Defenestrating Thoughts from the Bivouac

In February of 1933, Henry Ford said the following referring to the Hoover’s plan to bail out the banks:

Let them fail; let everybody fail! I made my fortune when I had nothing to start with, by myself and my own ideas. Let other people do the same thing. If I lose everything in the collapse of our financial structure, I will start in at the beginning and build it up again. (Source: LRC Blog)

Needless to say, that’s a just little ironic given that Ford is now begging for taxpayer money. :-P

Given it’s the start of the consumer spending season, I thought I should review Ron Burley’s short book Unscrewed: The Consumer’s Guide to Getting What You Paid For, which I read about year ago.

Billing itself as a “powerful and informative guide” to helping you deal with companies, it offers advice and strategy on “who to talk to, what to say, and when to walk away.”

While it does do this, I think at times the strategies are either unrealistic or way over the top. I personally have managed well with companies by simple being polite and making sure I’m talking to the person that actually has the power to make the decisions. If you do that and have a valid case, I think you’ll get what you want 90% of the time.

For example, when buying my car, I never spoke to a salesmen (except during test drives). Instead, I’d called and asked for a “Sales Manager” and said, “I want to buy a 2007 Honda Accord EX-L, Silver, Inline 4, Black Interior. I don’t need dealer financing. I’m calling the 5 dealers in town and whoever gives me the lowest price wins. I’ll come in with a check and pick up the car tomorrow.”

This actually worked really well, I didn’t need to learn about Dealer Incentives, Loyalty Bonuses, or play the “how much can you pay a month” four-square game. Instead, I got back 4 bids and then picked up my car from the dealer with the best price.

A great source of contact information is the Consumerist blog. While it has a disappointing signal to noise ratio, it does have contact info for the executive customer service line at a lot of companies. So when I couldn’t get Sprint to process my ~$80 refund, I used the relevant contact info, send a polite note explaining the situation, and immediately got my refund.

Again, the combination of being polite and knowing who to talk to solved the problem.

So, back to Burley’s book. Burley starts out explaining why customer service is bad today. First of all, there are lot more companies and customers out there, so personalized attention is hard to get. Second is that pressures on the bottom-line reduce funding in non-revenue departments like customer service. Lastly, since these businesses are rarely local, customers are basically seen as anonymous account numbers.

Next Burley presents a series of techniques to get attention from the right people. Some of them seem unethical, like pretending to be an accounting firm in order to get a CEO’s fax number and then spamming him with letters explaining your problem. Some are more reasonable, but pretty intense, like threatening to picket a business that you feel wronged you.

Generally, all the techniques involve making yourself annoying enough that you get what you want. In the end, if the amount of money owed to you is large enough it may make sense to use the more extreme techniques.

There’s one technique that I wish the book had gone into: don’t get into the situation in the first place by reading reviews, asking friends, and getting recommendations. If you do this, you’ll rarely need to use these techniques.

In summary, Unscrewed is a quick and probably worthwhile read. I would get this book from the library though, it’s not worth reading twice.

If there’s something that grows faster than the size of the bailout, I’d love to see it. Last week, I talked about an article that measured the bailout at $4.28 trillion. Today we learn that the number is almost double that, to a tune of $7.76 trillion!

Remember when Congress was considering the $700 billion bailout and we all called and clearly told them “No!” ? Well, so far, Washington has given away 10 times that amount.

Bloomberg has a nice interactive chart on which spending programs make up in this amount.

But even with a handy chart, it’s really hard to wrap one’s head around the scale of this bailout.

[$7,760,000,000,000 is] $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages. (Source: Bloomberg)

That’s $52,000 per taxpayer. So Crissy and I have so far contributed $104,000. I’m fairly certain I could have found a more productive use for that money than bailing out the rich and throwing the rest down a giant hole.

I found this great blog post on visualizing the bailout amount that included this picture:

The green is a stack of $100 bills. And the speck at the bottom is a car.

And the stack of bills is only $315 billion. So the total bailout is 25 stacks like the one in the picture.

Lastly, consider the fact that the national debt is about $10.6 trillion.

Sadly, this is all being done by appointed officials; our vaulted Congress refuses to do its Constitutional responsibility to manage and oversee the money the government spends.

So why are we in this mess and how do we get out?

Well, the big problem here is that the government is refusing to let people fail, which causes us to spend trillions of dollars to bail Wall Street out of their mistakes.

This is not good for the country as we’re damaging the system. The system works because people fail and then competent people take over the assets. Now you start again with a strong base.

But what we’re doing is taking the assets from the competent and giving them to the incompetent. As a results everyone is weakened; the whole country is weakened. That’s the system that leads to failure, every time.

There’s an old adage that says, “Insanity is doing the same thing over and over again and expecting different results,” (attributed to Einstein, among others).

I would say that it’s not just insanity, it’s also stupidity, incompetence and a whole slew of negative adjectives.

More lending is not going to solve the problem of too much lending. Period. Bubbles cannot grow forever, they must pop.

It is not possible to get “credit flowing” by pushing down the price of money (through printing and low interest rates). All you end up doing is adding more bad credit in the economy. Which is, again, what got us into this mess in the first place.

Lastly, the only sustainable way to improve the economy is to drive up real wages with new technology and productivity improvements. Both of them will come from empowering the competitive, not by taxing them in favor of the incompetent.

A friend sent me links to these two great YouTube videos

• Calculus in 20 Minutes, Part 1
• Calculus in 20 Minutes, Part 2

(I wanted to embed the videos, but for some reason the owner of the videos disabled that option.)

I really liked watching these. I was surprised at how many calculus I didn’t forget; while I forgot some memorizable facts (like the derivative of ln(x)), I did remember most of the concepts.

I also had a few moments during the conceptual discussion where things “clicked” in my head (also known as a “Aha!” moment). Unfortunately now that I’m not in school and not learning new conceptual stuff full-time, these moments occur a lot less often than I’d like.

Forget working for Detroit or Wall Street, I need a job where someone pays me to sit around and learn new stuff. Perhaps I should consider becoming, as Professor Richards says, a “gradual student”. :-)

A couple of weeks ago, my parents hosted a pooja at their house. About 10 families came, so there were a good number of kids running around. Half the parents made their kids sit still and participate in the pooja, while the other half left their kids to their own devices.

We learned an important lesson a few years ago about kids left to their own devices during a pooja. At that pooja, while all the adults where partcipating in the services, the kids dismantled the Taj Mahal 3D puzzle I’d spent weeks assembling. And once they finished taking it apart, they proceeded to tear some of the pieces in half.

Anyway…

After that incident, we started to set up a small TV in the adjacent room so the kids can watch movies. I usually tell the kids that they can quietly watch TV, but if they are loud I’ll make them participate in the pooja. That usually scares them straight.

There’s nothing like the fear of having to worship God to set a kid straight. :-P

All our kids movies in my parents house are on VHS and the small TV we use is a 13 inch tube. When the kids saw it this setup, they got really excited! One tiny kid screamed “It’s puny!”, while the other kids started bragging about the TVs they have in their homes and rooms: “We have a 46 inch LCD!” “Oh yeah, we have a 60 inch LCD!” “I have a 52 inch plasma in my room!”

Kids nowadays have 52 inch TVs in their bedroom?

I never felt so old in my life.

Until 15 seconds later.

“Why don’t you start the movie?” asked one kid.

“Oh, the tape needs to rewind,” I replied.

And then there was silence.

I asked them, “Have anyone of you seen video tapes before?” Only one 12 year girl had. She said she found a box of them in her parents’ basement.

“Why does it have to do that?” (“that” == “rewind”), interrupted another kid.

So I started to explain “Well, it’s like… um…” I was at a complete loss, what’s a good analogy to teach kids about the why you need to rewind tapes? Their world is all digital, mine apparently is analog. As I tried to figure out what to say, I got interrupted.

“That’s puny! That’s puny! That’s puny!” yelled the smallest kid pointing at the TV while dancing gleefully. Fortunately Crissy walked in, picked up the screaming little kid and teased him, “Short little boys shouldn’t be calling things puny.”

He laughed and squealed, and finally settled down.

Just then the tape stopped rewinding! I pressed Play. Success!

Except that it was a Disney movie. So there were 30 minutes worth of previews. So now I had to fast forward and you knew what came next: “Why can’t you hit Root Menu?”. Anyway, we eventually got everything working.

On the topic of feeling old, it’s a strange feeling being an adult at a party your parents host. Growing up the screaming kids were my peer group, but now all the adults are my peer group. But given the circumstances of a party at my parents’ house, I still associate myself with the kids and not the adults.

Growing up, the adults are the weird people with jobs, that sit around and talk about politics, the economy, and — oh wait.

As the party was winding down, one of the adults asked their kid, “Did you thank Vijay Uncle for showing you the movie?”

And I thought, who’s this “Vijay Uncle” character? :-P

(Because of the British influence on India, Indian kids don’t say Mr. and Mrs., they say Auntie and Uncle.)

So, I guess it’s official, I’m not a kid anymore.

Michael Alix was the Chief Risk Officer at Beat Sterns for two years. This is the same Bear Sterns that collapsed spectacularly due its extremely risky subprime-mortgage related investments.

After failing so miserably at his job, where’s Alix today?

Well, while the country was busy watching the election, Alix was hired by the NY Fed to advise on bank supervision.

Now granted, the job of a risk manager is to analyze risk and submit reports to the senior management who then decide what to do. But, Alix was in a Chief Executive level position, so you’d think that he could influence his firm to avoid and offload the risk.

So Alix either didn’t see the risk coming or he did, but was unable to convince his peers of his assessment. Either way, he was incompetent at his job, yet now he works for the Fed.

Forget being paid to do nothing by working for the Big 3, I should have gone into banking. All you have to do is fail spectacularly and you get a sweet new job.

Or perhaps more accurately, I need to get myself membership to the old boys club.

What happens if you have a 6-foot alligator fight a 13-foot python? Apparently, the fight ends with a draw as they both end up dead. Recently in the Everglades (Florida), rangers found the remains of this epic battle:

The Burmese python tried to swallow its fearsome rival whole but then exploded.

…

The python’s remains were found with the victim’s tail protruding from its burst midsection. The head of the python was missing.

The slightly disturbing picture can be found here.

Experts said that there have been four known similar encounters in the past; in these cases, the alligator either won or the battle was a draw:

The rangers say the find suggests that non-native Burmese pythons might even challenge alligators’ leading position in the food chain in the swamps.

Wow. Now I’m very scared of Florida.

Bailing out the Big 3 automakers is a very bad idea. The reality of the situation is that in aggregate not a single job will be saved by propping by these companies. If you throw money at the problem, you’ll just waste money.

And that’s money that could be used for much better purposes.

Inefficient, poorly run and uncompetitive companies need to fail

Let’s start with the notion that “businesses going under is bad”. That’s wrong. Businesses going under is part of the natural economic cycle that leads to growth and progress. The business that goes under is replaced by a new and better business that buys up the old company’s assets, hires its employees and produces a better product.

Bad companies are replaced by good companies; it’s pretty simple.

For example, way back in the day people used to get ice blocks delivered to their homes. Then the refrigerator was invented and the ice delivery companies went out of business. Sure this was bad for the ice delivery man, but he was now able to get a job as a refrigerator deliveryman, salesman, or assembler.

We see the same thing everywhere. We went from 8-tracks to cassette tapes to CDs and now mp3s. The guy sells Walkmans doesn’t have that job anymore, but now he probably sells iPods.

In summary it’s natural and desirable for bad companies to go under. They will be replaced by something better.

The Big Three are Inefficient, Poorly Run and Uncompetitive Companies

Now, no matter what the government tries to do, the Big 3 will fail. There are a lot of reasons why.

First of all, their products stink. Quality is poor; most American cars need to be replaced in 4 to 5 years. On the other hand, Hondas and Toyotas easily last 15 years. A great example is how my 15 year old Honda Accord sold for more than most comparable 5 year old Big 3 models.

Second, their business model is broken. Normal cars are sold at cost, while all the profits come from pickups and SUVs. By building a business model around low gas prices and discretionary spending, the companies set themselves up for failure.

Third, the Big 3 labor contracts are untenable. Their employees are paid significantly more than the market:

52.5% more than the market…54% more than management and professional workers, 132% more than the average manufacturing wage, and 157% more than the average compensation of all American workers.

These companies pay on average two and half times more than the average American worker!

And they pay employees not to work. As part of a “Jobs Bank”, the Big 3 pay workers to not come to work.

I’m totally working for the wrong company. :-P

Between labor costs and pension obligations, the Big 3 have a $1000 to $1500 cost disadvantage per vehicle. On an inferior vehicle.

Finally, the primary thing the Big 3 are good at is lobbying. For decades, they bribed lobbied Washington to keep gas taxes and mileage standards low. This helped them sell gas guzzlers. So basically, they took the profits and used them to prevent laws that would have forced them to invest in technology which would have helped them stay in business!

Good companies take profits and invest in new technology. Bad companies use it to bribe politicians. It’s misallocation of resources at its finest.

And now that they are about to go under, they come asking for taxpayer money to build technology that they always sneered at.

There are more efficient, better run car makers in the United States

My Honda Accord was made in Tennessee. So was my last car. And my mom’s, dad’s, and sister’s cars were too. And our old Toyota’s were made here too. So were lots of the parts:

Honda, Toyota and the rest employ about 113,000 American auto workers who make nearly four million cars a year in states like Alabama and Tennessee (source).

This clearly shows us that you can have a profitable car company in the United States. The the Big 3 are failing because of their own faults.

Bankruptcy Is The Best Option

Bankruptcy is not the end of world. The airline industry didn’t stop flying when it went bankrupt; likewise car companies won’t stop making cars.

Chapter 11 will let them eliminate debt, bring compensation in line, and reorganize to be more competitive. Chapter 11 was designed specifically for this situation:

• Under Chapter 11, these companies have a chance to adjust obligations and rebuild. Employees will be able to keep their jobs, but at market rates.
• Shareholders will be wiped out. But shareholders have already lost 95% of their investment. And stocks are not guaranteed, every investor knows that he could lose it all. It is an accepted risk. Prudent investors stayed away from these companies, so they aren’t harmed.
• Creditors to the Big 3 will likely be wiped out too, but this risk was built into the bond price already. And again, prudent lenders stayed away from these companies, so they aren’t harmed.

Recently a GM spokesman said the bailout is necessary because “Chapter 11 is not an option”. The arrogance is amazing. The company demands taxpayer money instead of using prudent mechanisms to return to profitability.

The assets don’t disappear

If the Big 3 shutdown, their valuable assets don’t disappear. The factories will be bought by other companies and their employees will be hired by other companies.

We need to let the incompetent go under and have the smart and prudent re-build.

Some people will say, “but there isn’t demand, so all the workers won’t be re-hired.” Well, if there isn’t demand, all those displaced workers would have lost their jobs anyway.

We already have a safety net for the workers

One reason touted for the bailout is to “protect the workers”. Well, that’s why they have been paying unemployment insurance and social security. We have mechanisms in place to help these people already.

And if push came to shove, I’d much rather we give the unemployed money directly, rather than give the money to the bureaucracy to pay them to build cars that no one wants. Aside from being more logical, the former costs less too.

What about the ripple affect?

“[I]f G.M. goes under, so too will many of its suppliers, who do business not just with G.M. but with other car companies as well. That, in turn, will make it hard for those companies to keep the assembly lines going. So the ripple effects of a failure of G.M. or Ford are bigger than we might imagine.”

You mean those companies that produce products no one wants will go under? So we should pay them to produce stuff no one wants?

That doesn’t make sense. Those factories can start selling things that people want and if they have to cut jobs, we have safety nets in place.

Even if just GM collapsed, the failure could bring down the other two companies — and even the U.S. operations of foreign automakers — as parts suppliers run out of money and shut down. (Source)

Not really. These suppliers will need to scale down. This may raise prices a bit or even need to go into Chapter 11 to reorganize, but they won’t shut down.

Here’s some more idiocy: Sen. Sherrod Brown (D-OH) said,

“Letting the industry collapse would also be a national security risk, eliminating companies that were essential in two world wars. If we ever need that national security production for serious defense, for any kind of significant war, it’s gone.”

Ah… the when you can’t think of anything else excuse: national security. This is wrong on so many levels, but I’ll pick the easiest. Detroit’s factories and workers don’t disappear. If we need to build tanks, we can do it.

Also, I’m sure the Honda and Toyota plants in Tennessee and Alabama could be re-purposed to build tanks. I bet they would be better tanks too.

American Taxpayers paying to have jobs sent overseas?

Yup, while the Big 3 are trying to pick your pocket. They are moving jobs overseas: GM Opens $300 Million Russian Plant to Boost Sales.

General Motors Corp., the world’s biggest carmaker, opened a $300 million factory in Russia as it looks to compensate for slumping sales in western Europe and North America.

The plant in the Shushary district on the outskirts of St. Petersburg will produce 70,000 Chevrolet Captiva sport-utility vehicles and the Opel Astra, with plans to manufacture the Chevrolet Cruze compact car next year.

“Our strategy is to become the leading manufacturer in Russia,” Carl-Peter Forster, GM’s chief for Europe, told reporters during the plant opening today. “For us Russia is not an emerging market. Russia emerged long ago.”

Ford’s most advanced plant isn’t in Detroit. The UAW wouldn’t let them build it there. Instead they built it in Brazil.

“Help me Chapter 11, you’re my only hope!”

The bailout plan can be summarized as “Let’s take our least efficient, mostly poorly run and least competitive industries and prop them up.”

While a bailout could help avoid bankruptcy in the short term, it’s just a stop-gap. It won’t address the fundamental fault that these companies are inefficient, poorly run and uncompetitive companies.

Their fundamental problem is that they make cars people don’t want and their labor contracts are too inflexible to allow the company to be competitive.

So the only hope is for Chapter 11. It will let them restructure their debt, labor contracts, and other obligations. And it will give them a fair chance to start building products people want. And if they do, they can return to profitability. If they don’t, they deserve to go under.

Finally, it’s very important to consider the opportunity cost. For every job you “save” at GM, you destroys one somewhere else. That bailout money doesn’t come out of thin air; you need to tax (or inflate) it out of productive sectors in order to help an unproductive sector.

In order to figure out how many people are reading my blog, I hooked it up to Google Analytics. It’s a pretty nifty tool and gives you all sorts of data that doesn’t seem important. :-P

I suppose if I was worried about driving traffic to my blog and doing SEO (search engine optimization) stuff, it would matter; but I just like writing stuff and getting to read it later. I guess it’s kind of like keeping a diary. That people are reading is icing on the cake.

Anyway, back to Analytics. One dataset I found interesting is what web searches people did to stumble on my blog. There were a lot of obvious ones like “vijay bangaru” and “defenestrating”, but the one I liked the most is “bivouac engineering & service co. llc”

That just makes me really happy. :-)

(Defenestrate and bivouac were my roommates’ and my favorite words back in college.)

A couple of month ago, I posted a video from over a year ago of “experts” laughing at Peter Schiff as he predicted this recession. A friend sent me this video which is a nice compilation of Schiff making accurate predictions and the “experts” dismissing him:

It’s really worth watching. Here’s a Schiff quote from 2006:

It’s not wealth that’s increased in the last few years. We haven’t increased our productive capacity. All that’s increased is the paper values of our stocks and real estate. But that’s not real wealth. When you see the stock market come down and the real estate bubble burst all that phony wealth is gonna evaporate and all that’s going to be left is all the debt we’ve accumulated to foreigners.

And as you watch it keep in mind that the people who were completely wrong back then are the ones that are saying the bailouts are necessary.

You’d think after someone is this wrong they wouldn’t interview them on TV anymore, but every morning I turn on CNBC and see these same idiots blathering and spewing not just incorrect analysis, but completely factual inaccurate statements.

It’s really sad.