GM and Chrysler

Using the taxpayers' money to temporary bail out GM and Chrysler will be a classic moral hazard. Anway, even if they lend out the money, they will eventually ask for more money again. Looking at AIG will tell you what will be the outcome of bailouts.

This time should be a time to cut loss and minimise damage. Be realistic, not all jobs can be saved. Instead of letting it bankrupt and have a million of loss of jobs, minimise the number of job losses to maybe half a million. It is painful but at least half will get to keep their job.

Next, there should be a possibility to merge the 2 frail giants together. The purpose is not to cut down on the general workers. The purpose is to cut the high cost of management. If a CEO pay is $20 million, cutting them by one will decrease the number of workers made redundant. This is to ensure that the people still receive cash flow. The main objective is to ensure that everyone still gets to have a shelter and have meals.

I can assure that those executives will argue that top management create value more than what they get paid. But at this point of time, due to macro conditions, they can do little to add value. Besides, they were slacking for the past few years while Toyota and Honda gained market share. Shame on you GM and Chrysler management.

All existing management should have their bonuses kept unpaid and into prepaid accounts so that when they really perform, the huge chunk of bonuses will then be paid out. The purpose is not to pursue short term profits but maximise the firm's value.

The management have been incentivised by the potential government intervention so much that they create publicity about the impact of them going bankrupt. They really did a great job on this because most people around the world roughly knows the impact of them failing and creating lots of Hoo Ha. If only they did this in running the business. It would have been brilliant.

At this point of time, unions shouldn't go on strike, because times are bad. They should strike in good times rather than in bad times. Mutual understanding makes everyone better off.

Population and Growth

Wealth was increasing exponentially during the baby boomers years because of a rise in world population that increases aggregate demand. Currently, the world population is peaking with an increasing numbers of greying population.

Looking at Japan, with its ageing population and low birth rates, it is clearly not growing. A bet can be made if birth rate increases enough to grow the population, economic growth will happen.

Currently, the reason for the optimism of commodities is because the current availability of resources are not enough to sustain everyone. Why is Africa so poor? It may be that countries exploit their resources, leaving the African people to poverty. Scarce resources is the main reason.

As there are economic cycles, I'm sure there are population cycles. Once the baby boomers die, the population cycle will be at its trough and a new upswing will happen. It may take 50 - 100 years depending on the cost of living.

Cost of living is rising, which may mean that resources are getting scarcer and scarcer.

The stages of the current crisis

The current crisis originated from the subprime problem.

Stages:

1. Subprime problem

Loans approved to those that cannot afford. Rise in housing price created wealth from nowhere. Market fundamentalism. Once it is unsustainable, the problem compounds just as how wealth is compounded.

2. Systemic problem of financial system

Fall of Lehman Bros and Bear Stearns. Bank panic. Lack of information due to moral hazard and adverse selection caused the financial system to fail. No one trust each other.

3. Credit Crunch

Letters of Credit, the essential for trade, becomes crippled as banks' credit rating diminishes.

4. Consumer Crisis

I argued back then that consumers were not affected yet.

This crisis consisted of increasing unemployment and the unsustainable use of credit cards usage. Taking a perspective of a company, if it spends more than it earns, it will be in trouble. Same for consumers because of sky high interest expense of 24%. Bad debts will rise.

This major sign is in the process now with increasing ongoing redundancy. Companies can save cost on salaries and wages but in the long run, if consumers do not have money, how are companies going to earn? When the velocity of money slows, deflation will be in cards.

5. Vicious cycle

The crisis will spiral deeper if government does not intervene. Decrease in aggregate demand decreases capacity needed, more joblessness.

Way

Long term - improve infrastructures and spending on research and development that aids mankind, not on the study on Alaskan Crabs' mating behaviour.

Short term - Follow Bush and encourage everyone to live the American Dream, go to Disney Land and enjoy all you can. It is but a dream, idealistic but not realistic.