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Prediction: The day the bailout of the auto industry fails in the Senate, the DJIA drops more than 700 points.

Why do I suggest this?  It’s fairly simple.  Today, Congress has agreed a bipartisan plan, provided the industry can present a “viable” and compelling business plan by December 2 — 12 days away.  So if the Big Three can’t make their case, why such a big blow?  Afterall, there are many arguments, particularly from the conservatives, that make an equally compelling case: Chapter 11 bankruptcy would be a more draconian means of forcing these companies to abandon their pithy ways.  Even Michael Moore concedes that the although the ripple effect of letting the auto industry fail would be intensive, Americans are equally angry in their response to bailing out failed institutions.

There’s reasonable cause for concern for these bailouts and without presenting the viability, the sustainability, and some forecast of measurable success, bridge loans to nowhere are a waste of taxpayers’ dollars.  In the 1990s, the Japanese government spent billions of yen propping up corporations that were otherwise inevitably doomed to failure.  As a result, the “zombie corporations” took the Japanese economy more than a decade to start recovery.  At a certain point, there should be institutions that are too big to fail; what is the rationale behind the sacred cows (p.s., it is no longer what is good for GM is good for the US… it is what is good for Google is good for the US).

So why would the Dow drop more than 500 points if an entire industry is thrown into bankruptcy?  Simple.  The field of behavioural finance looks at the various human, social, and emotional factors that form the basis of investment decisions.  It is often this herd mentality that drives a flight, en masse, to quality.  Or the same mentality that drives speculators to raise the high point of oil to near $150.  Behavioral finance was what caught the attention of investors when Lehman Brothers failed, raising the prospect of the $700bn bailout.

These psychological lines in the sand are always being drawn and it’s my belief that as Lehman Brothers was the straw that broke the financial camel’s back, the automakers will be the straw that break the manufacturing camel’s back.  The rescue of the financial industry was not a panacea and in the short run, confidence in the American financial system has been shot.  I suspect the same will happen if there is no rescue of the auto industry.  Not only will consumer confidance start to collapse as a result of the ripple effect of involved counterparties (don’t forget, Detroit’s problems stem from poor financing of auto loans *ahem GMAC Financing* and the subsequent seizure of the credit markets, brought on by Bear Stearns and Lehman’s collapses), but also, investor confidence will start to shrink.  For whatever it’s worth, Detroit represents a significant amount of American R&D.  Without sufficent investment, that R&D will be lost to other countries.

The fact is, the American visa process for qualified individuals is already cumbersome.  Attracting qualified candidates is not the problem — getting expedited paperwork for them to research here is.  Yet without sufficent R&D to speed innovation and swing the economic downturn in reverse, America loses its final vestigages of greatness.

What’s a shame is that these events are unfolding so rapidly that there is almost no time to focus on macro-level solutions.   The seizure of credit markets means too much attention is paid to patchwork, micro-solutions-as-bailouts.  Yes, American taxpayers have a right to be upset about the bailouts.  But doing nothing is equally as extremely detrimental.  Finding the pragmatic solution is what will salve the healing until the housing and healthcare problems (which are the fundamental, root causes of any of the entire crisis) can be stablized.

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Hillary Clinton a contender for secretary of state – FT.com

Around six months ago, when I was still supporting Hillary’s presidential bid, but conceding that it was falling short, I proposed that Obama would take the nomination.  Though many were riding high on the change they could believe in, my concession was based on the speculation that any presumptive Obama administration would likely not feature Ms. Clinton in the vice-presidency, but rather another high role.  Since she would not be vice-president, I envisioned her assuming one of two roles: 1) Secretary of State, or; 2) Senate Majority Leader.

Suffice to say, the emergence of Hillary as a contender for this position comes as little surprise to me, though I also see valid experience in gentlemen such as Bill Richardson and Chuck Hagel.  What I think I would find surprising, is the fact that nobody would have thought of Clinton as a potential pick for the position.  I mean, talk about rupture from current foreign policy; Ms. Clinton would make a phenomenal pick even just to engage in re-igniting the Israeli-Palestinian peace process (which, if moved forward, could put a fundamental crimp in Iranian nuclear ambitions).

But here on this small blog that is read by probably five people every two months, my words go unheeded.  These are the same words that, in August 2007, predicted the financial crisis to become a house of cards, waiting to fall in on itself.  Failure to acknowledge that asset-backed securities trading on non-existing liquidity would cause a ripple effect through the financial markets has caused the current economic crisis, and placed me back on the job market.  When the issue of the $700bn “bailout package” arose in September, many believed that “Wall Street and Main Street don’t cross paths” (further fodder for a discussion on a potential bailout of the American automotive industry).  Now, my former company has had nearly 20% of its assets under management wiped out in one quarter alone.  It is no surprise they had to eliminate positions.

Now, I’m no Nouriel Roubini, with the economic modeling to make these types of predictions.  However I’d consider myself well-read enough to start looking at the world in an interdisciplinary fashion and start piecing pieces of the puzzle together.  This hasn’t yet bottomed out and on a near daily basis, re-invents its black swan tendencies.  Whether I’m John Paulson (also, n.b.– exhibit 1D) or not, the models don’t always work right.

In my opinion,  the only country to correctly take action on the crisis is China; its stimulus package acknowledges the slowdown’s domestic impact, and re-invests in domestic infrastructure.  It is exactly what America needs and what types of steps the next president should take once in office.

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