The Price Of Solvency

There’s an old parable of a group of frogs.  Things were getting difficult in the pond, so the frogs demanded a king.

They were sent a new king; a stork.

Storks, naturally, eat frogs.  The frogs weren’t happy about this – but hey, they’d asked for a king, rigt?

With that in mind – what’s the price of effectively socializing the auto industry?

(Besides going down the same road that led us from Jaguar/Cooper/Lotus/Bentley/Rover to British Leyland, obviously?)

Eternal stagnance, perhaps?

The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat.The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it. Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts.

Perhaps the problem is that we have a generation of reporters, government figures, businesspeople and “thinkers” who don’t remember the nadir of the seventies, when the US economy flirted with socialism (and much of the rest of the Western world went way past flirting, figuratively ending up in the locker room with the whole metaphoric soccer team on the rhetorical first date).  The pain of the Carter years has dimmed in the minds of too many – or, perhaps those teachers, reporters and other eminementoes were biding their time in college and were immune to it?  I don’t know.

“We’re seeing a more statist world economy,” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run.”

It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits. Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector.

“If the rules of the game are changing, people are reluctant to invest in the stock market,” Sapienza says.

Which slows everything down.

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