Lessons From the 1979 Chrysler Bailout

A good way to see the current problems is to look back to the first big bailout of modern times. Before A.I.G., before Fannie and Freddie, before Bear Stearns, there was Chrysler.

In 1979, when it was still the 10th largest company in the country, Chrysler found itself on the verge of collapse, largely because high oil prices had made its gas guzzlers unappealing. Company executives and union leaders came to Washington, hat in hand, arguing that Chrysler’s demise would wreak unacceptable damage on the American economy. Congress and the Carter administration responded by arranging for $1.2 billion in subsidized loans. The Reagan administration helped further in 1981 by restricting Japanese imports.

On its face, the Chrysler rescue was a huge success. Under Lee Iacocca, the company came out with the K-car line of smaller vehicles, like the Dodge Aries, as well as the original minivan. By the mid-’80s, Chrysler had repaid the loans. Mr. Iacocca appeared on the cover of Time magazine as “Detroit’s comeback kid,” and his autobiography became a No. 1 best seller.

But if you take a moment to think through the full Chrysler story, you start to realize that it’s setting a really low bar. The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.

Barry Ritholtz — who runs an equity research firm in New York and writes The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80% of all new vehicles in this country. Today, it sells just 45%.

There is a similar chance for us to be fooled about the extent of today’s problems. Some day, house prices will stop falling and the financial markets will calm down. But the underlying problems aren’t going away on their own.

At its core, the current crisis stems from two problems. Regulators, starting with Alan Greenspan, assumed that a real estate bubble couldn’t happen and that Wall Street could largely police itself. And households, struggling with incomes that haven’t kept up with inflation in recent years, said yes when those lightly regulated banks offered them wishful-thinking loans. No bailout can solve either problem.

David Leonhart in yesterday's NY Times