Babobski’s Blog: News and opinions from South Africa and around the world

For awhile now we have been hearing from some of the property companies and other analysts that we are edging out of the recession and that the global economy has turned the corner.

Unfortunately some of the banks in America seem not to have heard and are not playing ball.

The US Government closed down another three banks this week, bringing the total number of failed banks to 98 this year alone.  The Federal Deposit Insurance Corporation (FDIC) has paid out around $ 25 billion to deposit holders as a result.

And that is not the worst of it.  The FDIC expects that more banks will collapse and it will end up costing $ 100 billion over the next four years, indicating that the worst is yet to come.

It is starting to look more and more that the surge in the stock markets since March is indeed nothing more than a rally in a bear market.

Another 263 000 people lost their jobs in America during September, which points to more hard times ahead. The industries most affected were financial, building, manufacturing and service related jobs like restaurants and retailers.

The automobile industry is still in serious trouble as well.  Sales for September dropped by 23 % overall.  This follows a 41 % decrease in August.  General Motors and Chrysler were the hardest hit and are struggling to regain a foothold in the market after being declared bankrupt.

The South African motor industry is also in the doldrums.  Large inventories and very few buyers have seen car dealers bite the bullet.  There does not seem to be any relief in sight.

The road to recovery is going to be a long, slow uphill slog and some detours can be expected along the way.  The talk of economic recovery is however, premature.

What will Barack Obama do about General Motors?

The financial crises took a new turn this week as General Motors started seeking bail out funds to keep the company afloat.

Banks have gone down and now one of the big three car manufacturers is in serious trouble.

One’s initial reaction is to say let them go bankrupt. After all, who looks after the man in the street if one of our businesses goes insolvent?

The trouble is that if GM goes down, it will take a lot of men in the street down with it. All the suppliers, dealers, salesmen and workers at GM will all be without employment should GM declare bankruptcy.

GM spends more than $ 2 billion a month. It has cash resources of $ 16 billion. Sales are down and GM will need an additional $10 billion just to pay its bills in 2009.

In announcing a $ 2.5 billion loss for the third quarter, GM admitted that it will need financial help to survive 2009.

This statement was taken from the company report:

Even if GM implements the planned operating actions that are substantially within its control, GM’s estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.

Looking into the first two quarters of 2009, even with its planned actions, the company’s estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing.

So what does Obama do?

Again it seems that his hands are tied. He will have to rescue GM to try stave off a financial depression.

It is estimated that about 1 000 000 jobs would disappear should the automobile industry fail in the United States.

Even if just GM filed for bankruptcy in the automobile industry, the effect would be enormous. However Obama is aware of the consequences and made this statement. “”The news coming out of the auto industry this week reminds us of the hardship it faces — hardship that goes far beyond individual auto companies to the countless suppliers, small businesses and communities throughout our nation who depend on a vibrant American auto industry.”

It is starting to look like the $700 billion bail out package will not be enough to keep America afloat, which is bad new for the rest of the world.