General Motors Files for Bankruptcy Protection
By U.S. News & World Report
With time running out on its June 1st restructuring deadline, GM expected to file for bankruptcy today. ABC World News reported last night it is a "foregone conclusion" that GM "will file for bankruptcy" Monday, "all in an effort to survive." One "estimate of best case scenarios predicts that GM and Chrysler's bankruptcies together will cost individuals more than $13 billion. Local governments, more than $5 billion."
NBC Nightly News reported "all the pieces are in place for General Motors to go bankrupt" after "54% of those holding $27 billion in GM bonds agreed to swap that debt for a stake in the new GM, clearing the path for a potentially smoother, quicker GM bankruptcy." The Detroit Free Press also reports that "a deal with bondholders not to oppose GM's bankruptcy plan was seen as an important step to helping speed GM's bankruptcy process." According to USA Today, "the U.S. government will invest an additional $30.1 billion in General Motors (GM) to finance its bankruptcy reorganization to be filed Monday, President Obama's auto task force said in a statement."
In a front-page story, the Washington Post says the restructuring plans call for "about 60 percent of the new GM" to "be owned by the United States, about 12 percent by the governments of Canada and Ontario, a union health trust would own 17.5 percent, and the company's current bondholders would get 10 percent." Although GM "now joins Chrysler as the bankrupt duo of Detroit's once-formidable Big Three," the Los Angeles Times points out that "the Obama administration is touting the bankruptcy filing as the beginning of a new era for GM, a painful but necessary court-supervised restructuring that will make the company profitable again and a leader in producing fuel-efficient vehicles."
The New York Times profiles 31-year-old Brian Deese, "a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry." Yet, "according to those who joined him in the middle of his crash course about the automakers' downward spiral, he has emerged as one of the most influential voices in what may become President Obama's biggest experiment yet in federal economic intervention."
Meanwhile, the New York Times notes on the front page of its business Day section, "With General Motors about to follow Chrysler into bankruptcy, the nation's ability to bounce back from the steep recession is being hobbled."
Chrysler Could Exit Bankruptcy As Early As Monday The Wall Street Journal reports on its website, "Chrysler LLC could exit bankruptcy reorganization as soon as Monday, after barely a month in Chapter 11 protection," as "Judge Arthur Gonzalez of the U.S. Bankruptcy Court in Manahattan is expected to approve the sale of most of Chrysler's assets on Monday to its alliance partner, Fiat SpA."
The Great Paradigm Shift
John Loeffler provides a good summary of the coming paradigm shift heading at Americans at an increasing speed. For several years, Loeffler has been talking about a window from 2009 to 2012 as the critical years when all the pieces begin to fall into place to create what Jim Pulplava has dubbed, "The Perfect Financial Storm."
In his July 18 episode of his weekly "Steel on Steel" webcast, Loeffler hosts:
- James Kunstler - The Long Emergency
- Warren Brucy - The Second Great Depression
- Matt Simmons - Twilight in the Desert
As we come out of this crisis, life as we know it will be very different than it has been. The Great Consumer Economy is coming to an end.
What is a paradigm shift? A paradigm is the way people perceive the world. As people go through a paradigm shift, there first inclination is to try to get things back the way they were. This is evident right now in our political leadership. Both major political parties are promising that the good times will continue to roll, in spite of the clear warning signs the economy has given us in the last year.
As people begin to recognize that perhaps things are not going to be like they used to be, they accept the new paradigm, but they still try to play by the old rules. Loeffler gives the collapse of the Soviet Union as an example. When the Soviet Union broke apart from 1989-1991, the paradigm changed. Unfortunately, the American political and military leadership still tried to play using the old rules of the cold war. It wasn't until 9/11 that Americans began to realize that the world was very different from the one we had lived in from 1946 to 1990.
The third stage = new time, new rules, new methods. The faster you get to that stage, the better you will adapt. Right now, the world is adapting very slowly to the new paradigm that is being thrust upon us.
Where are we now?
IndiMac Bank is the latest bank failure. The way we kept the economy afloat the last 15 years has been through inflation. Starting in the early 1990s, Alan Greenspan, then chairman of the Federal Reserve, started dumping liquidity into the markets. The result was the tech bubble of the late 1990s. By 1998 to 2000, everyone with any spare cash was investing. The news was buzzing with small investors who were suddenly millionaires (on paper). People with little, if any, investing experience were quitting their jobs to become day-traders. As this bubble began to collapse in 2000, the big investors got out in time, and a lot of little investors lost their shirts. Fortunately, for the government, 9/11 provided cover for the economic downturn and mild recession that started in early 2001 (months prior to 9/11).
Following 9/11, Alan Greenspan began to inflate the money supply again in an effort to bring the economy out of the mild recession, and the result this time was the housing bubble. Cheap, "no money down" loans flooded the market, and home buyers who were unqualified under old rules were encouraged by the government and by banks to buy into the housing market. Independent mortgage brokers began to spring up to meet the demand of buyers who were either moving into the housing market for the first time, or existing homeowners hoping to cash in their expanding equity for a bigger home plus cash to continue their consumer buying spree.
This combination of low interest rates, adjustable rate mortgages, and increasing home values provided enough stimulus to keep the economy growing until it all blew apart in August 2007. This is when the first edge of the large wave of bad loans created in late 2003 to 2004 (with three-year adjustable rates) began to readjust, and the home owners were unable to make their new mortgage payments. As a result, they defaulted.
This began a cycle that has not ended. Homeowners default, home values go down, homeowners who are unable to make their payments try to sell their home only to discover they now owe more on their home than the home is worth. This, in turn, drives more homeowners into default.
It took several months, but now we are watching the lending institutions start to collapse under the weight of these bad loans.
Coming Economic Crisis?
One of the issues on my radar is a potential coming economic crisis that some are referring to as "The Perfect Storm." For the past year I have been an avid listener of Jim Pulplava's weekly web cast, "Financial Sense Newshour." You can add the podcast and download more than three hours of news and financial information each week.
There is just far too much information available on Pulplava's web site to even provide a summary of his beliefs. The best option is to begin reading for yourself. Not only will you find his web site very informative, but also quite interesting.
I suggest you begin with a series of articles he has written under the heading of "The Perfect Financial Storm? Financial Storms Heading Towards the U.S. Economy."
The issues that lead financial advisors to suggest the U.S. economy is heading into turbulent times include:
- Federal Reserve's failure to allow the natural ebb and flow of the economy to occur, thus creating asset bubbles like the recent housing bubble.
- The Fed's monetary policy that is leading to a continual devaluing of the U.S. Dollar and the concern that too much U.S. debt is in the hands of countries not friendly toward the U.S. (e.g. China, Russia, etc.). Just this past week, for example, NBC News reported on the strength of the Canadian Dollar, which is a sign of the U.S. Dollar's weakness.
- The threat of peak oil, that the world will enter into a real oil crisis as the demands from developing countries like China continue to grow exponentially while the production of oil is declining. This is coupled with the strong environmentalist movement within the U.S. that prohibits the exploration for new sources of oil.
- The growing debt crisis within the U.S., both the federal debt and consumer debt. Again, this is compounded by the reality we owe countries like China our future.
Pulplava's co-host for "The Financial Sense Newshour" is John Loeffler. I first started to enjoy Loeffler's perspective as an avid listener of Chuck Missler's ministry, Koinonia House. Loeffler is the host of a weekly web cast called "Steel on Steel." He has defined a crisis "target window" of 2009 - 2012 as the period of greatest threat. He believes that it is during this three year period we will see these issues begin to metastasize.
For his part, Chuck Missler has also released a new briefing pack he is calling "The Vortex Strategy." As the promo clip states:
Compiled from public and private sources, Dr. Chuck Missler, an internationally known business executive, outlines our current economic predicament and defensive steps you can take to lessen the impact of the impending economic crisis.
I've listened to "The Vortex Strategy" and I'll post a review of it at a later date.
My Perspective on "The Perfect Storm" Scenario: as I listen to the various parties mentioned above talk about "The Perfect Storm" and draw conclusions, there is much that makes sense. I admit up front that I am a new student of economics, but I find it fascinating. With that said, I also am a student of history, and history and economics make an interesting combination. Like history, no one can predict what will happen in the economy tomorrow, next week or two years from now. Like history, however, we can learn from our past and make value judgments by observing historic trends.
Clearly, or so it seems, we are due for an economic correction of historic proportions. The last major correction in the economy occurred in the late 1970s until 1981. As Pulplava points out, it was Fed Chairman Paul Volcker who prescribed the harsh medicine that allowed the economy to cleanse itself and brought an end to the period of "stagflation" that marked the 1970s and early 1980s.
Since 1983, we have watched the economy grow, and grow, and grow with only a few minor corrections (i.e. recessions) in 1987, 1991, and 2001. We have also watched two historic asset bubbles expand and explode during this same period of time: the tech stock bubble of the late 1990s and the housing bubble from 2002 to 2006.
Moreover, the recent rate adjustment (September 2007) by the Fed was in response to the current crisis in the mortgage sub prime market and fears that this crisis could spill over to affect the whole economy.
Yet, in spite of all the indicators, I have to question whether this is a real crisis of historic proportions or another hiccup in an overall upward trend? I can't help but remember the doom and gloom forecast by the late Larry Burkett in his 1991 book, The Coming Economic Earthquake. Using what seemed to be credible data at the time, Burkett predicated an economic earthquake that would destroy the U.S. economy (and all of us along with it). The cause, in 1991, was the mounting federal debt.
As the 1990s rolled on, the next "coming crisis" that promised to bring absolute destruction to America was Y2K. Authors like Michael Hyatt sold many books first identifying the crisis and then helping us understand what we must do to survive the crisis. Again, the indicators were very credible. Major corporations were spending millions of dollars to correct the problem. Personally, I knew of several IT people who were assigned to various Y2K projects over the course of a three year period. While the Y2K advocates were publishing their books, selling "survival kits" and doing constant radio interviews, there were few voices of caution. One such man was Steve Hewitt, publisher of Christian Computing Magazine. In the end, the Y2K bug didn't live up to expectations. To this day, I do not know if it was a serious crisis that was avoided due to the hard work of many nameless men and women or if it was truly a hoax.
I bring up these two examples because as I read and research "The Perfect Storm" scenario, I find myself questioning if this is not the same hyperbole that fanned the flames of those two crisis. Clearly, I am not capable of providing an answer to that question today, but it will certainly interest me to watch this scenario unfold over the next three to four years.