruptcy? Don’t know. Is there any way to bail in bondholders without forcing the automakers into bankruptcy? Don’t know. How much will all this cost? Don’t know, could be anywhere between $8 billion and $50 billion.

Shorter shorter WSJ: With banks, you need to get things done over the weekend. With automakers, evidently, not so much.

This all bespeaks a lack of leadership, which is the one thing clearly needed to avoid a worst-case liquidation scenario which is looking increasingly likely.

Read it all.

In Oshawa’s gritty south end, tough economic times mean big business for Father Makarios Isaac.

“Everybody has been affected in this neighbourhood one way or another,” said Isaac, priest at St. Philip The Apostle Catholic Church, a stone’s throw from the General Motors’ assembly plants facing layoffs or closure.

It’s a time when the old adage ”” as GM goes, so goes Oshawa ”” affects more and more parts of the community.

Read it all.

MS. CARLY FIORINA: …I think all of those statistics are an important reminder. While we have been focused in Washington on big companies…

…the Detroit automakers, and big unions, the truth is we’re not as concerned, and we should be, about the hundreds and thousands of small businesses who actually create two-thirds of the jobs in this country. Which brings me all the way back to the original problem. We have a recession, a deepening recession right now because credit is unavailable. Credit is unavailable to small businesses so they can’t hire. When hundreds of small businesses can’t hire 10 and 15 people, over time that creates big unemployment numbers. They may not have big unions to represent their interests in Washington. They’re the little guy, but the little guy matters. When credit isn’t available, consumers don’t have the money they need to spend. So I think we have to go back to the root of this problem, ultimately, which is credit is still unavailable. And that is despite massive bailouts of big financial institutions who are still not lending (my emphasis).

Read it all from today’s edition of Meet the Press (and comments from two others besides these three also).

Steven Levitt’s best-selling book, Freakonomics, revitalized economics by explaining how economic principles affect our daily lives. With the economy so prominent in our lives today, how should we interpret what’s going on?

Host Scott Simon asks Levitt, now a professor of economics at the University of Chicago, for his thoughts about the state of the national economy.

Listen to it all.

Motown left years ago. The city’s former mayor is behind bars. Unemployment hovers around 14 percent. An emergency loan measure for its automakers died in Washington late Thursday after failing to generate enough support from Republican senators. Oh, and its professional football team is 0-13 for the season.

How much more, one wonders, can Detroit take?

“To me, it’s like piling on,” Gail Taylor, one of the city’s legions of unemployed men, said Friday of the Senate’s decision on the loan measure. “We’ve been through enough around here.”

Read it all.

The White House weighed its options Saturday for preventing a collapse of the troubled auto industry, once the backbone of the U.S. economy. So far, the only thing certain is that the Bush administration wants to avoid the possibility of a disorderly bankruptcy of any of the Big Three.

General Motors Corp. and Chrysler LLC have said they could run out of cash within weeks without government help.

“Administration officials are continuing to gather financial information from the automakers, assessing the data, their cash position going forward,” White House deputy press secretary Tony Fratto said Saturday. “We’ll take a look at that information, make some judgments and review our options.”

Read it all.

First the Big Three CEOs told Congress they needed $25 billion in federal loans. Then they told Congress they needed $34 billion. Then two of those CEOs ”” from General Motors and Chrysler, not Ford ”” told Congress they needed an upfront $14 billion compromise package before year’s end. No wonder those guys are in so much balance-sheet trouble: They don’t even know how much money they need.

If they did, maybe they could have convinced the Senate to pass that $14 billion compromise approved by the House Wednesday night. Instead, the Senate effectively killed it on Thursday.

It’s a shame our auto industry is in such dire shape and that the rest of our nation’s economy will feel painful ripple effects from its meltdown, with or without a bailout. But while the Bush administration said Friday that it will provide that $14 billion from the $700 billion financial-sector bailout or “other sources,” it’s difficult to see how Detroit can rally without a comprehensive overhaul. It’s also difficult to generate confidence in the Big Three bosses and in those Treasury officials who pushed through that other bailout in October by charting a “rescue” course that soon took major detours.

Read it all.

Senate negotiations for a U.S. automaker bailout plan collapsed, in a blow to General Motors Corp. and Chrysler LLC, which may run out of cash early next year.

“It’s over with,” Majority Leader Harry Reid said on the Senate floor in Washington. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”

The Senate began taking a procedural vote on a House-passed plan, though Reid said he didn’t expect it to get the required 60 votes.

“Millions of Americans, not only the autoworkers, but people who sell cars, car dealerships, people who work on cars, are going to be directly impacted,” said Reid. “It’s going to be a very, very bad Christmas for a lot of people as a result of what takes place here tonight.”

Read it all.

The prospects of a $14 billion government rescue of the American auto industry seemed to vaporize on Thursday morning as the Senate Republican leader, Mitch McConnell of Kentucky, spoke out forcefully against the bill, effectively dooming its chances despite the urgings of the White House.

In a speech on the Senate floor, Mr. McConnell said he and other Republicans had drawn a clear distinction between the Treasury’s $700 billion economic stabilization, which they helped pass in October, and the proposal to aid the American automakers, which he said raised questions about which industries or individuals deserve help.

“A lot of struggling Americans are wondering where their bailout is,” Mr. McConnell declared. Although Mr. McConnell voiced support of an alternative plan that was developed by Senator Bob Corker, Republican of Tennessee, it seemed unlikely that there was any possibility of compromise at this late point in the year, although some Congressional aides still expressed hope and said talks would continue.

Read it all.

Sen. Jim DeMint (R-SC), who opposes the proposed bailout of U.S. automakers, says the companies should go into Chapter 11 bankruptcy, which would force them to reorganize. He says the proposed “car czar” to oversee the automakers’ restructuring is a “ridiculous” idea.

Listen to it all from NPR.

Citing the risk of massive job loss, the House voted Wednesday to loan US automakers $14 billion in return for a direct government hand in restructuring the ailing industry. But the biggest hurdle to clearing the bailout bill lies ahead in the US Senate, where the 60 votes needed to avoid a filibuster and pass the bill are in doubt.

Although the legislation includes protections for taxpayers ­and the White House has signed off on it, many Senate Republicans say they’re not convinced that the loans will be repaid or that the plan will produce a more viable domestic auto industry.

“People realize this is an incredibly weak bill. It’s the product of an administration that wants to kick the can down the road and let someone else deal with it, and it has minimal, very minimal, support in our caucus,” said Sen. Bob Corker (R) of Tennessee, after a GOP caucus meeting on the bailout on Wednesday.

Read it all.

As I think about our bailing out Detroit, I can’t help but reflect on what, in my view, is the most important rule of business in today’s integrated and digitized global market, where knowledge and innovation tools are so widely distributed. It’s this: Whatever can be done, will be done. The only question is will it be done by you or to you. Just don’t think it won’t be done. If you have an idea in Detroit or Tennessee, promise me that you’ll pursue it, because someone in Denmark or Tel Aviv will do so a second later.

Why do I bring this up? Because someone in the mobility business in Denmark and Tel Aviv is already developing a real-world alternative to Detroit’s business model. I don’t know if this alternative to gasoline-powered cars will work, but I do know that it can be done ”” and Detroit isn’t doing it. And therefore it will be done, and eventually, I bet, it will be done profitably.

And when it is, our bailout of Detroit will be remembered as the equivalent of pouring billions of dollars of taxpayer money into the mail-order-catalogue business on the eve of the birth of eBay….

Read it all.

Check it out.

Congress and the White House inched toward a financial rescue of the Big Three auto makers, negotiating legislation that would give the U.S. government a substantial ownership stake in the industry and a central role in its restructuring.

Under terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government’s $700 billion rescue of the financial industry.

Read it all.

Several thoughts.

1. Why would anyone with the common sense God gave gravel think that a board consisting of political appointees–none of whom as named to date have any auto experience–will bring anything useful to the table? They don’t know jack about the industry and none has experience as a turn around investor. (OTOH, they can’t do all that much worse than the current management of the Big Three.)

2. An oversight committee comprised of 6 cabinet level officers has way too many chiefs and no indians. Who’s going to be in charge?

Read it all.

How many employees does General Motors have? How many General Motors employees and their spouses are covered by GM’s pension plan? What is the ratio between the first and the second?

No googling or researching, please. Take a guess.

An agreement between the White House and Congressional Democrats over the shape of a rescue plan for the auto industry advanced on Monday, with Congressional Democrats calling for a taxpayer-financed plan that would be directed by one or more appointees of President Bush.

According to draft language being circulated on Capitol Hill, the Democrats would call for an overseer, also known as a “car czar,” with expertise in such areas as “economic stabilization, financial aid to commerce and industry, financial restructuring, energy efficiency and environmental protection.”

The United Auto Workers union, meanwhile, is planning to seek a stake in General Motors and a seat on its board in exchange for concessions by its members.

The draft bill, which is still being negotiated by Congressional leaders and the Bush administration, would provide emergency bridge loans totaling about $15 billion to the foundering automakers, particularly General Motors and Chrysler, which are in the greatest danger of financial collapse.

Read it all.

The Sunday service at Greater Grace Temple began with the Clark Sisters song “I’m Looking for a Miracle” and included a reading of this verse from the Book of Romans: “I consider that our present sufferings are not worth comparing with the glory that will be revealed in us.”

Pentecostal Bishop Charles H. Ellis III, who shared the sanctuary’s wide altar with three gleaming sport utility vehicles, closed his sermon by leading the choir and congregants in a boisterous rendition of the gospel singer Myrna Summers’s “We’re Gonna Make It” as hundreds of worshipers who work in the automotive industry ”” union assemblers, executives, car salesmen ”” gathered six deep around the altar to have their foreheads anointed with consecrated oil.

While Congress debated aid to the foundering Detroit automakers Sunday, many here whose future hinges on the decision turned to prayer.

Outside the Corpus Christi Catholic Church, a sign beckoned passers-by inside to hear about “God’s bailout plan.” Roman Catholic churches in the Detroit area distributed a four-page letter from Cardinal Adam Maida, the archbishop, offering “some pastoral insights and suggestions about how we might prepare to celebrate Christmas this year when economic conditions are so grim.”

Read it all.

The most important issue is cutting Detroit’s output to an appropriate level. “What we would tell a client who went from 30% to 20% [share] and they say, ‘We’re modeling now at 20%,’ I’d say, ‘Let’s model it at 16%,'” says Conway. Scaling below capacity doesn’t mean you give up on 20% or even 22% share ”” you can add shifts, for instance, to boost output.

Reducing capacity could also go a long way toward solving Detroit’s revenue problem. Between Detroit and the transplants, there are around 17 million units of manufacturing capacity in the U.S. In 2007 vehicle sales hit 16 million, but about 2 million of those were driven by the combination of easy credit and discount pricing. In a normal economy, the true size of the business may be closer to 15 million units. The Detroit Three simply have to generate more revenue per car and, not incidentally, a profit. Right now, the revenue gap per car is $4,000 vs. Toyota.

The competition hasn’t stood still, of course. Japanese and German makers continue to improve their products, and the U.S. customers they have won over will be hard for the home team to get back. Even as the Big Three have closed the distance over manufacturing, drivetrain and other engineering issues, another has opened up. The transplants have moved on to the sensual: the quality of materials, the look and touch of dashboard knobs, the sound a door makes, the feel of seats. Craftsmanship is the new point of difference. “The Japanese have figured out, How do we reduce friction?” notes Gidwani. “Now they are going to have to catch them in a new area.”

The real catch, though, is whether American taxpayers are willing to give the Big Three the chance.

Read it all.

Here is one:

Re “Auto Executives Face a Hard Sell on Capitol Hill” (front page, Dec. 5):

I am one of those skeptics who believe that no amount of money will effect changes in businesses that keep their leadership in place. Promises aside, they’ve led their companies into the fix they’re in. A structured Chapter 11 is the way to go.

Also, I strongly suggest to the president-elect to institute a $1 tax on every gallon of gasoline on the day he takes office. With it, he can finance the desperately needed rebuilding of our infrastructure and create jobs. We Americans must have a powerful incentive to give up our wasteful, lazy ways ”” buying big cars, spending and driving unnecessarily.

Barack Obama must be honest with us; it’s not the economy of the country that is in peril, it’s the economy of the earth ”” and all its inhabitants.

Lawrence Holofcener

Read them all.

Members of Congress wanted Detroit’s Big Three automakers to redo their homework before they resumed begging for a government bailout today. So how’d they do?

It doesn’t matter. If a Senate Banking Committee on the matter Thursday was any indication, America’s automakers failed badly enough and pose such a danger to the economy that lawmakers seem less focused at this point on whether they’ll give the automakers a bailout, and more so on how they’ll do it.

“We’re not going to leave town without trying,” committee chairman Sen. Christopher Dodd, D-Conn., said of their efforts to provide funding for General Motors , Ford Motor and Chrysler.

Read it all.