Tuesday, May 15, 2018

Often Mentioned 2008 Crisis Chiefly Forgotten

While reading an article about the economy and how things are different this time it occurred to me that while we constantly refer to it the often mentioned "2008 crisis" it has been chiefly forgotten and we have learned very little. By this, I'm pointing to the harsh reality and the details. The so-called great recession blamed by many on a crisis in housing is now so far in the rearview that many people see it as merely a reset from which we have moved on. We should not forget the auto sector also slammed into the wall because it was mired in debt and because of its ability to produce far too many vehicles.

On the other hand, it is possible to argue we have never moved on but have merely muddied the water with a mind-boggling amount of stimulus and newly printed money. Those in the financial sector of the economy in many ways have raped and plundered their way forward. A glaring example of this is how GM was saved throwing its bondholders under the bus. While supporters praise the solution as courageous, brave, and the "best solution" to an ugly problem they have chosen to forget the carnage that was left in the wake of the actions of the Obama administration. As proof, their action was the correct "thing to do" they point to how the company has performed since.

GM Bondholders Were Thrown Under The Bus! (click here for larger)

For a reminder and details of just one of the events that unfolded during that ugly time in our economy see the following article which appeared in 2009:

GM bankruptcy: End of an era

(CNNMoney – General Motors filed for bankruptcy protection early Monday, a move once viewed as unthinkable that became inevitable after years of losses and market share declines capped by a dramatic plunge in sales in recent months.
The bankruptcy is likely to lead to major changes and job cuts at the battered automaker. But President Obama and GM CEO Fritz Henderson both promised that a more viable GM will emerge from bankruptcy.
In the end, even $19.4 billion in federal help wasn’t enough to keep the nation’s largest automaker out of bankruptcy. The government will pour another $30 billion into GM to fund operations during its reorganization.
Taxpayers will end up with a 60% stake in GM, with the union, its creditors and federal and provincial governments in Canada owning the remainder of the company.
GM will shed its Pontiac, Saturn, Hummer and Saab brands and cut loose more than 2,000 of its 6,000 U.S. dealerships by next year. That could result in more than 100,000 additional job losses if those dealerships are forced to close.
Assembly lines at a plant in Pontiac, Mich., which make full-size pickup trucks, will be closed later this year. A Wilmington, Del.-based facility that makes roadsters for the Pontiac and Saturn brands will also close later this year.
Pain for retirees, investors
More than 650,000 retirees and their family members who depend on the company for health insurance will experience cutbacks in their coverage, although their pension benefits are unaffected for now.
Investors in $27 billion worth of GM bonds, including mutual funds and thousands of individual investors, will end up with new stock in a reorganized GM worth a fraction of their original investment.
Owners of current GM (GM, Fortune 500) shares, which closed at just 75 cents a share on Friday, will have their investments essentially wiped out.
In 2008 both GM and Chrysler were headed for bankruptcy but if they had gone bankrupt under chapter 11, most of their factories would have stayed open and they would have continued making and selling cars. Stockholders would have lost the value of their stocks, but bond owners who have the first claim to company assets and profits would have been paid off, if not in whole then at least in part. With Obama's decision to “bail them out” by taking them over stockholders still lost everything as did Chrysler’s bondholders and GM bondholders were also shortchanged. This is a lesson of government can and will change the rules without warning.

Now fast forward to this week where an article that recently crossed my desk contained the great line, "brutal assessment of the world economy is fascinating, but not for the faint of heart." In a rather of matter fact tone, the article outlined a slew of structural issues and problems we have papered over and failed to address. The thought those forgetting the lessons of the past are doomed to repeat it rapidly comes to mind. Welcome to the economy of the year 2018.

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