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Does anyone care about economic common sense?
Posted by: McQ on Thursday, November 13, 2008

More GM bailout news:
Momentum is building in Washington for a rescue package for the auto industry to head off a possible bankruptcy filing by General Motors, which is rapidly running low on cash.

But not everyone agrees that a Chapter 11 filing by G.M. would be the disaster that many fear. Some experts note that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay, at considerable cost, the wrenching but necessary steps G.M. needs to take to become a stronger, leaner company.
A bailout won't fix GM. It will only prop it up. And given it's situation, that won't last long either. So it most likely would mean a further "investment" would be necessary later - the AIG model if you will.

Bankruptcy is not only the smarter choice, it avoids the moral hazard inherent in government bailouts as well as avoiding throwing good money after bad.

The Heritage Foundation says the incoming administration would do better to let GM go bankrupt:
It’s not the end of the industry, but a new beginning. Here’s why:

* First, it’s really not so radical, in terms of magnitude. Yes, shareholders would stand to lose out, but with GM’s current market capitalization of just $2.5 billion, they wouldn’t lose much. Apple, by comparison, is worth $87 billion.

* Second, reorganization would put the automakers on a sustainable course. Key are labor costs: Gold-plated salaries and benefits packages for union workers mean the automakers lose a bundle on most cars sold. There’s no incentive to renegotiate when government dollars to pay those contracts are a real possibility. With a bankruptcy judge’s approval, collective bargaining agreements can be reformed to fit economic realities.

* Third, bankruptcy is the only way to restore innovation to the U.S. auto industry. In the end, the automakers make money by producing vehicles that consumers want. But any government money is sure to come with strings attached. Pelosi, for example, said the government would exact a “ recoupment” for any investment of taxpayer funds — specifically, a say in what kinds of cars it produces. That’s a recipe for certain failure and future bailouts. Bankruptcy, in contrast, strips a company down to its valuable assets and then sets to putting those assets to work in the marketplace. Whether it works or not, it’s the best chance for success.

The incoming administration can deliver this dollop of change today: Take the bailout option off the table once and for all and let Detroit get itself working again.
Of course the problem is that economic common sense - letting the market sort it out - is exactly the opposite of Democratic political common sense - save the jobs of the union constituency. Any guess which will win out at the end of the day?

Treasury Secretary Paulson made the job of bailing out GM a little more difficult yesterday when he announced that the auto industry would not be getting any of the $700 bailout money now out there. That means Congress, if it wants it soon, will have to get it through the Bush White House.

Unfortunately Bush isn't against such a bailout, he just wants something for his signature. That would be the Columbia Free Trade agreement.

The only real questions then are will Congress capitulate on that to get the money or will they wait until Obama is in office? Can GM wait that long? Is anyone up there at all concerned with moral hazard or the lack of economic common sense this bailout displays?

As Dan Ikenson says at CATO, "There's nothing wrong with a Big Two"".
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Previous Comments to this Post 

Let the feeding frenzy begin. Emboldened by the Democrats’ willingness to change the terms of eligibility for the $700 billion financial bailout, suspect entities have now begun to make a case for consideration. e.g. The National Marine Manufacturers Association and the National Automobile Dealers Association say that they too deserve a piece of the pie. Says the chairwoman of the National Automobile Dealers Association: "Any government intervention should include provisions to preserve the viability of dealers". Hell, you even have Hispanic business groups meeting with Paulson to push for minority contracts in asset management, legal, accounting, mortgage services and maintenance jobs, like plumbing and masonry: "They are going to need a lot of folks in minority communities that are able to service their own communities," said David Ferreira, head of government relations for the Hispanic Chamber of Commerce.

Let’s get this straight: Because some Hispanics made bad choices regarding the affordability of their mortgage, it should be an Hispanic company that profits from the cleanup. Beautiful.
Written By: jfw1961
URL: http://
Hey I got upside down on a car loan and the payments are killing was no ones fault but my own,,,,WHERE’S MY BAILOUT???!!!!?
Written By: firefirefire
URL: http://
Bankruptcy as a reform step is completely bereft of all common sense. Since you can’t be selective about who you short on such a step, warranty holders would be screwed. No one would buy a car from a company that has gone bankrupt or might go bankrupt.

Bankruptcy is what you do when you’re ready to cut up the tooling for scrap metal and sell all the desks and chairs.

This notion was brought to us by the same geniuses who said GM should let go of marketshare in the 80’s and 90’s to become leaner and more efficient leaving GM with double the legacy cost per car today than it would have had. And their most recent hit suggestion that GM give over controlling interest in its financial arm. That lead GMAC under Cerberus’ control to deny credit to those with a credit score under 700. Yeah, wallstreet inspired suggestion for the auto industry have just been awesome.
Written By: jpm100
URL: http://
Unfortunately Bush isn’t against such a bailout, he just wants something for his signature. That would be the Columbia Free Trade agreement
As opposed to Bush saying no to a bailout and then the next congress does it anyway. At least this way he gets something good done.
Written By: shark
URL: http://
"Bankruptcy is what you do when you’re ready to cut up the tooling for scrap metal and sell all the desks and chairs."

There are six types of bankruptcy under the bankruptcy code. You are probably thinking of chapter 7, whereas chapter 11 only calls for rehabilitation and reorganization.

"In Chapter 11, the debtor retains ownership and control of its assets and is retermed a debtor in possession ("DIP"). The debtor in possession runs the day to day operations of the business while creditors and the debtor work with the Bankruptcy Court in order to negotiate and complete a plan"


What effect would a bailout have on foreign competition, since it is,after all, a subsidy? If I recall correctly, foreign manufacturers can impose acountervailing tariffs and other penalties to balance this unfair advantage. So much for GATT and free trade.
Written By: timactual
URL: http://
Would you buy a car from a bankrupt automaker?
Written By: unaha-closp
Would you buy an overpriced, underwhelming car from a bailed out automaker?
Written By: Twba
The best thing about this whole debacle is that I get to watch (and participate in) my wife’s steady awakening to the futility of government management of markets. She heard Paulson speaking yesterday and she said, "these guys are just shooting in the dark." It is beautiful to see my brilliant, (yet San Diego born and raised) wife slowly turning Libertarian. -sniff-/tear
Written By: Mal Gusto
URL: http://
In 1992, or there ’bouts, I bought a used 1986 Toyota Camry LE. It was my first car. I am still driving it.
Written By: Adriane
URL: http://
In 1992, or there ’bouts, I bought a used 1986 Toyota Camry LE. It was my first car. I am still driving it.
Oh, yeah, those damn things from back then last forever. I think that Toyota might have fixed that problem, though.
Written By: Martin McPhillips
"Would you buy a car from a bankrupt automaker? "
The bankruptcy would be the least of my concerns when selecting a car.
Written By: Grimshaw
URL: http://
"Would you buy a car from a bankrupt automaker?"

Why not?
Written By: timactual
URL: http://
If any of the Big Three decided to file for Chapter 11 protection, the process would obviously have to include plans for a fund that would cover warranties. United Airlines had the same set up when they went through the process.
Written By: jfw1961
URL: http://
Would you buy an , car from a bailed out automaker?
The bailed out stigma doesn’t hold a candle to bankruptcy (of any variant).

Just the fact the word GM and bankruptcy are being used publicly often, GM is going to suffer more car sale losses. This will likely prompt the CEO to make a very public statement about not entering bankruptcy, ever. The stockmarket, of course, will react negatively because you disobeyed them.
Written By: jpm100
URL: http://
jpm100 - Bankruptcy as a reform step is completely bereft of all common sense. Since you can’t be selective about who you short on such a step, warranty holders would be screwed. No one would buy a car from a company that has gone bankrupt or might go bankrupt.

Normally I find myself in substantial accord with your comments, but not this time.

While I don’t think anybody WANTS to see GM go belly up, it is the most sensible of the two options on the table. Either they go bankrupt and we hope that a better, stronger company emerges when the dust settles, or else we throw billions of taxpayer dollars at the problem in the hopes that the executives who got the company into its current fix will magically reform themselves and the unions to build a better, stronger company.

Honestly, I’m all for the first option. I really don’t see why I should pay taxes to save incompetent executives and greedy union members from the results of their folly. I can’t understand why I should send more of my pay to DC so it can be funneled to Detroit in the hopes that GM will learn its lesson and start making cars that sell. I certainly am not interested in paying more taxes to cushion the blow of lost warranties.

I’m also not interested in sending a message to large corporations that the Treasury is now daddy’s credit card. I’m also DEFINITELY not interested in sending a message to those fools on Capitol Hill that they can take over companies and mismanage them the same way they’ve been running the government these years past. I mean, honestly: Congress can’t pass a balanced budget. They pay $400 for a hammer, fer cryin’ out loud. Do we REALLY want House and Senate committees on automotive design???

As for nobody wanting to buy a car from a bankrupt company... Why not? If the price is good (as is usual in "going out of business" sales), people will buy the cars even knowing that they won’t get a warranty. Indeed, people do this all the time when they buy cheap used cars. They know the risks and figure that paying thousands more for a new(er) car just to get a warranty doesn’t make sense.
Written By: docjim505
URL: http://
As we speak, automotive experts from Lada, Trabant, and Yugo are buying tickets to Washington DC.

If its really just an issue of warranties, then the US government could "guarantee" those by paying an amount to the buyer of GM’s assets if they eventually go down the drain and don’t come out of Chapter 11.

God, what that would do to quality I don’t know.
Written By: Harun
URL: http://
"...GM is going to suffer more car sale losses."
So what? Why is it the taxpayer’s responsibility to prevent this? It’s a poorly run business and should stand or fall on its own merits.
Written By: Grimshaw
URL: http://
Would you buy a car from a bankrupt automaker?
Delta went bankrupt in 2005. People still flew on that airline. No one is going to walk away from a good car at a good price, because ’eeewwwwwww that company is bankrupt’. That’s ridiculous. The real problem is GM doesn’t make good cars at a good price. Hence their problem. And, no bailout is going to change that; it will just perpetuate it.
Written By: Is
URL: http://
Does anyone care about economic common sense?
Everyone does, except when it comes to them.
Written By: Is
URL: http://
GM is not a car company. GM is a Health Insurance and Pension plan for retired UAW workers. I have a sister and brother-in-law, both engineers, who will be hurt when this tanks, but tank it must. All a bailout will do is prolong the inevitable.

There is simply no way GM can make an extra $1500 on every vehicle and compete. Either their obligation gets shifted to the taxpayers, most of whom never got UAW level pay and benefits, or you try to kneecap the competition in some way so GM can compete, like some sort of hidden tax of $1500 on "foreign" cars, even if they are built here.

I know of no reason anyone should subsidize the UAW and GM.
Written By: MarkD
URL: http://

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