Construction, Auto Industry, Banks and 9/11

In the post 9/11 easing, the Fed, faced with the likely implosion of the economy used
Autos and housing and construction to keep economic activity. With a wave of liquid
credit Greenspan and Bush chose to fight the implosion and sure enough they succeeded.
Fast Forward to 9/15/2008 and we have the "credit tsunami" begin to engulf(or the lack
of it) start to hit the exact same sectors. Some would say that it was long coming and the
effect of this was sure to be felt sometime, the lack of thereof of any recognition by the Fed
and the Treasury is perhaps as appalling. The Auto industry too given its addiction to debt
should have been more circumspect. That said, the question of bailing out the Auto industry
must also be seen in the context of the next big tsunami which is the retirement pension
plan issue. A credit based bear market built within a specter of an oil shock is a tripple whammy
for the US auto industry. There are several related factors
(1) Credit crisis - implies there is no lending for the purchase of autos - further people are
afraid to lend to auto companies and they have to pay more to make anything
(2) recession - fear of job loss causes people to postpone large sized purchases
(3) oil shock - the cars they make are not suitable for $200 oil which could easily be the
situation in 2011
(4) bear market implies that the pension plans that are starting to come due are even more
fragile and will need additional funding
In that sense, Autos and finance (along with retail and healthcare) are the big employers in
the economy.

The Obama treasury needs to squarely understand the interrelationships and implications
of all this. There is no free walk away - only a postponement. Paulson has mainly chased
after (1). But in the context of autos, we are not really seeing the effects of his measures -
implying that without fiscal stimulus, we are not likely to see any increases in vehicle sales.
The Obama treasury could offer either a tax cut - or a targeted tax credit for a fuel efficient auto purchase.
This would be one way to attack (2).
But Obama also needs to worry about (3) as it was a campaign promise and an important
reason behind the Obama election.

But just as important is the negotiations over PBGC and (4). A permanent settlement with
the UAW must be on the cards as the Obama admin takes office and it should be on the agenda
in the first 100 days.
This is a difficult industry to salvage. It will require a lot of sacrifice from the UAW workers
and a can-do attitude from the auto industry mgmt and Congress to bring about a permanent
turnaround that can work without a large bailout.

Banks and construction require quick action too. Most notably, the ability to prime up the
falling demand due to foreclosure. My prior columns outline some proposals. In the long run,
the coming of new workers and the ability of the US economy to create more jobs can be
the panacea, but in the interim, a revival of fortunes for the US economy is important.

I must add here that I own small amounts of GM and Goodyear in my personal portfolio.