Government Bail-Out Of The Auto Industry – Part 2
About 4 months ago, I protest against the government bail-out of the auto industry. I said they were inefficient operations that were being driven out of business by the Auto Workers Union and they’d be back asking for more money pretty soon.
Well, it looks like the time to ask for more money has arrived! GM just announced it would need another $16.6 Billion if economic conditions continued to worsen, in addition to the $13.4 Billion it has already recieved. Of course economic conditions are going to worsen. GM’s statement that it may achieve profitability in 2 years and might be able to pay off its loans by 2017 sounds completely bogus to me.
GM claims it will be out of money by March. That means it spent the $13.4 Billion it recieved in December in just 3 months, or nearly $4.5 Billion every month! The company claimed that if it had to file Chapter 11, the cost to the government could reach $100 Billion, so in fact, pay them $16.6 Billion is actually a good deal.
When are we going to pull the plug on this loser?
Many people say that the economy can’t withstand the shock from the loss of nearly 1,000,000 jobs that the auto-industry provides. But the US lost nearly 600,000 jobs in January. Why aren’t we bailing out all those people too? Who decides which jobs get preferential treatment and which ones get axed? Does it help if the CEOs have friends in Congress? Or the Federal Reserve? (We know Ben Bernanke bailed out his old friends at Goldman Sachs while letting Lehman fail).
With the government spending all this money on things that don’t affect me, I can only think of one thing.
Where’s my bail out?
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February 18th, 2009 at 8:04 am
Nirav, I share your outrage over the auto bailouts: that they are even needed. The unions and executive managements dug their own grave in the 1960s and 1970s when they contracted for ridiculous wages and benefits that ensured their mutual failure at some future date. That date is now.
The American auto industry will not look at all the same in 10 years. Even if GM, Ford and Chrysler survive in name, their structure and ownership will be entirely different. They are deadmen walking right now (from a common stock shareholder perspective at least).
But for the American people to just walk away from the problem is no better than to throw money at the industry, mindlessly. The liabilities to our economy are enormous, even if not fair. I have no problem believing the 1 million unemployed number if we let them fail without a plan. I think when including suppliers and derivative businesses (retailers and others in auto dominated cities that depend on the industry) that we are probably talking about 4 or 5 million unemployed if they fail without a plan. Every million unemployed costs the economy $24B per year, directly (assuming $2K per month per unemployed with transfer payments included, but not including lost tax revenues). So, $100B in one year is an easy number to get to if we just let them fail.
But better than throwing money at the problem as we are right now, we need to push the Big 3 into bankruptcy court, or some Federal government equivalent. We need to “nationalize” the auto makers and then sell off their assets to the highest bidder. This would be an RTC idea for the auto makers, since they didn’t run the business responsibly themselves.
February 18th, 2009 at 4:34 pm
Two words: structured bankruptcy.
February 18th, 2009 at 6:05 pm
All this stuff just goes to show what I always thought anyway, “Hey, maybe our system doesn’t work…”
February 18th, 2009 at 6:33 pm
Our system works if the government would butt out and let it work.
If GM and Chrysler are going under because of poor management (which includes giving away the store to the Unions), then so be it.
But artificially and temporarily propping them up (which, it is my opinion that this is a payoff to the Unions for their support of Democrats) only prolongs the agony. Market forces will eventually win, and if they don’t become lean and mean, GM and Chrysler will go under.
February 18th, 2009 at 8:34 pm
I am not disagreeing with Ben, James or Snerd. But for others who are ranting that “the American economic system is a joke” or “we are all going to hell in a hand basket” or “it is the end of America”, let me share my insights.
I am in the engineering profession for 30 years. One thing I have learned, there is no system made by nature or by man that is not subject to occassional “process upsets”. In nature, take a lightning storm or a volcano. It is the same with man: the more we try to fine tune a complex system (the economy in this case), the more any unobserved or underappreciated variable or aberration will build up pressure until the process erupts.
In the engineering world, we observe that process upsets will eventually stabilize under control, but that return to control is always subject to overshoots and undershoots while the process seeks equilibrium.
All this is a way to say: don’t worry, be happy. It will get better. If you don’t enjoy the spectacle (and I do in a morbid kind of way), take a long nap and when you wake up, it will be over.
February 18th, 2009 at 9:31 pm
Brian,
thanks for the calculation about the $100 Billion.
I’m not worried about the economy. Eventually things will get better. They always do. But I’m really keen on profiting from these periods of inequilibrium.
Have you seen gold prices lately?
February 18th, 2009 at 10:44 pm
Nirav, as you know, I am in with the idea of a gold spike. It has happened before and it is probably happening now and it can be really big (I don’t discount the idea of 1:1). But these things always end in tears. This is just the next in a series of investment bubbles, one moving to the next. And gold is one of the most dangerous games to play because of its narrow supply base and potentially huge demand. If you are nimble and get out in time, you can do well. But be careful. I am posting a story on gold on my blog tomorrow.