Should Detroit receive a bailout?

[iNow]

So, the hot topic in American politics and economy this week is whether or not the big 3 automakers in Detriot should receive a bailout to help them through this difficult time.

 

Good ideas on both sides have been raised. Powerful men who made a name for themselves, such as Ted Turner and T.Boone Pickens, tend to ask, "Where will they stop?" or "Who gets a bailout next?" and comment "I never got a bailout." I can't help but appreciate the underlying sentiment. When do we let people pay for their mistakes, and take the medicine for a sickness they contracted due to their own poor decisions?

 

 

However, I'm becoming more convinced by arguments made in key economic circles that it will actually cost us less to bail them out than to let them fail, so long as that bailout comes with explicit terms and conditions, such as forcing them to make significantly more fuel efficient vehicles and preventing labor unions from dictating terms that are not in line with auto competitors in other countries like Japan.

 

 

The basic logic is that, in normal economic conditions, bankrupcy would be best... Let it happen, the market will correct, most likely through Chapter 11. However, implicit in chapter 11 bankrupcy is the ability to still get credit to continue operating. With the financial crisis, even strong companies with solid balance sheets cannot get credit, so likely a backrupcy filing would instead be Chapter 7, liquidation, and that might not work either since nobody is buying. A dilly of a pickle this is, for sure.

 

The other strong point in favor of a bailout is that right now the shock wave that would be created by allowing such a collapse would devastating to the economy as a whole, not just the automakers. Since our economy is already so weakened and fragile, allowing the automakers to "face free market forces" could crush us as a nation as the ripple effects cascade outward. Their countless suppliers to their manufacturing operations would be devastated, local dealerships in small tows throughout the country would be demolished, and people in all different parts of the process would be heavily impacted, resulting in huge numbers of more lost jobs, foreclosures on homes, and a deepening sickness in our depressed economy.

 

The auto industry accounts for 1 in 10 jobs in the US. All of these lost jobs would mean millions (if not billions) of dollars in lost income tax revenues. It would also mean that all of GMs pensions would need to be paid by the pension security guarenteed by the government (if GM cannot pay the pensions, the government has to by law), resulting in another 2.3 billion dollars cost right there.

 

The numbers I've seen show that a bailout would cost us $25 billion, but is not guarenteed to work. However, not bailing out Detroit could cost us at least $175 billion, and IS guarenteed to do measurable and predictable, possibly catastrophic harm.

 

 

So, how do YOU think we should proceed?

[Phi for All]

I think the oil and gas industry should bail them out, as a favor for not turning electric sooner.

[CaptainPanic]

Internal combustion engines are obsolete (although still very popular). Steam engine locomotive manufacturers also did not receive a bail-out when they were becoming less popular.

 

The US industry needs to reform. Perhaps that means people lose their jobs. If anything needs government money, then it's future technologies and emerging industries... not some old fossil from the previous century.

[doG]

Let the autoworkers union bail 'em out

[Phi for All]

If the taxpayers bail them out, I want us to be able to review all patents they hold to see if they've been suppressing any technology that could help.

[npts2020]

I say put them to work building vehicles for an automated transit system. If there is a bailout of some kind there needs to be very explicit instructions about what is to be done with the money. Unfortunately, it is just handing more money to those who couldn't manage it to begin with to keep on doing the same things. Are Toyota and other manufacturers in line as well?

 

I agree 100% with Captain Panic and Phi for All

[iNow]

So, "to hell then" with the cascading impact and ripple effects on the rest of the economy and all of us?

[Riogho]

It doesn 't matter if it would cost us less to bail them out. Bailing them out is wrong.

 

If GM wants to pay people to stand around all day they deserve to go out of business. Let a new less-retarted car company take its place.

 

GM just went and f'd up when they decided a few years ago that the market was in SUV's. They figured oh, we can make SUV's for the same as a small car and cost the consumer 20thousand more dollars. Lets do it!

 

So now they are getting screwed for screwing us. Let them die.

[Mr Skeptic]

So, how do YOU think we should proceed?

 

Would it be possible for the auto worker unions to bail out their companies?

 

I think the oil and gas industry should bail them out, as a favor for not turning electric sooner.

 

That too!

 

Let the autoworkers union bail 'em out

 

Great minds think alike!

[bascule]

I think it'd be fine so long as the government got equity in the companies they bail out, and it weren't just forking over cash into a black hole.

 

Government buying up the means of production: now that's socialism!

[Realitycheck]

I'm ready to buy a new car, but I think it would be prudent to wait until they are a little bit deader. They should have focused on changing gears a long time ago and now it is a mad dash to innovate. Tsk, tsk.

[Pangloss]

I think government bailouts should happen in some of these cases but they should be extreme penalties and moves of last resort, and that's just not the case at the moment. I saw something over the weekend where a couple of the banks that got bailed out are giving something like $13 billion in profit sharing this year. And of course the AIG thing with the vacations was ridiculous. Bailouts need to be last-resort measures and heralds of vast change in a company's direction, not a way to make the bottom line work out for the year.

 

California wants some of the bailout money. Just a few billion a year for a few years, that's all. Do you think they'll cut back on the massive entitlement programs they instituted that are unlike any other state, which apparently they cannot now afford? Nope. The very next thing they'll do after getting the bailout money is start debating another program that is "desperately needed for the state's poor" or some such. When those "few years" have gone by they'll say "why, you can't take that money away now, we're depending on it!"

 

Anyway, we can't afford to let GM or Ford fail, but we can't afford to give them a straight-up bailout either. They need to be restructured and redirected. All top managers and directors should be asked to resign effective the arrival of the first government dollar. New top management can hire them back based on merit if they believe it's the right way to go.

[ecoli]

 

However, I'm becoming more convinced by arguments made in key economic circles that it will actually cost us less to bail them out than to let them fail, .

 

The government is good at making the argument that we need more of it our lives... people are actually starting to buy that.

 

The strongest argument I can't think of against the bailouts is that the economic system needs to contract before it can grow again. For too long, the government has been funding projects by borrowing money and restructuring the money system. You can't create sustained economic growth by printing dollars, because long term investment requires that real dollars are invested.

 

Real investment requires sacrifice... spending has to slow down, so funds can be invested into new areas, and those new areas can grow. What the government is proposing is that we can cause economic growth by spending even more, without the necessary sacrifice!

 

We borrow money, raise taxes and print money to fund these bailouts, but every dollar spent on a bailout is taken from somewhere else. We can't bailout a company without injuring another area. What good is bailing out American companies, when China owns all our debt, the people are taxed into poverty, or our currency is hyperinflated?

 

Simply put, we can't finance these bailouts (not to mention lots of other government spending) because the money just isn't there.

[iNow]

The government is good at making the argument that we need more of it our lives... people are actually starting to buy that.

Oh. I was listening to Nobel Prize winning economists, but if you want to dismiss them as "the government," I suppose that's one approach.

 

 

Simply put, we can't finance these bailouts (not to mention lots of other government spending) because the money just isn't there.

Right, but the then question becomes how do we finance the cascading effects of letting them fail?

[Pangloss]

Oh. I was listening to Nobel Prize winning economists, but if you want to dismiss them as "the government," I suppose that's one approach.

 

It was amusing watching Paul Krugman yesterday try to pretend that he thinks that under normal circumstances GM should be allowed to die. When I realized I agreed with him I had to go and take a shower. ("Unclean! UNCLEAN!!!")

[jackson33]

Basically, it's hard to disagree with the argument iNow is making. Not only for the active auto makers, but the retired workers and both union member and retired management, somewhere around 3 million households. In turn these folks support local government around this country and in short those economies.

 

The problem is the causes for the big 3 being where they are, are not going to be fixed and they have little to no advantage over unions to cause a correction. Keep in mind most all suppliers to the big three also supply other manufacturers and though hurt will still be operational. On th other side, GM and Ford are actually doing just fine overseas (may were) showing profits, feeding the unions here in the US. Then there are two bailouts, each with 25B, one for retooling, the other for union expenses owed by them.

One would be wasted if the other not enacted or the reverse and the potential loss of all.

 

Most opponents to the bailouts, feel under Chapter 11, these Companies will or at least could merge or restructure union contracts and cut cost under the guidance of a judge.

IMO, although the least likely is a group buy-out, which is where Chrysler is today, a private Company. The market value today for GM is under 2B, about 1.7. If Soros, Buffett or some group of investors wanted, they could probably buy GM for 10B, which is no where near the value of the real estate alone, much less machinery and all involved in production and many currently unused factories. They would not have a judge involved and have leverage over the unions. The purchase of a company involves debt, or agreement with the debt holders, which the unions are just one. The buy out then subject to these pre arranged agreements. Hypothetical then, you would have a new owner of a company the US has already agreed to retool under a LOAN of 25B at a purchase price of 10B and with a real business value of 2B. If this makes no sense, I would agree, but the reality of the problems, Congress is addressing pro or con the bailouts...

[DJBruce]

Personally I hate the idea of bailouts and have opposed them but to me I feel that we cannot let the automakers fail. If the automakers fail I feel that the ramifications will be huge. If they were to fail I feel it would send this recession spiraling into a depression. I do not endorse giving the auto companies or any company that is a blank check. If we are to give them money it should also come with mandatory restructuring and significant oversight.

 

Over course I am a little bias because I live in The Mitten.

[doG]

Using existing law to reorganize is not failing. Paying billions of dollars to automakers so they can continue to meet their extortion requirements to the UAW is failing, failing the taxpayers. Any bailout should require the same cancellation of union contracts as required under Chapter 11. If the union doesn't like that then let them finance the bailout themselves.

[iNow]

It was amusing watching Paul Krugman yesterday try to pretend that he thinks that under normal circumstances GM should be allowed to die. When I realized I agreed with him I had to go and take a shower.

In addition to Krugman, I was listening to Jeffrey Sachs, who echoed the sentiment on Charlie Rose last night, even though I'm pretty sure he's not won a Nobel (yet).

 

EDIT: More on Sachs' view here:

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/16/AR2008111601743.html

 

 

 

Any bailout should require the same cancellation of union contracts as required under Chapter 11. If the union doesn't like that then let them finance the bailout themselves.

 

I completely agree with this, and also suggest that those executing the bailout package should have the ability to discharge the executives where appropriate. They spent decades lobbying Washington to avoid changes in fuel economy laws, as selling Hummers and SUVs was better for the bottom line. That's a problem, and it's come back to bite them in the ass.

Edited November 18, 2008 by iNow
multiple post merged

[Pangloss]

I would go a lot farther than Jeffrey Sachs, but it's an interesting article, thanks for passing it along. He's right that it's not about punishing the automakers for building gas-guzzlers and environment-destroyers, but I think we should go farther than guaranteeing no profit sharing after a bailout. I'm leaning towards the idea of removing the entire leadership team automatically.

 

Regarding unions, I really think this next administration is going to be a very mixed bag for labor interests. They'll get a few things to help them out with recruiting and unionizing companies, but they may actually decline in enrollment overall. Everyone's pretty much aware of the fact now that GM and Ford have sky-high costs, and you can't toss that off to the price of overseas labor since Toyota is making money on cars made right here in the US.

[ecoli]

Oh. I was listening to Nobel Prize winning economists, but if you want to dismiss them as "the government," I suppose that's one approach.

Krugman's Nobel was awarded for his ideas about trade theory, just so you know. I can pull up a list as long as my leg of Austrian economists who could fill several volumes of how Krugman's Keynesian policies contributed to and directly causes business cycles (if you want to play the credentials game) and, yes, some of them would be Nobel winners.

 

However, I care less about credentials and more about ideas. The ones coming out of Krugman, when he's not talking about trade theory, seem to increase the scope of the government's power over our economy.

 

I disagree with that on legitamate economic principles.

 

 

Right, but the then question becomes how do we finance the cascading effects of letting them fail?

A better question would be, why would we assume there would be long term cascading effects? Why wouldn't some other automobile firms buy them up to control the rich American markets? This is always what happens in a free market, when an industry overstretches itself. If our automobile industries fail its because the company is doing something wrong, our that the government is creating an environment where the company can no longer operate. Neither scenario requires further government intervention to fix.

 

People are so intent on deciding that only the government can save our economy, we forget (or never realized in the first place) that the economy has done just fine without government in the past and, dare I say, government has even made economic situations worse.

[Pangloss]

People are so intent on deciding that only the government can save our economy, we forget (or never realized in the first place) that the economy has done just fine without government in the past and, dare I say, government has even made economic situations worse.

 

That's not the motivation here. Clearly people are aware of the drawbacks, and public faith in government is arguably the lowest it's ever been. In short, they're aware of your alternative and they don't want it. This isn't a matter of public ignorance.

[CaptainPanic]

So, "to hell then" with the cascading impact and ripple effects on the rest of the economy and all of us?

 

Yes.

Redundant obsolete technologies and all industries that are connected to it must disappear at some point. You can cry about it, but in the end it has to go. The question is not if, but when.

 

Basically, it's hard to disagree with the argument iNow is making. Not only for the active auto makers, but the retired workers and both union member and retired management, somewhere around 3 million households. In turn these folks support local government around this country and in short those economies.

This is the whole point. Once an entire economy starts to depend so heavily on some old fashioned technology, you prevent innovation.

 

Sadly, the longer you wait, the more jobs it will cost in the end. And short term managers/poloticians don't care about that.

[gcol]

This is the whole point. Once an entire economy starts to depend so heavily on some old fashioned technology, you prevent innovation.

 

Yes indeed. I tried to extrapolate that idea to the banking industry, but the banking industry has in fact ditched its old fashioned ideals/purpose, and become dependant upon new instruments which have not stood the test of time.

 

So for banking, out with the new and back to the old, and for the auto industry out with the old and into the new. Opposite ideals.

 

The investment costs for the auto industry would be horrendous however, and will not be available until the financial world sorts itself out.

 

Catch 22?

[CaptainPanic]

I think that banks have undergone a great innovation. You can use internet to do banking, and money can go around the earth faster than anything else.

 

This has great potential.

 

As an analogy with cars, I would say that innovation can be overdone (imagine a battery powered car that would become so popular that you'd need an additional coal powered plant on every street corner - not exactly desirable), and it can also go the wrong way. That does not automatically mean that the innovation itself is wrong. In fact, most technology and most innovation will have to re-invent itself a number of times.

 

The concept of "bank" is not wrong. It's just wrong that we have no clue what the money represents anymore.

 

I challenge you to support that!

 

This is a great argument against unions. Can I translate your argument as: "I ignore previous argumentation, and I want to to give me a decent argument!"?

 

I think I just gave 4 points which are good about unions:

 

You don't have to fight for a good pension yourself anymore - unions do that, and with success.

you get healthcare (insurance) when you get an accident at work

you get better safety

you got not more child labour

 

Do you honestly think that each individual labourer can achieve all these things by themselves? You need to unite a little to get that. Unions do that... in theory. Apparently unions in the USA are total crap. ... so where I wrote unions before, I mean "European unions".

Edited November 18, 2008 by CaptainPanic
multiple post merged