Ted Allrich is the founder of The Online Investor and author of the book: Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he'll offer advice to investors who are just getting started.
There must be something in the Treasury, Federal Reserve, Senate, and Congressional water bottles that's causing brain damage.
While the initial idea of saving the banking industry to avoid a crisis of confidence made sense because capitalism depends on trust in the banking world, there's a new fever going around that's much more dangerous.
It's the notion that the Treasury or the Fed should start investing directly into all kinds of companies, take equity positions, become a shareholder in private enterprise.
If you like the way the post office runs, you'll love this idea. If you think Sarbanes-Oxley is no burden to business, doesn't interfere in any way with running businesses, then you'll love this idea. You most likely are also fond of socialized medicine, higher welfare benefits, and more taxes.
Think this one through. If the government decides to own part of a business, it will most likely want a seat on the board of directors, maybe even a controlling interest. Why is that a concern? Have you looked at how the government runs its own business? It takes in taxes and always spends more than it brings in. It spends money like it's someone else's (oh, wait, it is....it's ours), keeping payments to outdated programs on the books for political purposes, building bridges to nowhere, and funding projects like investigations into the dating habits of the Argentinean fruit fly.
Getting government involved in business doesn't work. Look at the international airlines that are partly owned by their governments. They fly but rarely on time, and service is horrid. Or look at government involvement in the medical business, otherwise known as socialized medicine. Canadians have to wait years for many surgeries. So do the Brits. And why do you think most of the new drug discoveries and new medical breakthroughs occur in the U.S.? Because free enterprise allows the inventors (and investors) to reap the reward for their work and risks, unencumbered by government until the final approval process.
But what about all the jobs that will be lost if General Motors (NYSE: GM) or Ford Motor Co. (NYSE: F) or Chrysler go out of business? They're just like the jobs that are lost when a restaurant fails or a farmer who has to sell the farm. There are just more of them. Sure that would hurt the economy, a lot. But the government's job isn't to tax everyone so it can spend the money on people to hold jobs. Creating jobs is what private enterprise is for.
A capitalist economy separates those capable of creating value -- such as a car that is well-built and lasts -- the way the Japanese do (with Koreans not far behind), and those that can't. Sure, new models from GM, Ford, and Chrysler are better than ever, even competitive with the Japanese, but they may be too late. Management at U.S. companies may have played golf once too often and let their market shares slip too far.
What will happen to all those workers if the government doesn't save them? Most likely they'll go to work for the Japanese companies that are building plants in the U.S. to keep their costs low. Or they'll go to the German car makers building plants in the U.S. The market for cars won't go away, just the bad car makers, if the government doesn't step in and foul things up. The same thing has already started to happen in the banking world: the bad banks are going out of business or being bought by the healthy banks. That's the way a free economy works.
To think that the government is the total answer to every problem isn't right. Free market economics requires that certain businesses fail. That's part of the deal. High risk, high reward. If the government is the safety net for many businesses, then it will want to run them.
And running a business is not like running the government. There are no taxes to be raised. There are no pools of money that can be transferred from one program to another. There are only revenues and expenses, generated by what the business offers. If it isn't offering the right stuff, then there are no revenues because nobody wants its products or services, and it goes out of business. It's that simple.
There's talk of "giving" (in quotes because there will be many strings attached...as there should be...this is no gift) money to car companies on top of the banks, thrifts and insurance companies that have already received funds.
Why stop there? It seems the logical step (and certainly the most democratic) is to set up a new, bureaucratic, government agency that will take applications from any business, then, after many months, maybe years, of deliberations, will get back to the applicant as to whether or not he/she qualifies. By that time most will be out of business, but that doesn't faze the government employees. They still have their jobs.
Here's another issue: when administrations change, they will place new rules into the game, can even change the rules from the last administration. New board members, replacing previous ones, would be added to any company that already had government representation. That would create even more changes for the companies involved, changes which have nothing to do with the basic business of the business.
If you think having government invest in private business is a good idea, let me give you one more example of why it doesn't work. Talk to anyone in Louisiana who was homeless after Katrina and was told by the government that house trailers were on the way. Those people are still waiting.
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Reader Comments (Page 1 of 2)
11-08-2008 @ 2:19PM
Kent said...
Ted Allrich makes a valid point point about government intervention in a capitalist economy doing more harm than good. Ultimately if they do, I foresee it bankrupting our treasury even further and the result is: more taxes from the citizenry. Cases studies aren't needed to support this view; but we can see from history that nationalization eventually ends up pursuing privatization to relieve governments of the financial burdens. Hopefully our government doesn't intend to make a habit of it and get out of private businesses post haste when the dust settles. I believe they will.
11-09-2008 @ 11:51AM
angie said...
i agree with you, goverment can not manage its own agencies, now i know obama followers will say, obama will fix it, but he is the only new kid on the block,goverment is stepping to far,
11-09-2008 @ 10:58AM
John said...
One of the best articles on the subject, that I have seen. We scream that we are a capitalist society - but we ask for help when things go wrong. Detroit's problems are self-inflicted, by both management and labor. Honda just completed it's third plant in Indiana. And the Big 3 want money from the taxpayers. The best thing the taxpayer could do is to buy Detroit's products. But that's not going to happen - because they are not the best products. End of story.
11-09-2008 @ 1:10PM
Rick said...
If you are against a bailout of the auto industry simply write your elected representative and tell them NO BAILOUT.
11-09-2008 @ 12:43PM
arizona johnny said...
when our dear leader-to-be says the government will no longer interfere that's when the government backs off. lenin rocks! comrade citizens break rocks!
11-09-2008 @ 12:52PM
Jim said...
I thought the $700,000,000,000.(Wow take in all those zero's!)was for buying the bad loans on the books of banks,and that seemed like a somewhat safe bet,as there is an underlying asset,the property itself.Now everyone has there hand out.
I say let them fend for themselves we owe them nothing..Bad management got them where they are today.So giving them more money to lose is the answer? let the losers go down in flames.Someone can come in and buy GM and these other companies for peanuts and throw the losers out and build that companies back to financial success! thats my opinion.....
11-09-2008 @ 12:59PM
Jack Hartog said...
You do not offer anyu alterntives. It will cause an unacceptable dislocation in employment and other manufacturing companies if the car companies go bankrupt We also need the car companies for defense.
I do agree thqat any government aid should be offered with very substantial strings attached. The government should indeed get significant equity and the shareholders do not need to be protected.
KLM, controlled for many years by the Dutch government, was one of the finest airlines in the world. Canadians and the British I have talked to are satisfied with their government controlled medicine and at least, there is medicine available for everyone.
We went astray and we have to get back on track. Any government participation must have an exit program, 5, 10, 20 years. We can build enough incentives into the system so that creative individuals still will want to maximize innovation and profit.
Even the housing problem needs a fresh approach. The government should take title to the houses that are in forefeiture or close to forfeiture, leave the presennt occupant in their house, maybe give them a manageable mortgage, and allow them to eventually buy the houses in an affordable manner.
I am interested to hear what constructive alternatives you propose.
11-09-2008 @ 2:14PM
rob said...
Reducing the real problem to it's lowest common denominator says this in my opinion. We are going to lose about s generation and a half becasue the biggest change requireing immediate attention is building for the future while at the same time trying to stablize out of control spending.
We MUST for our often LIBERAL UNIVERSITY PROFESSORS to have a minmum of 10 years in the real world of their particular area of expertise. Not grants actual physical daily experiences. When you combine the fact that most Professors are not teaching for the most part, it is done by Graduate Assistants with the fact that theory with no basis for or from practical application is a recipe for diseaster when you understand that these Professors no longer encourge learning from all aspects of an issue or problem. They are telling "WHAT YOU MUST LEARN" NOT ENCOURAGING HOW TO LEARN. We need to demand of our corporations that they have work study programs for these students much the same way General Motors did before the Board of Directors trashed engineer study and the relationship of the General Motors institue (GMI) in favor of having the number dummys (accountants) run the company. Lastly from an educational process we need to understand that every young person is not meant to go to college. we do however need training ground for several thousand different kinds of important jobs and the old Trade Schools should be reimplimented. In my opinion it is only when companys are encourged to build and develope new better products useable at least on an 80% global scale wil will become a third world service country.
While this is an entirely different topic, I have actually been threatened for writting that the failure of Fanny and Freddy was a carefully orchestrated plan to create a trickle down domino effect for certain corporate failures. The country would bailout these company's, take a position of overship(control) and effective force the people to accept the effects or strave. I further believe that Barney Frank, Nancy Polici, Harry Read, chuck Schumer and about 6 other extremely far left Democrats and Republicans who took an "OATH TO PRESERVE AND PROTECT THE CONSTITUTION OF THE UNITED STATES should be arrested and tried under the RICO ACT statue I further believe (and pray that I am wrong) the President Obama will never have the oportunity to unite this great country because he would have to cross his own PARTY LINE much the same way in a smaller scale as Joe Liberman. I see a JFK sutuation and them making a Martyr out of him. History suggest the possibility of civil war again if this happens. I think he has some worthy ideas if he can convienence the far left and the far right to work together and that the country's long term prosperity and freedoms are at stake. If by the grace of God he is an effective Presdient the Republlicans don't need to worry about 2012 . If the President is not able to be effective, I see a new People Party" represented by a cross section of Americans who put country and it's people firrst without regard to political agenda coming to fruisshion by 2012
11-09-2008 @ 4:09PM
Brad said...
I've got news for all of you. Bush is a socialist. He has socialized the banking system, and is about to do the same thing with the Auto industry. A rose by any other name is still a rose. When faced with problems this worst president of the USA ever ran to the socialists solution. For his wall street friends, and his auto industry friends, now its time for the little guys to get their, and well oh so sorry? That will get you barracades in the streets. But wait we had an election, we spoke in a strong voice...a different kind of president, wall street move over, and get ready to open your wallet -WIDE.
As to Bander, and Chaney, go elsewhere (Bander already has left).
11-09-2008 @ 5:08PM
ukarl said...
any consideration of a bailout to the automotive companies is insanity.. we preach capitalism / free enterprise / and then go socialist by supporting failing corporations where greedy unions demanding unrealistic copensation and incompetent management has gotten only semselves to balme for failure " can't run a profitable company close the doors" we don't need GM too many other choices to select from.....ka...
11-09-2008 @ 4:51PM
beachpaul said...
Leopards do not change their spots. We already bailed out the auto industry. They make overpriced crap that no one wants except their own employees who get steep discounts for buying it. They can all go jump in a great lake.
11-09-2008 @ 6:01PM
PHIL said...
What the pundits and anal-yst and Harvard economist grads forget in their rants !! Is that the united states is a 2/3rds consumer economy ! bottom line ! in the 8-10 million good paying jobs we have lost in the last 6 yrs . we still have people that are so called anal-yst and Harvard economist ranting about good paying jobs to boost the 2/3RDS consumer economy along here in the good ole USA ! so to the so called anal-yst and economist lol jobs idiots nothing but good paying jobs is going to get the united states out of this mess ! consuming consumers with good paying jobs in a 2/3RDS consumer economy ! what a bunch of jokes!
11-09-2008 @ 6:29PM
PHIL said...
oh ya BTW to all the people who like to rant socialist ? LOL WE WENT SOCIALIST when we gave a welfare bailout of AIG and the banks and so on and so on ! so as far as free trade and free enterprise ? LOL LOL look at wall street!
11-09-2008 @ 9:31PM
Dan said...
When Ford built the Excursion (a 6000 lb beast that gets 8 MPG), I told myself that I will never buy another Ford. When I rent a car (quite frequently) and get a GM product I am embarrassed that they can sell such junk with a clear concience. The last thing I want is to see my tax dollars bail them out. Perhaps we would see some innovative designs come out of Silicon Valley if the Big 3 weren't around.
11-10-2008 @ 9:41AM
ccm989 said...
How about requiring that any company that gets a bailout that the CEO return his bonuses & dividends for the last 2 years. If you want help you have to prove that you are willing to put your own assets on the line. If you aren't willing to do that, you don't deserve help.
Because if the CEO doesn't believe in the company enough to invest his own money, we should we?
11-10-2008 @ 1:43PM
Rob said...
Ted Allrich's article misses two important points. First, the loss of the big three car makers would not only mean lost jobs but entire areas of population supported by the employment provided for by the auto factories (towns and small cities) would be devastated - the taxpayers would end up with this bill anyway, so wouldn't it be better to keep people working ?
Secondly, survival of the big three is a matter of national security. These three companies are the largest among the factories that were retooled to build and supply tanks and other vehicles in World War II, where massive production was needed, and fast. I do not think we should leave the potential emergency production of wartime equipment in the hands of a few scattered foreign car factories here.
Someone as intelligent as Mr. Allrich apparently is should nix the 'zero sum' attitude, along with the 'government is always the bad guy' approach and the selfish whining about expense (face it, we're going to be supporting people who need support), and try to concentrate on ideas to make the pie bigger. For example, can the government, by contributing, lending or taking part ownership force a change in policy of these manufacturers to retool, redesign and build more fuel efficient cars, alternative energy cars and/or other non-auto alternative energy equipment ? Can we invest government money with a view toward finally obtaining the edge in technology, fuel efficiency and alternative energy that has previously escaped our industries, in order to make them competitive, if not dominant, in this new and emerging industry? Can policy changes like the ones I suggest help these industries, as well as their employees, the taxpayers and the economy of this nation at the same time? I think we need to be a little more creative than the free market fire-sale of an entire culturally significant and strategically important industry, likely to India for peanuts, that Mr. Allrich suggests.
11-10-2008 @ 2:29PM
Tom said...
The Government steals jobs from main street. In my instance, they put a disabled person out of business to where he killed himself. Most politicians think there is nothing wrong with this. We all have rights (Human & Civil) until we go to use them. I thought we elected politicians to protect our interest. It appears they didn't do their job. I would suggest that their salary be cut in half and if they don't like it they can be replaced by a 5th grader.
11-10-2008 @ 5:02PM
Alan said...
So why does no one seem to see or be aware of the 800 pound gorilla in the room?? The US government! One third of the workers in the USA "work" for the government. Ireland has less than 1% of its people as government "workers". Why do we have such a bloated, lazy, inefficient bunch of worthless bureaucratic parasites feeding off the rest of us who actually work for a living. My 401K has lost what? 30 to 40% of its value in the last 3 months. Show me one Federal parasite who's retitement fund has lost a penny! They haven't because we taxpayers guarantee their retirement. Show me one who has been fired or laid-off when 250,000 lost their jobs in the private sector in October alone and 285,000 in September. Not one politician has mentioned this "gorilla" nor one media twit. It's way past time we people rose up and demanded wholesale firings in our governments. All the traitors we elect do is promise the moon and then cravenly preside over expanding this governmental cancer. High time we fired the lot of them, or like Joe the Stalin send them in their millions to a firing squad at dawn.
11-10-2008 @ 5:24PM
leon thomas said...
Bush was bought and sold from the begenning and the bail out was the last hail mary for all the butt buddies. I dont spend more than I make and I don't make bad decisions I cain't back up.We need to get everyone out of Washington thats been there 2 terms or more. We need a real change. Im 74 and I know what I am talking about
11-10-2008 @ 8:49PM
teltech54 said...
The only reason AIG is getting any money at all is because of rampant corruption in the government. Find out how much of this money gets back to your congressman. Follow the money trail.