In spite of my criticism of the auto industry for its banking business models, there’s some good going on in the auto business, too. With one eye studying for an exam, and the other eye flipping through the boob tube channels, I came across an interesting interview. The local PBS show I love to watch, Autoline Detroit, had as its guest Dieter Zetsche, on the Board of Management DaimlerChrysler, and CEO and President of the Chrysler Group. (This interview will be uploaded for viewing soon.)
Now I find Zetsche fascinating, if not brilliant at times. The German who invaded Detroit (as some of those will tell you) has brought some common sense to Chrysler, which is, I think, operating on the most sound business model of all the Detroit 3. On the show, the panel on hand (mostly local automotive writers) got right to questioning Zetsche about the usual, media favorite: the politically correct hybrid. Why are GM and DaimlerChrysler behind everyone else in the production thereof?
Ask a silly question, get a silly answer. Said Zetsche: “there’s not much of a market for them,” and, in addition, how dare him say that “they don’t add to the bottom line.” Give that man a cigar! (Though he can probably afford his own Cubans.) The auto industry has only knuckled to the hybrid movement to keep ‘em all quiet while the car companies go about the business of trying to make money. As it stands, virtually no one wants hybrids, and, they are entirely inefficient for nearly all consumers of automobiles. As Zetsche remarked, they are only usable and efficient under the conditions of close-quartered, urban traffic with heavy road snarls. Virtually no normal, rural or suburban commuter in America can make use of these battery-laden, ultra-hybrids that the Hollywood crowd likes to use for photo-ops before they go home and jump in the Ferrari for a cruise up the coast. As Dieter also remarked, diesels are the way to go in a sense. Considering the current technology available, and the market demand, the hybrid idea is a long way from being an efficient diversion of resources for the auto manufacturers, even with the Feds subsidizing the purchase of one. Of course, DaimlerChrysler caught heck at last week’s auto show for its dual-hemi jeep. “We haven’t forgotten, nor will we ever forget, what makes a Jeep a Jeep,” said Chrysler CEO Dieter Zetsche, standing next to the open-top monster at the 2005 North American International Auto Show.
{ 15 comments }
Is lending corrupt? Do you have a credit card, a mortgage? Are all bankers corrupt?
Mr. Canning, who has been awkwardly cyber-attacking me recently, appears, for starters, to not have a single substantive comment in regards to the theme of the post at issue. His empty comment stems from an unrelated issue that he has -0- concept of. In addition, I think he needs to read up on a few items of considerable importance, especially concerning his constant obsession and flaming of me: (1) fiduciary duty to stockholders; (2) the credit bubble/credit economy and the Austrian view and (3) the ability to sustain a warped business model in the long-term, based on short-term bubble expectations.
In additon, Mr. Canning can’t quite make out the difference between (1)thoroughly bad business models relying on a Fed-induced credit bubble to sustain profits, and (2) the act of lending itself. Amazing, but this gentleman repeatedly shows he has no such knowledge of any of the above.
Mr. Canning, the issue is not lending per se. What Karen De Coster has noticed, as have several Wall Street observers, is that the auto companies seem to have lost the ability to generate earnings from auto manufacturing. Auto financing can only mask this weakness temporarily, while Fed policies engender artificially low interest rates.
What is the “Austrian view” of businesses who lend?
You made the claim that the business model is corrupt. However, you have not substantiated this claim in any way. I am genuinely curious.
As to the business model, I was aware of it prior to Karen’s posting about it. That it was a sign of corruption is what was new to me.
Mr. Henderson, indeed this is a conundrum that the Bears and Austrians are seizing upon as part of the credit bubble/credit boom. And goodness, I thought Mises.org has been quite vocal and heroic in its shakedowns of such. I was so hoping that Canning – who appears to not read mises.org, but only post irrelevant comments – would get there on his own, since it is such a basic tenet of Austrianism, but instead, he seems a bit hung up on one little word that has snuffed his ability to rationalize.
I must have missed the article (too busy reading books to see it?), do you have a link?
Canning, see The Quirky Nature of Credit by Christopher Mayer.
https://mises.org/fullstory.aspx?control=981&id=70
Christopher Mayer is a commercial lender for Provident Bank in the suburbs of Washington, D.C.
Interestingly, I have read a few articles by Mayer. I have also read The Theory of Money and Credit, Prices and Production, America’s Great Depression, Time and Money, as well as the relevant portions of Human Action and Man, Economy, and State. I understand business cycle theory just fine.
My question is, why is what GM is doing more “corrupt” than what Mr. Mayer does himself? Further, as anyone aquatinted with the ABCT knows, consumer lending is not the root cause of the business cycle. Rothbard (2000) writes,
“Another favorite whipping-boy during recent booms has been installment credit to consumers. It has been charged that installment loans to consumers are somehow uniquely inflationary and unsound. Yet, the reverse is true. Installment credit is no more inflationary than any other loan, and does far less harm than business loans (including the supposedly “sound” ones) because it does not lead to the boom-bust cycle. Mises analysis of the business cycle traces causation back to inflationary expansion of credit to business on the loan market. It is the expansion of credit to business that overstimulates investment in higher orders, misleads business about the amount of savings available, ect. But loans to consumers qua consumers have no ill effects. Since they stimulate consumer spending rather than business spending, they do not set a boom-bust cycle into motion. There is less to worry about such loans, strangely enough, than any other.”
Now that we have the business cycle worries cleared up, why is this business model corrupt? At worst it is a risky stategy, but it seems that some think it is a good one.
Corrupt can also mean to alter from the original. Ms. De Coster is not accusing the auto companies of illegal behavior, a different definition of corrupt. The negative is that automakers have been tempted by Fed-induced, artificially low interest rates to boost sales via zero interest mortgage financing – rather than by improving the attractiveness of their products to consumers.
Now, if Chrysler could only learn to make a transmission that doesn’t leak profusely…
GM can’t make, or at least hasn’t made in a really long time, a profit through manufacturing and selling cars. Unfortunately, the vast majority of their equity is tied up in this industry. Most of their future obligations through pensions and medical expenses are also tied up in this industry. Their situation is such that they lose LESS money by making as many cars as possible, and then selling them at a loss with bundles of hundred-dollar-bills attached to them, then they would by letting the plants idle, and management is unwilling to take the hit to the stock price that would be involved in divesting themselves of the manufacturing portion of the business. GM now makes essentially all their profit through financing the cars they sell at a loss, insuring the cars they sell at a loss, and soliciting mortgages to those people to whom they sold cars at a loss.
Regardless of whether you believe the Austrian Business Cycle Model, interest rates are going to rise over the next few years, and this will drive away their finance profits and decrease their domestic sales volume – bad news for GM, and a bailout is probably looming. I think their management has made questionable calls from an automobile manufacturers perspective, as well. They killed Oldsmobile at a time when its product was arguably the best in their stable. The Camaro, GMs only real Mustang-fighter, is dead, and the GTO looks like a Cavalier and is imported, to boot. The SSR was an answer looking for a question, not a good sports car, and not a good truck either. They bought Saab based on what Saab was and then decimated the local management, making it just a GM brand. They may be forced to buy Fiat (ugh). They stress feature content (re: OnStar on every vehicle) over product quality. Disclaimer: two of my three vehicles are GM, a 96 S-10 and an 86 Fleetwood.
For an interesting take on the death of Oldsmobile, see this link.
http://auto.consumerguide.com/auto/editorial/imho/index.cfm/act/opinion43
I think that maybe some people are reacting to this development and to other companies who have their eyes set on expansion into “financial services” (like big-bad Walmart). Perhaps some are concerned that such conglomeration and Fed-induced “success” (based on business/government becoming more & more indistinguishable) can lead only to eventual competition for the ultimate socialist prize: Ministries.
hello all, im not sure whether this is the right place but was hoping someone might explain to me as to why credit is soo important in contemporary economies?
slim,
Sir Alan Greenspan, back when he was a lowly but principled commoner, explained why the issuance of non-asset-based credit facilitates the deficit spending that is the “shabby secret of the welfare statists’ tirade against gold”:
“Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.”
http://www.usagold.com/gildedopinion/Greenspan.html
And as the state’s appetite is insatiable, the credit grows exponentially, until it can no longer be absorbed and the Ponzi (for that is what it is) collapses.
Comments on this entry are closed.