Whither Detroit?
Okay, Peter asked in the previous thread, and I was going to blog on it anyway, so here’s the hot question du jour: do the Feds bail out the automakers? More to the point, do they bail out GM (Ford is in better shape, thought it is hemorrhaging cash – Chrysler is 80% owned by private equity, and is the smallest of the Big Three by a good margin)?
The question of whether the Feds should bail out GM is almost academic (though I’ll touch on it). They WILL, ultimately. It may be sooner (in the lame duck session starting next week) or it may be later (when the new Senate, with more Democrats, is seated), but if any company is too big to fail, almost by definition, it’s General Motors. Given the coziness of Democrats to big labor, the iconic stature of GM, its importance to Detroit, the ripple effect a bankruptcy would have on suppliers, and the big hit that manufacturing jobs would take, I find it hard to believe that, politically speaking, GM will be allowed to fail.
Should it be rescued? There are good arguments both ways. I’ve laid out the political case above…and a bailout of GM would look more like a Main Street move than a Wall Street move. A failure of GM would shake the confidence of the entire market. It would scare the crap out of consumers. It would be disastrous.
Perhaps the only thing more disastrous would be a bailout without strings. I’m not talking pushing GM to be more ‘green’. It has already made a huge, irreversible commitment to the Chevy Volt, a car that will be enormously presitigious, heavily subsidized, and will still lose money. GM doesn’t need more pressure to build money-losing cars – it needs to be allowed to build the cars that sell well, and at a profit. Though SUVs and pickups fell briefly out of favor when oil had its brief bubble, historically, these have been the worst mileage cars GM makes – and the most profitable. Unfortunately, given the Democratic government that we’re about to seat, I fear GM will be pressured to make more highly efficient cars that don’t sell and further endanger its future.
The kind of strings I prefer are these: (1) GM management has to go, and (2) the government needs an equity stake.
The kind of aid I prefer is as follows: (1) a direct capital injection of $25 billion for GM in exchange for a new class of preferred shares or something of that nature, (2) streamlined disbursement of the energy efficiency upgrade funds already promised, and (3) participation of GMAC (still 49% owned by GM) in the newly revised TARP program, following expedited approval of its restructuring as a bank holding company.
Your thoughts?…
Some conservative you are! Why in the world should we reward their poor decision making and crappy products with our tax dollars? What does “fail” mean in this case, are they are risk of going Chapter 7? Not that I’ve heard. What the hell is wrong with letting them file Chapter 11?
I think there are strong arguments to be made for both sides. Perhaps the best argument for a bail-out is that perhaps they should be allowed to fail in normal times, but these are not normal times. The fragility of our economic situation should tilt the government towards keeping them alive — it’s too hazardous to the rest of the economy to allow them to fail. Also, the new union contract which takes effect next year will change the dynamics of the auto business, and perhaps we should get them over the hump until then.
However, the obvious response to that is that you’re rewarding bad management, which could come back to the trough for more in a few months. The auto makers have systemic problems which a bailout will not fix, most notably the huge legacy costs for retirees’ health care and benefits.
I think the best solution is a pre-packaged bankruptcy which involves some sort of government aid or loan guarantee for the “new” GM. The retirees have to take a hit along with shareholders and taxpayers — there is no reason why the government should support retired auto workers in perpetuity — but hopefully an infusion of capital and a new business structure will do the trick, without causing a cascading series of problems with the rest of the economy. It’s messy and regrettable, but it seems to me to be the best of a bad lot of options.
Well, Steve, I admit it’s not the conservative argument. I’m taking a cue from the rhetoric of our new administration, and in this case, putting pragmatism in front of ideology. But the bailouts have to stop somewhere…we can’t bail out every company that fails. But GM is, I think, a special case…
I don’t think this is a “liberal” versus a “conservative” thing. It should be noted that Berkeley economist, Brad Delong, agrees with Steve that GM should be allowed to go into Chapter 11.
I can see arguments on both sides. But you would need to convince me that you could structure a bailout so that it would not simply amount to pouring money down the rathole before I’d sign on. Pretty much (per Justin Fox, quoted by Delong), that would look a whole lot like Chapter 11, anyway …
Also, there is the argument that no one will buy a car from a company in bankruptcy, for fear of not having their warranties honored, and that a bankruptcy would, in effect, be a death sentence, even if it was a Chapter 11…
I could agree with a bailout, a la Peter, if it can be proved that failure is worse than a bailout. Can we agree neither alternative is great such that we a choosing the least bad? I just don’t see how we prove that letting GM fail is worse than spending another $25B, or whatever the final number may be, on a company in crisis, especially given the belief that this bailout would not fix the long-term structural problems with these companies.
25B ain’t nearly enough to save GM unless people start buying cars again.
No way should the GOP, other than people in Ohio and Michigan, give a single vote for this. Elections have consequences. The Dems will get all the the credit if it works anyway so let them have all the potential blame. Don’t filibuster or anything, just oppose quietly.
President Bush should veto unless Columbia gets free trade or whatever he has left that he wants. His popularity is not getting any lower.
Well, since I work with airlines and am from Michigan, maybe I just have a built-in aversion to propping up big companies that are run like crap. Of course I also opposed the first bailout, so maybe I’m just a libertarian. Who knows.
Almost all “manufacturing” plants in the US that make large number of part assemblies are basically just assembly plants. They have been shipping their sourcing and sub-assemblies, wiring harnesses, fabrication of raw goods, etc. overseas for a very long time. NAFTA only made that issue much worse and now it is bankrupting these corporations because they’re too stupid to realize that paying pensions for retired workers, startup costs of new plants in Mexico, continued operating costs of 1/2 utilized plants (to make the Mexico numbers look good, duh!), and ridiculous advertising costs just doesn’t work. Why the heck should we reward these stupid companies? I left Whirlpool because they’re quite possibly the dumbest group of executives I can imagine. I’m sure GM isn’t much brighter.
And, in there I should have also mentioned that the suppliers to GM and other large assembly shops are moving south of the border anyway. Ross Perot was absolutely right. Too bad he looked like an elf…
NAFTA the problem? I don’t think so…I think the acronym you are searching for is UAW…
Jacques, I don’t believe GM can get any financing under a Chapter 11 bankruptcy in the current climate. If I believed they couldn’t turn it around, I might say let them fail. But the economy will turn around eventually, probably in the latter part of 2009, and people will start buying again…and about that time, the labor concessions GM got from the UAW will take full effect – and the Chevy Volt will hit showrooms, and even though it’s a money-losing ‘show’ car, it will generate an enormous amount of pro-GM publicity.
I’m not talking unlimited access to government funds – just enough to keep them afloat until 2010…
[...] even some conservatives get all squishy and hope for a bailout of, say, General Motors (oh, um – that was me, wasn’t it?), when the leader of France scoffs at those crazy Americans and their love of [...]
I think they should give taxpayers money to buy GM cars. Give the proper number of people the price of a GM car (say the Volt), provided they spend the money on the cars. That way at least some taxpayers will get something from this boondoggle.
Mark: It’s not just the car manufacturers that are in trouble. The Big 3 are just the posterchild. But you can pretend all you want.
Yes, Mike, the entire economy is in trouble. I DO have a television, and there’s this Internet thing, also…but it’s not because of NAFTA! For cryin’ out loud…you heard of the subprime crisis? Did Mexico cause that? The credit crisis? Did it begin in Quebec? ‘Cause otherwise, you’re talking nonsense…