Searching for answers to crisis

Don Stowers
Editor-OGFJ

Our economy is in shambles, and we just elected a new President who inherits the mess. The financial sector is being hit the hardest right now, but no industry – not even the oil and gas business – is immune to the turmoil.

Just this morning, Citigroup, the largest bank in North America, announced it is cutting 52,000 jobs and will reduce expenses by 20%. This comes on the heels of similar, but smaller, cuts by such venerable institutions as Bank of America and American Express.

On Nov. 4, US voters chose a new course for the nation. For better or for worse, we need to help the new administration in Washington take the steps necessary to get the economy back on the right foot. However, the $64 question is: what are the “right steps?”

Here is where the basic philosophies of conservatism and liberalism collide. Do we want greater government involvement in the form of so-called “bailouts,” which some call corporate socialism, or do we want to stand back and let the markets work this out?

One would expect Democrats to favor the handouts, but it was amazing to see the leadership of both parties, including both presidential candidates, support the $700 billion rescue package (which may become several trillion dollars before this is over), which the Bush administration had said was essential to avoid a total collapse of the financial sector.

The problem with letting giant financial institutions fail is the catastrophic impact it would have on ordinary people. We could expect similar consequences if we allow automotive giants General Motors, Ford, and Chrysler to fail, which all three are on the verge of doing if they don’t get an infl ux of billions of dollars from somewhere.

Our economy is so complex and intertwined that these failures would mean not merely the loss of jobs by the hundreds of thousands of people directly employed by these businesses, but there would be a domino effect on down the economic chain. Think of all the branch banks throughout the US, and then consider the number of automotive dealerships that would go out of business if GM, Ford, and Chrysler all went under. Small businesses located near shuttered institutions that counted on the patronage of their employees would suffer and possibly fail as well.

It is clear that the fi nancial sector contributed to its problems by failing to understand the risk involved in getting involved with subprime mortgages. This is inexcusable considering that banks, credit grantors, and insurance companies like AIG that got heavily involved in credit default swaps should be the most risk-aware institutions in the country. They made a huge mistake and are paying for it now.

Similarly, Detroit has not been competitive with Japanese, Korean, and European automakers for years. That industry needs a huge infusion of innovation more than it does capital. Maybe Steve Jobs could help. Certainly the jokers who head those companies today don’t have a clue and don’t deserve taxpayer money.

Maybe a recession is a normal selfcorrecting process for an economy that got out of whack. Theoretically, we should allow the pendulum to swing back. However, theory doesn’t take into account the human suffering involved.

Back in the ‘80s, the oil and gas industry went through one of its periodic down cycles after industry profi ts reached a high point around 1981. I was working for a large and successful oilfi eld equipment manufacturer, which was especially hard hit. As the company began laying off employees to staunch the bleeding, I saw co-workers at all levels suffer the effects. Marriages failed, families lost their homes, some filed for bankruptcy. One shop foreman I knew well committed suicide, and a product manager who was in his 30s suffered a fatal heart attack. We had played together on the company softball team.

All this is to say there is a human toll and tragedy to an economic downturn. It is not merely economic theory that you study in college. As someone once said, “When your neighbor loses his job, it’s a recession. When it happens to you, it’s a depression.”

So, as much as I hate to admit it, I don’t see how we can allow these massive failures to happen if we can do something to prevent them. Let’s hope the Obama-Biden administration is up to the task.