Friday, November 07, 2008

Taxpayer Rescue:Down Payment on Endless Bailout

Let's not kid ourselves that a taxpayer rescue would be anything but a down payment on a never-ending bailout. The bailout already is never-ending: Chrysler was already rescued once. Forgotten are the Reagan-era import quotas that inflated the price of every car sold in America to help prop up the Big Three. If hooked up to Washington life supports today, Detroit's first assignment would be to "protect jobs" -- job protection guarantees being one of the Big Three's fatal errors in the first place.

With or without a taxpayer rescue or the ministrations of a bankruptcy court, breaking the labor monopoly is the step without which Detroit will remain the problem child of American industrial policy.

The stakes here are even bigger than they seem. Detroit's bad news could be America's worse news if the industry's year of living extra miserably starts the whole economy down the road to protectionism and taxpayer-financed industrial cronyism.

~Holman Jenkins in Wednesday's WSJ

15 Comments:

At 11/07/2008 10:19 AM, Anonymous Anonymous said...

http://info.detnews.com/video/index.cfm?id=1189

 
At 11/07/2008 10:54 AM, Blogger Arman said...

starts the whole economy down the road to protectionism and taxpayer-financed industrial cronyism.
That was started when Eisenhower sloughed off government run weapons factories and research labs to corporate interests (friends of the administration).

http://info.detnews.com/video/index.cfm?id=1189
hooray for free trade.

 
At 11/07/2008 10:55 AM, Blogger Walt G. said...

Chrysler received a government loan in 1979, and repaid every penny with interest. Using Jenkins’ definition of “bailout,” anyone who has every received a loan and repaid it, on time and in full, has been “bailed out.” That definition includes a lot of very responsible people: Probably even a couple of his readers.

 
At 11/07/2008 11:35 AM, Anonymous Machiavelli999 said...

GM just reported a $4.2 billion loss and warns that it is running out of money.

Let this half dead carcass die.

 
At 11/07/2008 12:43 PM, Anonymous Anonymous said...

Walt,

A positive outcome does not a good decision make. If you get one roll of the dice and the odds of winning $100 are 1% but the odds of losing $100 are 99%, it's not a good decision to take that gamble even if the outcome is that you ultimately won the $100.

If chrysler had gotten that loan from a private entity (assuming that was possible), the entity would have assessed the true risk of lending to chrysler and the interest rate Chrysler would have paid would have been multiples of what it actually paid to compensate the lender for the risk of lending to a dead, mismanaged company. Chrysler didn't want to do that. So, the government forced taxpayers to take that same risk but did not compensate them adequately for it.

And that's only the start of the problem with the chrysler bailout. The bailout was a signal to other corporations that instead of figuring out how to run their companies better, they could simply go to government to force taxpayers to bail them out. Senators are pretty cheap to purchase - as all two bit whores are.

You can't equate this to people who receive loans from lenders who were not coerced into lending to them.

 
At 11/07/2008 1:24 PM, Anonymous Anonymous said...

"As Congress and the Bush Administration negotiate over the terms of a financial rescue bill, Democrats on Capitol Hill are drafting language designed to rein in executive compensation ..." - Businessweek, September 23, 2008

I wonder if, as a condition of taking a government bailout, the Democrats will demand that the auto companies "rein in" the ridiculous union pay and benefit packages that have devastated the industry? I know. I know.

 
At 11/07/2008 1:47 PM, Blogger Walt G. said...

Anonymous 12:43,

Any thorough risk analysis would have to factor in the government's cost of doing nothing as part of the risk as an alternative to providing the loan guarantees. Failure will not be free. One of the numbers being used by economists is $100 billion in costs borne by taxpayers in the event of one or more of the auto companies failing. Those risks are not associated directly by private lenders, so risk wise we can’t compare public with private lending sources.

In essence, I guess the question becomes how much the taxpayers should pay to prove a principle that business should stand on its own two feet in a capitalistic system. And it is really worth that premium to prove that point? It’s a fact that we currently have social- entitlement safety nets everywhere, so we just have to figure out which we want to use.

 
At 11/07/2008 1:53 PM, Anonymous Anonymous said...

Maybe these two can do for the whole nation what they've done for Michigan:

http://www.detnews.com/apps/pbcs.dll/article?AID=/20081107/POLITICS01/811070386

 
At 11/07/2008 2:07 PM, Anonymous Anonymous said...

"Failure will not be free. One of the numbers being used by economists is $100 billion in costs borne by taxpayers in the event of one or more of the auto companies failing."

This isn't about the auto industry, the industry will be fine. This is about a quid-pro-quo political payoff to the unions. I say we take the one time cost of 100 billion vs. the on going costs of providing overpaid jobs for union workers and the continuing corruption of our political process. It's time they learned that there is no job guarantee outside the health of the company they work for. Letting them fail will help to reinforce that reality and help to put labor and management on the same page.

Next, we take on the government unions.

 
At 11/07/2008 3:16 PM, Blogger like such as said...

Good luck Anonymous

It's that sort of non-compassion that politicians will avoid like the plague, even if their logic would have them agree with you. The sad truth is that "labor-unions" and "labor" have become synonymous terms. Any politician who tries to take down that system will be outflanked by both the ignorant and those already receiving special privileges, accusing them of "corporate greed" and "not caring about the common man."

 
At 11/07/2008 6:32 PM, Anonymous Anonymous said...

Walt,

I'm not familiar with the $100 Billion estimate, so it's hard for me to analyze your argument and respond. Please provide a link.

so risk wise we can’t compare public with private lending sources.

As a person who assess risk for a living, I assure you this is not true.

 
At 11/07/2008 10:03 PM, Anonymous Anonymous said...

Let's face it, GM is not making products people want. Also, the legacy costs are killing them. They need to scale back on SUVs and trucks and make what people want. Government keeps interfering and pandering to union lobbying efforts. But this has been the problem for years. Management, government and the unions destroyed the goose that laid the golden eggs. Mining, steel, textiles, now autos. What's next, public education?

 
At 11/08/2008 5:50 AM, Blogger PeakTrader said...

GM and Ford sold their products too cheaply (because of perceived lower quality) and with zero percent financing, which benefited U.S. consumers enormously. GM and Ford are most competitive in SUVs, minivans, and trucks. Unfortunately, high gasoline prices reduced demand. There's no endless bailout. However, there are global imbalances (e.g. in the balance of payments).

 
At 11/08/2008 9:10 AM, Blogger Plamen said...

You have to give credit to the Detroit 3 - they smelled gov't money and moved fast - but maybe not fast enough. Philadelphia Mayor Michael Nutter on Nov 6: "You've helped out Wall Street, you've helped out the banks - we're next."
Pelosi and Co. may soon find themselves besieged for money by constituencies they want to lose no less than the UAW - states (see CA) and major cities.

 
At 11/08/2008 4:04 PM, Blogger Walt G. said...

Anonymous 6:32, here’s my source:

“David Cole, chairman of the Michigan think tank Center for Automotive Research, estimates that the failure of either GM or Ford could cause a $100 billion hit to the economy. Suppliers, dealers and the retail base in cities and towns that depend on auto plants would feel the pain. “Whether it's $100 billion, $80 billion, $200 billion, we really don't know," he said. "But whatever it is, it's a much larger number than the cost of keeping these guys in the game."

(Source: Chris Isidore, CNNMoney.com senior writer
Last Updated: October 29, 2008: 7:06 AM ET)

About risk—I assume that you know more about risk that I do. How do you quantify the cost/benefits to the government/citizens for a Chrysler loan of $1.5 billion that paid the loan off plus 350 million in interest within 4 years? Even though the market rate should have been about 14% and Chrysler only paid around 10% to the government, benefits such as income taxes were received for 29 years after the investment was made (1979-2008). Since the benefits in the private sector would have stopped with the last loan payment, it seems to me that the government got a better deal than the private sector. It looks like they both won: Do you see it differently? If so: Why?

 

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