Should the Government bail out the Big Three?

November 21, 2008 at 7:47 pm Leave a comment

There doesn’t seem to be an end to this golden-parachute business. The “Big Three” automakers (Chrysler, General Motors, and Ford) have appeared before Congress to ask for governmental assistance and a bailout. They were turned down, in the absence of a re-configuration plan, but told there might be a chance of reconsideration should a “convincing turnaround” plan be submitted by December 2. (WSJ)

Public sentiment is actually against them, as people are still simmering over the $700 bailout package rescuing Wall Street. But, like any matter, the prospect of another bailout is complex. Should the government step in?

The fear is that, should the government not intervene (ignoring, of course, the $25 billion already lent with low-interest loans), the American auto industry will go up in smoke. More importantly, at a time when the economy is extremely volatile and everyone is panicking, the death of these three companies will result in a staggering loss of jobs that will only hurt the economy further, in the short run.

But, if the government does bailout these industries, the government’s rescue business is spiraling out of control. We’re essentially rewarding failure; these companies were poorly managed, and the government is sending out a message to take risks and let them absorb the negative consequences. The question, of course, is how detrimental it would be to a fragile economy right now to let these companies slide. (Chrysler is considering filing for bankruptcy, saying they may not have enough cash to make it to January. GM is also in significant trouble, but will last a little bit into 2009 and is holding out on considering bankruptcy for fear it will hurt their business. In the end, they claim, they are in so much trouble that going bankrupt would cause them to lose and sell absolutely everything, and not be able to rebuild. Ford, while in trouble, is as badly off as the other two).

There are arguments everywhere for whether or not to prop up these industries. Some analysts are referencing the airline industry, where some businesses have gone bankrupt and re-emerged, much stronger, without service interruption. Others are simply worried about the poor management of the Big Three and their refusal to provide “all of the requested financial information about the companies’ performances.” (HP: WSJ) This elusiveness is raising questions (and eyebrows) that rescue money would actually help the industry. If it continued down these same wrong paths, it would only be hurting again in the future. Mitt Romney, the former republican presidential runner with a specialty in economics, says that with a bailout the industries’ “demise will be virtually guaranteed.” (HP: NY Times)

The auto makers troubles have been brought to a head, not necessarily caused, by the economic climate. While people might generally slow their car-buying during a recession, what is unique about this one is the credit freeze. No one is lending to anyone, and cars are an item that everyone buys on loan. Even the car dealerships have to have loans to buy the cars on their floors. Everyone is suffering because of this. But the troubles are not just because of this recession; Romney goes so far as to say that the managerial path they are on is “suicidal”. (As a random note, he’s a Detroit guy himself whose father turned around American Motors in the ’50s. He knows what he is talking about).

But, he argues, without a bailout the Big Three will be forced to turn themselves around. They’ll be forced to cut money in some places, invest further into long-term benefits like research and cutting edge technology, and be forced to be more competitive with foreign cars. In the end, “A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.

In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.”

I’m sure I don’t understand all the facets and complexities such a bailout, or refusal to bailout, incurs. Either way, it will be rough on America, for either the short-term or the long term. But right now, I agree with Romney. Bailout may save some jobs right now, but it will only hurt us in the future. Better to crash and reinvent ourselves to come up stronger than continue on in the weak and crippled state they’re in.

(As a side note, having the CEOs fly to Congress in private jets wasn’t very good PR for a someone begging for financial aid.)

 

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Entry filed under: Economics.

A Question to Ponder And We Did it Again…

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