Timeline from Hell

2008's Economic Crisis In Review

January

Bong Insurers (Monolines) Near Failure

Bad MLK Day for World Markets / Fed Rate Cut Next Day

Societé General Fraud: Jerome Cerviel

March

Bear Stearns Failure & Bailout (Mar 17)

July
Oil shoots to nearly $150 barrel (July)

ECB raises interest rate due to inflation fears (see oil)

September

Fannie/Freddie nationalized (Sept 7)

Oil shoots downward

Lehman Brothers bankrupt (Sept 14)

Merill Lynch sells to B/A (Sept 15)

US Treasury Bill hits lowest level ever

TARP proposed (3 pages) (Sept 19)

Iceland banking system collapses

WaMu fails; sold to JP Morgan

Fortis Bailed-out (Europe banking problems)

House rejects TARP (Sept 29)

-- biggest sell-off in 21 years (2nd largest ever)

October

First week --> Market Crash; worst week since 1931, second worst ever

Wachovia purchased by Citi then Wells Fargo

Britain announced bank recapitalization plan

TED Spread hits historic high (mid-Oct)

Dollar shoots up against world currencies

Currency collapse in emerging markets

November

Obama elected, stocks decline

No troubled assets for TARP, decline of markets

-- worst credit market ever

-- highest daily volatility and weekly volatility (VIX)

-- lowest S+P since 1997

-- Citi bailed out

-- turnaround on troubled assets

December
$50 billion Madoff ponzi scheme

Interest rates move toward 0

3-Month T-Bills negative

$17 trillion in value lost

What to Do with the Big 3

As I've thought about this carefully -- and looked into the ramifications of different courses of action -- it's become increasingly clear to me that we have to avoid a Chapter 7 bankruptcy (ie, liquidation) of the Big 3 auto makers. I suppose it possible to do that by just allowing them into Chapter 11 bankruptcy and having them restructure. But since financing will likely be untenable for such restructuring, it seems that doing nothing right now is tantamount to paying Russian roulette. Therefore, I would have preferred if Congress had passed the compromise $16 billion in loans (i.e., the bailout). Tonight, it has been rejected by Senate Republicans, many of whom represent states that have non-Big 3 auto plants (Toyota, Nissan, Honda, Mercedes, BMW) and were simply trying to cause wages at those plants to decrease as result of forcing UAW wages to decrease (or, for that matter, cease to exist at all).* This increases the likelihood of the Chapter 7 scenario. If that were to happen, then we should expect a Second Great Depression. It's really that simple.#

Of course, I think Ford, Chrysler, and GM have been mismanaged, but I could say the same thing of the banks. (I'm still expecting Bank of America to go under, for all of their reckless buying of companies with land mines on their balance sheets.). We bailed out the banks to save the larger economy, now we probably need to do the same for the auto industry. Bailouts cannot end, because the economy is unable to survive market forces. Things are that bad. We're a couple big failures away from 15% unemployment and unrest in the street. (We're likely loosing 750,000 jobs each month already.) I know this sounds alarmist, but I've done the math and the modeling, and that could be where we're heading. This kind of loss of production resultant from a Big 3 collapse would nearly complete the parallels between now and the early 1930s. (All we need are protectionist tariffs in a couple countries, and we will have hit them all.)

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*In fact, the recommended decrease for the UAW wages would actually put them lower than the ones paid to Southern plant workers. This, in turn, would allow Southern automakers to competitively decrease the wages they pay. Ironically, the liquidation of the Big 3 would likely destroy the Southern auto plants as well, since the part manufacturers that supply them are often able to exist only due to large Big 3 orders. If the parts suppliers all go under, than Toyota et al. will be unable to make cars.

#Of course, there are several other events that could similarly cause such a bad outcome. The liquidation of the Big 3 is just one of them.