What’s Going on with “Government Motors?”

by George Leong, B. Comm.

There are rumblings regarding why President Obama decided to fire General Motors Corporation’s (NYSE/GM) CEO Richard Wagoner Jr. after allowing the CEO of American International Group, Inc. (BYSE/AIG), Edward M. Liddy, to keep his job.

These are difficult times and sometimes things don’t make much sense. The lack of consistency from President Obama is worrisome, as is the government’s role in interfering with the free market system. GM has received about $15.0 billion in aid, compared to a whopping $180 billion by AIG. There appears to be a different approach to Wall Street and GM. This is not healthy for the market’s confidence. Whether the GM firing was right or wrong, the point is that there must be a consistent and fair approach. In a free market, it is up to the board of directors to decide on the fate of its CEO and not the government.

In the case of GM, maybe the company, which is now coined “Government Motors,” should be allowed to seek bankruptcy protection and then restructure thereafter, instead of receiving more funding. It appears this could happen unless the government can somehow come up with a solution to the grave problem at GM. And don’t forget there are over 240,000 jobs at GM at stake, along with the thousands of jobs from companies linked to GM. The company will need to be saved, but not by simply giving it taxpayers’ money. A workable solution must be developed.

The sad reality is that the government cannot help every sector that is in trouble. Next we could see the retail sector seeking help. The auto parts sector has already requested billions in aid. The government does not have an endless supply of money.

The deficit will run in the trillions and could swell even more. As a government, you simply cannot just hand out money. The recent weak auction of U.S. debt is a concern, as the money loaned has to come from somewhere, since you cannot simply go out and print money. Mind you, in Europe, the idea of printing extra money has been put out there. China may begin to reduce its investment in U.S. debt due to its concerns regarding the U.S. economy and desire to diversify its foreign reserves outside U.S. assets. This will impact the debt market.

Anyways, there is a sense that markets could eventually trade lower again. As I have been saying, the global economic and investment climate is not right, and will continue to require tons of work. The upcoming G20 meeting will try to look at solutions, but we are hearing resistance to more spending from some countries, such as Germany. The leader of the European Union called the U.S. spending a “way to hell.”

It may not be a way to hell, but clearly the growing size of the deficit is a concern, especially if the recession is longer and deeper than expected. President Obama is betting on an economic recovery to cut the deficit, but the deficit at that point may be massive.

As I said back in January, when President Obama took office, he has his work cut out for him.