The Scary Message of Republic Windows & Doors

As the economy weakens, government becomes more intrusive.

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The standoff at Republic Windows & Doors in Chicago is a bad sign, folks. As the hometown Trib describes things:

On Monday, workers were visited by a parade of politicians, including Gov. Rod Blagojevich and U.S. Sen. Dick Durbin (D-Ill.), who voiced their support for the workers while threatening Republic and Bank of America with lost business, legal action and federal inquiry. At City Hall, Chicago aldermen called for hearings on Republic, which had received about $10.4 million in city redevelopment funds as of the end of 2007, according to city documents. ... Bank of America cut its line of credit to Republic, which the company said forced the plant's closing last week. Blagojevich threatened that the state would suspend all business with the bank until the Republic matter was resolved. Aldermen and Cook County officials also proposed suspending business with the bank and withdrawing hundreds of millions of dollars.

(I am pretty sure Blago won't be coming back anytime soon.) Anyway, superstrategist Andy Busch of BMO Capital Markets nails it:

This is the path the United States is heading towards as the recession takes its toll and government reaches further and further into the private sector to stabilize the economy. Initially, the moves are welcomed as workers are looked after, jobs are created, and big business vilified. However, the government forcing banks to make loans to companies that can't make the payments perpetuates the weak credit problem and keeps the cycle going. This cycle deploys capital to non-productive uses and keeps it from flowing to solid companies that can create new jobs.

This is eerily similar to what happened in Japan in the 1990s when companies were kept on life support when they should've been shut down. The US has always been able to adjust faster the changing economic conditions due to the ability to hire and fire workers faster than other nations. It's Schumpeter's creative destruction at its best with job churn high, but job growth high as well. This will now be challenged as aggressive, short term action is taken without regard to the corrosive long term problems it creates.

I am also reminded of recent comments by bond guru Bill Gross:

We are now morphing towards a world where the government fist is being substituted for the invisible hand. ... Animal spirits, and with them the entrepreneurial dynamism of risk-taking has likely experienced a body blow. ... The benevolent fist of government is imperative and inevitable, but it will come at a cost. The champion of free enterprise, Ronald Reagan, knew that growth of the private sector was in no small way dependent on deregulation and the lowering of tax rates. Now that those trends have necessarily come to an end, no rational investors should expect innovation and productivity to be unaffected. Profit and earnings per share growth will suffer.  ...  More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.

Hey, who wants to buy stocks!

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