Big Three failure may be catastrophe ?? or Worse ??

Big Three failure may be catastrophe
Blow to economy could be costlier than bailout, automaker CEOs say
By S. CARTY and B HAGENBAUGH USA Today

When the heads of General Motors, Chrysler and Ford went to Capitol Hill last week, they tried to persuade lawmakers that if they go under, an already fragile U.S. economy will be dealt a blow far costlier than the $25 billion in aid the companies are seeking.


As lawmakers wrestled, then decided to head home and not quickly approve a bailout, foremost in their thinking was a question the Big Three CEOs apparently failed to answer: If we let these guys fail, how bad will it really be for the economy?

Critics say Detroit created its own problems with poor planning and inferior products, and cite a healthier foreign auto industry operating mostly in southern states that isn't seeking a taxpayer bailout. But even Toyota said over the weekend it fears the impact on the parts suppliers it uses if the U.S. auto industry collapses.

Moody's Economy.com chief economist Mark Zandi estimates that 2.6 million jobs -- about 1.9 percent of the U.S. work force -- would be lost if GM, Chrysler and Ford were to go under.

That includes more than 255,000 people directly tied to the three companies and another 2.3 million whose jobs are indirectly dependent -- everything from people who work in the steel, glass, fabric, tire and electronic industries to the barista who makes $4 cappuccinos for the ad executive who'll be out of work when his auto industry business ceases to exist.

Zandi argues the economy is too weak to absorb that fallout.

"This could be the thing to push us over," he says. "The ripple effect is like throwing a big boulder into the economic pond."

The auto industry is woven into the grass roots of the U.S. economy, through its dealer networks, the advertising it buys in newspapers and local TV and radio stations, the health care it buys for its workers and their families and the retirees it supports.

The domestic auto industry supports nearly 800,000 retirees and spouses with pensions and, until recently, health care for everyone. Now that's being cut back for white-collar retirees, but if the automakers file for bankruptcy, they could shed their pension costs and force the government to pick up the tab.

Advocates of a bailout argue that if one of the Big Three fails, it could take down the entire supply chain that cuts a wide swath from Wisconsin to Ontario, Canada, and south from Florida to Texas. As Toyota officials pointed out, the effect would be on all companies making vehicles in the USA.

The impact of the industry woes already is being felt beyond Detroit. Saturday, a Chrysler-Dodge dealer in North Brattleboro, Vt., closed after 20 years, citing slumping sales. It became one of the projected 700 dealers nationwide expected to have closed by the end of this year.

Advertising agencies and media from New York to local TV stations in New Mexico are seeing revenue dry up because the automakers and their dealers are spending less money hawking cars. Suppliers in North Carolina, host to roughly one-quarter of the parts-manufacturing base for the auto industry, are declaring bankruptcy at an alarming rate.

'Very difficult judgments'
The ripple effect of an industry collapse could further trim consumer confidence and unemployment, said Lyle Gramley, a former Federal Reserve Board governor who is senior economic adviser at the Stanford Group.

"As a general principle, I don't think that bailing out individual companies is a good idea," said Gramley. However, "You have to contemplate the possibility of 1 million employees losing their jobs and the entire industry at risk" if an automaker were to fail.

Comerica Bank chief economist Dana Johnson said there are some "very difficult judgments" for lawmakers to make about the potential impact an auto industry failure would have on the economy. If one or more of the companies were to go under, the U.S. government would be on the hook for unemployment benefits, retraining and pension obligations while receiving less in taxes, he said.

"There are roughly two parts producers for every employee at the car companies, and there are a lot of vendors -- steel producers, paint producers, glass producers, business services, accounting, advertising," he said. "There's no question that it is an important industry, that there are linkages to employment elsewhere."

Zandi and other economists argue there is a better way to aid the auto sector than to provide bailout loans.

There is growing support for allowing the companies go into bankruptcy, using government funds to guarantee financing from banks. That would allow the automakers to restructure, including tearing up old labor contracts and reducing their sizes. Government support could give consumers confidence that the car companies would exist after bankruptcy, soothing worries about car warranties and availability of replacement parts.

"Like the airlines, I think they should go into Chapter 11 bankruptcy and start with a clean slate," said Michael Cusumano, a professor at MIT's Sloan School of Management who has written two books on the auto industry. He said reorganization should include replacing management.

But then, there are two auto industries in the U.S. The first, based in and around Detroit, is GM, Ford and Chrysler. The second is sprinkled around the Southeast and includes foreign automakers Toyota, Honda, Subaru, Nissan, BMW and Mercedes-Benz.

Parts suppliers are spread out between them "like pearls on a necklace" along the highways connecting the South and the Midwest, said Thomas Klier, senior economist with the Federal Reserve Bank of Chicago.

Suppliers in the past tended to focus on one customer, but now almost all have overlapping customer bases. That's why Toyota is worried about the Big Three. About 75 percent of Toyota's suppliers here are North American companies who also make parts for the Detroit companies.

"We are concerned with the industry in general, but we're mostly concerned about our suppliers," Toyota spokesman Mike Goss said. "If the worst happens in Detroit and these companies suffer, we're worried about their longevity as well."

Russian Credit Collapse getting worse ??

Putin Promises Russians to Prevent Another Financial Collapse

By H Meyer L Pronina

(Bloomberg) -- Russian Prime Minister Vladimir Putin vowed tax cuts, defense of the ruble and ``everything'' needed to prevent the kind of financial crises that shook the country after the collapse of the Soviet Union.

Among the measures unveiled by Putin today to counter the effects of the global economic crunch are corporate tax cuts, higher welfare payments and increased government spending.

``We'll do everything we can to prevent a repeat in our country of the problems of past years, the collapse of past years,'' Putin told the annual congress in Moscow of the ruling United Russia party which he heads, broadcast live on state television. ``We have amassed sizable financial reserves which will give us the freedom to maneuver, allow us to maintain macroeconomic stability.''

Putin, 56, is bolstering his public role in response to a global slowdown that has punctured Russia's 10-year oil-fueled boom, sparking growing speculation that he may seek to return to the Kremlin as president next year.

Putin remains at the center of power after handing the presidency in May to his chosen successor, 43-year-old Dmitry Medvedev. He may persuade Medvedev to step down, triggering snap elections that would enable Putin to reclaim the No. 1 post for up to 12 years under a new six-year presidential term, analysts say.

``Medvedev can announce that he isn't coping and it's better if an experienced political leader takes the reins again,'' said Leonid Sedov, a political analyst at the Levada Center research group in Moscow.

Oil, Gas Exports

As the U.S., Europe and Japan slip into recession, the price of oil has fallen to almost $50 a barrel in New York from a July high of almost $150, hurting Russia, the world's largest energy exporter which relies on oil and gas for two-thirds of its export earnings.

Russia's economic growth will slow to 3 percent next year after average expansion of 7 percent a year since 1999, the year after the 1998 financial default, the World Bank estimates. The economy grew 8.1 percent in 2007.

Russia in August 1998 defaulted on $40 billion of debt and devalued the ruble, wiping out the life savings of millions of people overnight and pushing the government to the edge of bankruptcy.

Russia ``won't allow a spike in inflation or sharp changes in the ruble's exchange rate,'' Putin said. Bank deposits are safe in Russia since 98.5 percent of all retail deposits are fully covered by a state guarantee, he said.

Tax Cuts

Putin announced that the government will cut the corporate profit tax rate by 4 percentage points in January, reduce taxes for small businesses and speed refunds of value-added tax. Unemployment benefits will rise next year to 4,900 rubles ($177.79) a month as ``structural'' labor market changes loom, he said.

Plans to inject funds into the health and education sectors and social spending under a long-term strategy until 2020 will not be abandoned, Putin promised.

With Urals crude already $20 below the $70 average required to balance Russia's budget next year, the government is depleting its reserves, the world's third-largest.

Already Russia has spent 24 percent or $144.6 billion of its central bank stockpile since early August, mostly on a failed attempt to defend the ruble, which has lost more than 17 percent of its value against the dollar during that period.

The tax cuts announced today amount to 550 billion rubles, including 400 billion rubles in profit tax relief, Finance Minister Alexei Kudrin said. Putin also pledged 50 billion rubles for the defense industry and 83 billion rubles for new housing.

Boosting Liquidity

The government has already pledged more than $200 billion in loans, tax cuts, delayed tax payments and other measures to boost liquidity in the financial system during the credit crunch.

Putin accused certain politicians of complacency inherited from the years of high prices, which he criticized as ``absolutely unacceptable'' in today's crisis. He didn't name any of the politicians he attacked.

``This will inevitably lead to mistakes that will cost us the trust of the Russian people,'' he said in his speech. ``In difficult circumstances, the real capabilities of public institutions become clear.''

Putin next month will once again take center stage by holding a live call-in show on national television.

Putin Call-in Show

Putin has held a nationwide call-in show every year since 2001, broadcast live and lasting several hours, with questions on a wide range of issues submitted by TV link-up, phone and Internet. The event dominated TV news coverage on the days it aired.

Russia's lower house of parliament on Nov. 14 and Nov. 19 approved in two of the three required readings a constitutional amendment that would extend the president's term to six years from four.

The measure is expected to secure final legislative approval by mid-December. It would allow Putin, who stepped down as president in May after serving two consecutive terms, the constitutional limit, to serve at least another 12 years should he again become president.

Depression Or Recession ??

Crisis Hits Main Street as Employers Cut More Jobs (Update3)
By S. Chandra and R.Miller
(Bloomberg) -- U.S. payrolls plunged in September, signaling the economy may be heading for its worst recession in at least a quarter century as the 13-month-old credit crisis on Wall Street finally hits home on Main Street.
Employers cut the most jobs in five years in September as cash-squeezed companies pulled back in an effort to bolster pinched profits. In its last employment report before Americans choose their next president, the Labor Department said the unemployment rate was 6.1 percent, a climb of 1.4 percentage points from a year before.
``If credit markets remain dysfunctional, the current recession could turn out to be as severe as any in the postwar period,'' said former Federal Reserve governor Lyle Gramley, now senior economic adviser at the Stanford Group Co. in Washington.
The spreading crisis is also having reverberations on the campaign trail, as polls show anxious voters increasingly see Democrat Barack Obama as the candidate best placed to see the U.S. through its economic travails. The unemployment rate has only risen twice in the year leading up to elections since World War II, and in each case the incumbent party lost.
`This country can't afford Senator McCain's plan to give America four more years of the same policies that have devastated our middle class and our economy for the last eight,'' Obama, 47, said in a statement.
McCain's Reaction
Arizona Senator John McCain, 72, took the opportunity to paint his opponent as a tax-and-spend liberal, whose prescriptions would exacerbate the crisis.
``Unlike Senator Obama, I do not believe we will create one single American job by increasing taxes, going on a massive spending binge, and closing off markets,'' McCain said in a statement. ``Our nation cannot afford Senator Obama's higher taxes.''
Job losses accelerated as the credit crisis deepened last month, forcing the failure or government takeovers of Lehman Brothers Holdings Inc., Fannie Mae, Freddie Mac and American International Group Inc.
The figures came hours before the House of Representatives passed a $700 billion rescue plan for the U.S. financial industry pushed by Treasury Secretary Henry Paulson. The Senate approved the legislation two days ago after the House rejected an initial version of the bill Sept. 29.
Market Reaction
Stocks rose and Treasury securities fell. The Standard & Poor's 500 index climbed 1.8 percent to 1,134.6 at 1:39 p.m. in New York. The yield on the benchmark 10-year note rose to 3.71 percent from 3.63 percent late yesterday.
Today's report showed that hours worked -- considered a good proxy for the state of the overall economy -- matched the lowest level since records began in 1964. That indicates the likely current recession may be at least as severe as the 1981-82 slump, during which gross domestic product shrank by 2.7 percent.
Payrolls fell by 159,000 in September, the Labor Department said in Washington. Aside from a 9,000 gain in government payrolls, all major categories showed declines except education and healthcare.
``The really bad news here is that job losses are now widespread,'' said Nariman Behravesh, chief economist at Global Insight Inc., a Lexington, Massachusetts, forecasting firm. ``The problems in housing and manufacturing are now spreading everywhere. We are in a recession, there is no debate about that.''
Health Services
Even the vibrant health-services industry is showing signs of succumbing to the economy's troubles. Health care employment rose 17,000, about half the average monthly gain for the prior 12 months.
Walgreen Co., the largest U.S. drugstore chain, reported Sept. 29 that its profits rose less than analysts estimated after it posted its smallest sales increase in a decade.
A private report today showed that services-industry growth remained stagnant in September. The Institute of Supply Management's non-manufacturing index slipped to 50.2 from 50.6 the month before. Fifty is the dividing line between growth and expansion.
Total payrolls were forecast to drop 105,000 after declining by a previously estimated 84,000 in August, according to the median of 76 economists surveyed by Bloomberg News. The jobless rate was projected to remain at 6.1 percent.
Rate Forecasts
Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said the unemployment rate may eventually rise to more than 7 percent as the credit crunch takes its toll on the economy. If that happens, that would make the overall rise in unemployment the biggest since the early 1980's.
Edelmira Clark, 53, of Chicago, said she was concerned about losing her job as a hotel housekeeper. Her company has already cut her work hours to two days a week.
``I'm trying to find a part-time job in the morning to balance, because I can't do only two days of work,'' said Clark, who immigrated to Chicago from Belize in 1997. ``But a lot of people, my friends, have lost their jobs for good.''
Workers' average hourly wages rose 3 cents, or 0.2 percent, to $18.17 from the prior month. Hourly earnings were 3.4 percent higher than September 2007. Economists surveyed by Bloomberg had forecast a 0.3 percent increase from August and a 3.6 percent gain for the 12-month period.
After today, the total decline in payrolls so far this year has reached 760,000. The economy created 1.1 million jobs in 2007.
Americans will go to the polls on Nov. 4 and the October jobs report is due Nov. 7.
`Angry' Voters
``Voters are extremely angry, and they want someone to blame,'' said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis.
Obama has opened up a lead over Republican rival John McCain in the aftermath of their first debate and amid growing concerns about the economy, according to a Pew Research Center survey taken Sept. 27 to Sept. 29. A mid-September poll from Washington- based Pew had shown the candidates were in a statistical tie.
Earlier in September, a Bloomberg/Los Angeles Times poll showed more respondents said Obama would do a better job handling the financial crisis than McCain, and almost half of the voters believed he had better ideas to strengthen the economy than his rival.
Factory Firings
Factory payrolls fell 51,000 after decreasing 56,000 in August. Economists had forecast a drop of 57,000.
Today's report also reflected the housing slump. Payrolls at builders declined 35,000 after falling 13,000. Financial firms decreased payrolls by 17,000, the most since November last year.
Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 82,000 workers after eliminating 16,000 in the previous month. Retail payrolls slid by 40,100 after a 25,400 drop.
In the past month, Hewlett-Packard Co., the world's largest personal-computer maker, announced it will cut 24,600 jobs, and auto-parts maker Federal-Mogul Corp. said it would eliminate 4,000 positions globally.
Marriott International Inc., the world's largest hotel chain, yesterday reported third-quarter profit fell 28 percent as U.S. companies and consumers cut back on travel.
Without action from Congress, ``the resulting credit squeeze could threaten businesses,'' Chief Financial said on a conference call. There are ``tens of thousands of jobs at stake in our company alone, and we are typical.''
Mounting job cuts will further limit consumer spending, which accounts for more than two-thirds of the economy. A Bloomberg survey in September predicted spending will be unchanged this quarter, the weakest performance since 1991.
The ISM on Oct. 1 said manufacturing shrank in September at the fastest pace since the last recession in 2001. The odds the central bank will lower its benchmark rate by a half percentage point, to 1.5 percent, were almost 100 percent today, up from 32 percent a week ago.