No Rescue Likely For Car Manufacturers…Yet
By Justin Gardner | Related entries in 2008 Election, Economy, Money
We’ve been having a pretty spirited debate on Donklephant in recent days about whether or not the “Big 3″ should get a chunk of the rescue money the government freed up back in October.
Pretty much everybody else has said no, while I’ve been saying yes.
Well, looks like the government is going to allow them to fail, which I think could have pretty massive consequences for the economy. Because the economy lost 240,000 jobs last month and 2.5 million jobs in the last year. And if these companies fail, well, get ready for millions more in the coming months.
“Right now, I don’t think there are the votes,” Dodd of Connecticut told reporters about prospects in the Senate. “I want to be careful of bringing up a proposition that might fail,” he said.Although Dodd said “we ought to do something” and personally backed using money from the ongoing $700 billion financial services rescue program to help Detroit, he was skeptical that enough Republicans would support a bailout. [...]
Dodd said there have been “legitimate issues raised” about how to help. He plans to hold a hearing next Tuesday, and a House of Representatives Financial Services Committee hearing is set for Wednesday.
House Financial Services Chairman Barney Frank, a Massachusetts Democrat, is trying to write a bill that would amend the financial services rescue package to include $25 billion for carmakers.
The government would likely take an equity stake in the firms and Congress would impose stiff conditions.
As I’ve mentioned in the past, these aren’t normal circumstances and the Big 3 don’t have access to this capital because of it. And do know that they’d be able to secure these loans if the credit market wasn’t so screwed up. These are corporations that have massive value, a huge customer base and good brand equity. Sure, their brands aren’t as good as Toyota or Honda, but it doesn’t mean that we should simply allow them to fail because they’re not at the head of the curve. Businesses go through slow periods, and with the economy in such a free fall, people aren’t buying as many cars. How is this the car companies’ fault?
And yes, credit is still essentially frozen up. A little bit of cash has been injected, but that is mostly being put toward buying stakes in large banks so they can have enough time to unload the mortgage assets that caused the crisis in the first place. So I think it’s irresponsible to deny these key sectors the capital they need to survive in times as specifically difficult as this. Because why else did we make so much money available in the first place if to not help massive corporations make sure they had access to it? I mean, yes, it was for the banks, but banks lend money and if they don’t have enough money to lend to major corporations, then why does it not make sense for the corporations to come directly to the government?
Consider me disappointed in these developments, but there’s nothing anybody can do until January 21st, 2009.
More as it develops…
This entry was posted on Friday, November 14th, 2008 and is filed under 2008 Election, Economy, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
November 14th, 2008 at 9:08 am
Hi Justin,
I mostly agree with you on stuff, but I’ve got to disagree here. A few points: AIG and other financial institutions were generally saved b/c–while unfair–they provided an essential job for a functioning capitalistic economy. Trade is the lifeblood of our economy and if that freezes up due to lack of access to capital (which these banks provide) things were going to get really bad.
In contrast, these car companies are not essential to a functioning US economy. There is a very well defined process of bankruptcy that allows companies that are unprofitable to stave off their debtors, wipe out the equity holders, make the debt holders into equity holders, renegotiate unprofitable arrangements and remove incompetent executives so that it can re-emerge as a solvent and more profitable institution.
The US airlines have gone through it and no one stopped buying plane tickets. A similar reorganization is possible w/ car companies and it is inaccurate to think (as some would like to portray) that the company will stop operating if it files bankruptcy. It’ll keep going. It will just have to figure out how to slim down and become competitive again.
Fundamentally, the big 3 have business issue. Even before this economy, they have been losing badly to foreign car companies due to inefficient labor contracts, healthcare obligations that were unsustainable, poor investment decisions and horrible management. A capital injection by the government does nothing to change any of this, so it doesn’t really prevent bankruptcy. It just buys them some time and gets them more in debt. This is not a capital markets issue that is temporary and due to the credit crisis. It is an issue about these three being viable going businesses. They are not.
Bankruptcies are tried and tested means to re-structure unprofitable companies and salvage as much value as can be salvaged. Zombie companies that are propped up by government Clearly, ford and gm will survive in some leaner form if they go bankrupt. even if it is dissolved, other car companies will pick up the assets and a good portion of the autoworkers will retain their jobs. Its not nearly the scary process that it is being made out to be.
November 14th, 2008 at 9:47 am
I’m not sure this will help, if the rest of us haven’t managed to convince you. But you might want to review Megan McArdle’s discussion of the costs (and relative merits) of “saving” the auto manufacturers. http://meganmcardle.theatlantic.com/archives/2008/11/right_to_work.php
Lots of us have been thru the whole layoff/company-going-out-of-business thing. It was no fun, and it certainly would have been nice to have someone make the reality go away. But we survived. And her point is well made: where do you draw the line? There is no special merit to simply being big — and it shows some signs of being bad for the long-term health of a business to get too big.
November 14th, 2008 at 10:02 am
Heard on the radio this morning that the WTO issued a thinly-veiled warning to the US not to bail out its auto industry. Basically saying that they would consider it unfair trade practices.
November 14th, 2008 at 1:03 pm
Not saying we should bail them out, but the WTO can stuff it. The other car manufacturing countries subsidize their respective auto industries.