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Auto Bailout? Wondering why

December 11, 2008

The House of Representative passed a bill to provide $15 billion in aid for the auto industry.

I have had a busy day so I have not seen the particulars of the bill. It looks like getting it passed in the Senate may be tough.

Congressional votes aside I have just had a tough time in my mind justifying why there should be a taxpayer funded rescue of the auto manufacturers. Help me out. Am I just missing something?

Yes, a downsizing will hurt people and communities especially in the Midwest. Yes, it will even reach across the United States to local markets where automobile dealers are the largest contributors of sales tax revenue in many cases.

Still, does this justify a subsidy?

I asked a few people. Speaking with a friend on the phone Sunday I asked him. He basically said it was not deserved but that “there would be a mushroom cloud over the Midwest” if we do not support them.

Yesterday at an industry event I asked two guys I was chatting with but had never met before. They basically said it was not deserved but we have a gun to our head.

Why do we have a gun to our head?

The auto industry would downsize, not disappear entirely. Competitive brands and models would survive. Their overseas operations, which are generally solid, would survive. They would conserve their cash burn rate. They might even instill some investor confidence and be seen as a good value given the low price of GM and Ford at this time.

If they had to go through Chapter 11 would consumers really consider it a death wish and not consider buying products? I don’t think so.

Even if, for example, Ford disappeared tomorrow do you really think the industry of automotive aftermarket for parts and service would disappear? Of course not.

Along with the general philosophy of not feeling the bailout is justified I don’t see who is best prepared to manage the oversight of the rescue funds.

Should Congress be driving a certain percentage of the money toward developing “green” vehicles that the public may or may not want or may not be price competitive?

Should an outside group, Congress or others, determine whether top management should stay or go? What makes them qualified to make that choice and who is to say how and who should move into new top management positions? Let the companies make those choices and succeed or fail by the decisions they make.

Out of fairness, along with owning some imports I want to say that I have driven American cars in my past and now. I drove my dad’s old 1972 Impala during college. It was a tank and had the wonderful 350 engine. I drove an Oldsmobile (or maybe it was a Buick ) as a company car all around the country in my first job out of college. I bought a used Chevy Cavalier when I moved back to Seattle from Indiana. I bought a new Pontiac Grand Am (“We build excitement “is the old ad slogan) later. I drive a Ford Freestyle now. Some were more reliable than others but none a lemon. 

So I do not have it in for these guys by nature. I do not have it in for the UAW just because they are unions. I don’t have it in for management because it is in vogue these days to kick around CEOs of companies.

So help me please. I would like some thoughtful comments and reasoning about why we should really want to rescue the companies and why it is justified.

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6 Comments
  1. Tim Jones permalink

    Steve, I appreciate your thoughtful comments. I am very torn on this issue. I believe to a large extent the industry was shamefully asleep at the wheel, but I also feel that many thousands, if not millions of innocent people – many of them not even directly employed by the Big Three – will suffer if a loan package is not created. It goes without saying that it should have close controls built in, so that the money is not pissed away recklessly.

    That said, I am not sure any financial rescue will save these companies. I read one essay in Newsweek recently that suggested that perhaps the Big Three should merge and downsize into the Big One.

    It will be painful no matter what solution if offered but I am not sure sitting by the sidelines and just letting them implode is the best decision for our nation’s economy at this precarious point. And unfortunately it sounds like there are literally only a couple weeks to do something before two of the three could fail – rushed decisions usually are not the best decisions.

  2. Steve:

    While many have waffled over the question of bailing out the auto industry, I for one have been in favor of the bailout. It comes from my empathetic nature:) While manufacturing states like Michigan and Pennsylvania have been in a deep recession, if not depression, since about 2005, California and Washington state (where I live) have been mostly unscathed because of our economic diversity. Good, honest people have suffered from the mistakes made by the leaders of the Big 3 and the unions alike. However, letting the auto companies fail would truly lead to the demise of at least the state of Michigan.

    The domino effect of hundreds of thousands of auto workers losing their jobs will put us closer to 10% unemployment in a hurry. Then what? I’ll say it now: If we don’t have a healthy consumer demand to buy all the cool new cars and trucks that we need to build in Detroit, then we’ll see a really deep economic downturn. We need to stop the hemorrhaging of jobs now!

    What if we use Detroit as a proxy for new, clean, efficient, and desirable cars and trucks? Instead of pulling the plug on these companies, a new day dawns on the auto industry, providing great jobs for re-trained American workers. Part of our loss in leadership and competitiveness in the global economy has been a lack of innovation by our manufacturers, as well as a willingness to export those jobs overseas. With gas prices edging towards $1.50 per gallon again, will we give in to our addiction to oil; and Hummers, Escalades, and enormous Ford 350 trucks will start driving off dealers’ lots again?

    We are at the most important transition point in our history in terms of the future of manufacturing as a part of a robust, healthy economy, and the change in global climate conditions. There are two guns pointed at our heads: 1) Save the Big Three. 2) Don’t make the movie: “The Day After Tomorrow” a reality in our children’s lifetimes, if not ours. It’s time to demand that the oil companies just flat out stop their hegemony of energy for transportation and industry. What was the real mission in Iraq? Can anyone argue that access to that enormous pool of oil under the ground in that country was at least a piece of the objective to invade that country?

    I like executive accountability for those arrogant fat cats that flew into D.C. on their corporate jets, hats in hand, to beg for a bailout from you and me. If Steve Jobs of Apple were running any of those companies, we would be well on our way to producing amazing transportation products. I don’t like the Feds. determining who gets to run those companies at all. The successors to the CEOs of the Big Three should come from private sources. Still, we need those jobs so that auto workers can buy I-pods and IMacs:)

    Finally, a big dose of cynicism as I close. As long as we’re printing money in government, what’s another $34 billion? As we approach government debt of 100% of GDP, what’s a few more billion, huh? Given that we were quick to say “O.K.” to AIG, Fannie and Freddie for what will be north of a $ trillion from taxpayers, let’s keep spreading the wealth that we do not have. Did Wall Street do us any favors during this economic disaster? What happens to the CEOs who looked the other way while their firms were trading $60 trillion in Credit Default Swaps? Why did we blithely bail them out? Because we had to! Enough said.

  3. Steve:

    In the last decade, the United States has been bailing out one industry after another. First, after 9/11, it was the airlines. More recent events have shown us there is no limit to where a powerful lobby might suggest additional support.

    There are many families that will be affected by the poor decisions auto makers made 5, 10, or even 15 years ago. I recently lost my job to the recession. I am lucky — I am young, healthy, skilled, and my family has savings we can fall back on. But what about the guy who has worked on the line for 20 years, has a sick wife, a mortgage he can’t pay, and no other skills…what is he to do if a car maker goes under?

    I look at the bail out as not a vindication or support of short-sighted car execs but as a support of my fellow American who needs a hand. I have no problem with my tax dollars going to support that person who will ultimately pay a higher price than any exec.

    So, sure, support the families and bail out the auto companies. But in the process, let’s do it as investors and not charity. I want a stake in the auto companies my taxes will go to support. I want a vote as to who leads, their compensation, and where the company is headed. And, I want the average worker to not have to pay the price for corporate America and Wall Street’s misguided dealings.

    — David Kinard

  4. Michael permalink

    Steve,

    I appreciate your thoughtful commentary. We do live in extraordinary times, and sending money to the car companies — in whatever form we choose to label it — is indeed a challenge to support. But far worse to contemplate, in my opinion, is not making the investment to keep America working.

    Right now I feel like a disillusioned capitalist — one who believes in the positive power of the free-market, and also good government. It seems to me we are now reeling from overindulgence in the former, while at the same time suffering from not enough of the latter.

    So without a clear answer on whether this ‘invesment’ will pay out, I’m struck by the WPA-like opportunity with which we’re presented. If we don’t bail the industry out, we will have a real mess (10% unemployment sounds very realistic to me). I think that’s a scenario to be avoided at almost any cost.

    We can’t be ideologically pure at this point and let the market prevail — we’ve already erred (in my opinion) by making somewhat arbitrary decisions — letting Lehman Brothers fail, but then saying AIG is too large to fail. I can come at the auto industry question from the standpoint of the situation we’d find ourselves in if we don’t intervene — huge job losses, and an even steeper decline into recession. At that point, if we were faced with double-digit unemployment and the opportunity to put people to work in good paying jobs (like the auto industry), we’d take it — so I land on the interventionist side, as a relatively effective way to avoid pushing the American economy further into the hole.

    I think it’s important at this juncture to keep the millions of auto-industry jobs going. And yes, I’d like to see ‘business as usual’ changed for the US auto industry. Too much hidebound tradition, and not enough forward-looking change and agility. I don’t know if an auto czar would be helpful or idiotic, but I do know I don’t trust either the unions or the execs who have been in position for years to think clearly about how to best to move forward. I do believe though, that it’s in all of our interests to keep the jobs while we can as we try to guide this industry out of the darkness.

    My two cents. Thanks for asking.

    –Michael Bronsdon

  5. Jimbo permalink

    Unfortunately for everyone involved, I think the harsh reality of the problem calls for reorganization through bankruptcy. Either way their situation has become all of our problem and ultimately affects each and everyone of us in the US of A but I feel the auto manufactures have to bear the brut of this and own up to the problem they have created for themselves. If they want to use the TARP money that was supposed to have been used for the finance industry then this would be fine with me too but we have to draw the line somewhere and allow businesses to pay the price for their mistakes.

    I hear rumor that some of the major democratic players are actually not only trying to get money to bail out the auto manufactures but trying to get $400,000 in pork as well to assist a new green auto manufacturer TESCO to get in business stateside.

  6. KimCorbin permalink

    Steve,

    I’ve thought many times about your comments in the last few weeks. My random thoughts could fill pages, but the I keep coming back to the same question.

    You commented, “Should Congress be driving a certain percentage of the money toward developing “green” vehicles that the public may or may not want or may not be price competitive?”

    Should the public’s opinion on these matters drive how our government acts? Or should the public’s overall interest (whether or not the individuals agree) be sought? I think our individual interest quite often does not match up with our country’s best interest or the world’s best interest.

    I think we need to bite a very large bullet and revamp the auto industry in light of our energy crisis. As the gas price plummets, individuals will be less likely to pay more for the more gas conserving models. I think the government needs to step in and place more stringent requirements on the auto industry (and others for that matter).

    I’m not sure what this has to do with the bail out… Sorry about that!

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